Question 3 please The Fastener Company manufactures office equipment for retail

Question

Question 3 please

The Fastener Company manufactures office equipment for retail stores. Carol Watson, the vice president of marketing, has proposed that Fastener introduce two new products: an electric stapler and an electric pencil sharpener. Watson has requested that the Profit Planning Department develop preliminary selling prices for the two new products for her review. Profit PLanning has followed the company's standard policy for developing potential selling prices. It has used all data available for each product. The data accumulated by Profit Planning are as follows: Fastener Company Budgeted Income statement For the Year Ended May 31 ( in thousands) (Revenue $2,400) (Cost of goods sold 1,440) (Gross profit $960) (Selling and administrative expenses 720) (Operating income $240) 1. Calculate a potential selling price for (a) the stapler, using return on assets pricing, and (b) the pencil sharpener, using gross margin pricing. 2.Could a selling price for the electric pencil sharpener be calculated using return on assets pricing? Explain your answer 3. Which of the two pricing methods--return on assets pricing or gross margin pricing pricing---is more appropriate for decision analysis? Explain your answer 4.Discuss the additional steps Carol Watson is likely to take in setting an actual selling price for each of the two products after she receives their potential selling prices ( as calculated in requirement 1.) (CMA adapted)

Explanation / Answer

Answer:(a) Electric stapler (return on assets pricing):

Return on Assets–Based Price = Total Costs and Expenses per Unit + [ Desired Rate of Return x ( Total Costs of Assets Employed ÷ Anticipated Units to Be Produced ) ]

= ( $14 + $3 ) + [ 20% x ( $160,000 ÷ 16,000 ) ] = $19

Answer:(b) Electric pencil sharpener (gross margin pricing):

Markup Percentage = Desired Profit + Total Selling, General, and Administrative Expenses/Total Production cost

=$240000+$720000/1440000

=66.67%

Gross Margin–Based Price = Total Production Costs per Unit + ( Markup Percentage x Total Production Costs per Unit ) = $15 + ( 66.67% x $15 ) = $25

Answer:(2) No, a selling price for the electric pencil sharpener cannot be calculated using return on assets pricing because sufficient information is not available.

Answer:(3) The return-on-asset pricing is a more strategic pricing model in meeting the long-term strategy of a business. The gross profit pricing basically focuses on short-term return. Hence, the return-on-asset- pricing is more appropriate for decision analysis.

Answer:(4) Additional steps to be taken to set an actual sales price:

a. Industry sales price

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