Question 4 please The Fastener Company manufactures office equipment for retail

Question

Question 4 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

1. a. To get the potential selling price, would require further information as , number of units Fastener Comany is planning to sell for each of the products and also the value of assets utilized. Both the information are missing. However, for your understanding Return on asset(ROA) pricing is calculated using the following formulae:Total cost per unit + Desired ROA% ( Assets Employed / # of Units ). So will need the number of units of stapler Fastener plan to produce and value of assets employed to get the potential selling price for the product.

1.b. Gross Margin pricing is a pricing method when a markup percentage is based on the product's total production costs. The mark up % shall be the Gross Margin percentage. Again will need the planned units of sharpener to find the potential sale price.

2. It depends on the resource or assets utilised for the partcular product. If the pencil sharpener utilizes high value resources ( no information of such is given in the question) then ROA pricing method may be used.A resource heavy project typically uses the return on assets pricing method as it takes into account the costs associated with the project.

3.The gross margin pricing method computes unit selling price based on production costs rather than total costs , whereas ROA pricing uses cost per unit taking into account the total cost. So to get more accurate pricing ROA pricing is more apprpriate for decision making as it covers the entire gamut of cost.

4. Carol Watson is likely to take the following additional steps while setting an actual selling price:

1. Costs

If rate doesn't include enough just to break-even,the best thing to do is sum up all your costs and divide by the number of units you think you can produce in a year. Also make sure to factor in all the hidden costs of your business like insurance, invoices that never get paid for one reason or another, and taxes.

2. Profit

Somewhat related to costs, should always consider how much money trying to make above breaking even.

3. Market Demand

If product is in high demand, then should be aiming to make products more expensive. Conversely if there's hardly any demand around, need to cheapen up if hope to compete.

4. Industry Standards

It's hard to know what others are charging, but may try asking around , a market survey.

5. Business Strategy

Strategy will make a huge difference to how you price. Think about the difference between Revlon and Chanel, the two could make the same perfume but would never expect to pay the same for both. How you are pitching yourself and use that to help determine, high end or somewhere in between.

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