The Fastener Company manufactures office equipment for retail stores. Carol Wats

Question

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 plans to use an average of $1,200,000 in assets to support operations in the current year. The condensed budgeted income statement that follows reflects the planned return on assets of 20% ($240,000/$1,200,000) for the entire company for all products.

Fastener Company

Budgeted Income statement For the Year Ended May 31

( in thousands)

2. Could a selling price for the electric pencil sharpener be calculated using return on assets pricing? Explain your answer

Electric Stapler Electric Pencil Sharpener Estimated annual demand in units 16,000 12,000 Estimated unit manufacturing costs $14 $15 Estimated unit selling and administrative expenses $3 N/A Assets employed in manufacturing $160,000 N/A

Explanation / Answer

Hey Dear Student !!

Answer to the question is No Return on Asset Pricing method could not be used in case of Electric Pencil Sharpener because the amount of the Assets engaged in Manufacturing of the Electric Pencil Sharpener is not available so we can't directly apply any rate or margin required on assets when assets detail is not available.

Pleasure Teaching You !!

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