chapter 8. problem 8.6 Jiambalvo, J. (2016). Managerial Accounting: ebook (6th e

Question

chapter 8. problem 8.6

Jiambalvo, J. (2016). Managerial Accounting: ebook (6th ed.). Hoboken, NJ : John Wiley & Sons. (ISBN: 9781119158073)

PROBLEM 8-6. Cost-Plus Pricing [LO 2] The Wendel Stove Company is developing a “professional”-

model stove aimed at the home market. The company estimates that variable costs will be

$2,700 per unit and fixed costs will be $12,600,000 per year.

Required

a. Suppose the company wants to set its price equal to full cost plus 30 percent. To determine cost,

the company must estimate the number of units it will produce and sell in a year. Suppose the

company estimates that it can sell 6,000 units. What price will the company set?

b. What is odd about setting the price based on an estimate of how many units will be sold?

c. Suppose the company sets a price as in part a, but the number of units demanded at that price

turns out to be 5,000. Revise the price in light of demand for 5,000 units.

d. What will happen to the number of units that will be sold if the price is raised to the one you

calculated in part c?

e. Explain why setting price by marking up cost is inherently circular for a manufacturing firm.

a.

a.

Price for 6,000 stoves: Variable cost per unit Fixed cost per unit Total Cost per unit Markup (30%) Price b. What is odd about setting the price based on an estimate of how many units will be sold? c. Price for 5,000 stoves: Variable cost per unit Fixed cost per unit Total Cost per unit Markup (30%) Price d. What will happen to number of units sold if the price is raised to price from part 'c'. e. Explain why setting price by marking up cost is inherently circular for a manuafcturing firm.

Explanation / Answer

SOLUTION

(A)

(B) Setting the price based on an estimate of how many units will be sold is odd because usually the price depends on the cost of the product and profit margin. In this situation, price depends on the number of units.

(C)

Amount ($) Price for 6,000 stoves- Variable Cost ($2,700 * 6,000) 16,200,000 Fixed cost 12,600,000 Total cost 28,800,000 Cost per unit ($28,800,000/6,000units) 4,800 Mark up 30% 1,440 Price 6,240

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