Pecos Printers, Inc. manufactures color ink jet printers for the small business market. It has just launched the PP 7500. A 50% markup is standard in this industry so that Pecos must sell to distributors below $400 per printer to keep the retail price below the industry top of $600 ($400 * 150% = $600). Paul Pecos, the founder and CEO of Pecos Printers, wants to keep the price to distributors as low as possible. Lester Ledger, the Pecos Controller has developed the following cost sheet for the model 7500: *This is determined on a per unit basis as followed. Lester assumes that the annual fixed overhead costs for this product will be $450,000 and that approximately 10,000 Model 7500's will be produced during the current year. Pecos has the capacity to produce 20,000 units per year without increasing fixed costs. Paul has determined that approximately 20% of the total manufacturing costs are necessary for a decent profit. Paul has developed the following pricing rule for his sales staff: Accept any offer from distributors of $300 or more and reject any offer below $300. In addition, Ms. Glenda Goodperson, the office assistant manager received an offer from a new distributor for 700 units at $290. She felt this would be advantageous for Pecos and accepted the offer. When Paul Pecos found out about this transaction, he was furious that Ms. Goodperson had violated his decision rule and fired her on the spot. He then cancelled the order with the new distributor. Overall, Paul was satisfied with the month's sales results. His sales staff had sold 925 units which translated to an annual rate of over 11,000 units. This was 10% above his estimate of 10,000 annual sales.
Required: Evaluate Paul Pecos' decision rule. Evaluate Paul Pecos' reaction to Ms. Goodperson's sale. Prepare a contribution margin income statement for the month with two columns: in the first column, show the results following Paul's decision rule. In the second column, show what the results would have been if you chose to revise the decision rule and your revised decision rule had been followed. Do you have any other recommendations for Paul to improve his operations?