Task: What is better figure for this about in between $8.00 and $14.70??
At a factory price of $8.00 Frank figured they could sell 50,000 timers. He figured there should be a $50,000 advertising budget that would be spent regardless of sales volume. He figured the $1.00 per unit for general admin. And selling expense would just cover the advertsing cost and could be allocated to advertsing since other SG&A costs would be fixed.
When Frank showed his proposal Jim, the latter flatly disagreed with the idea of cutting overhead."you start doing that" he said, " and pretty soon you've got lots of volume and no profit" . You can't just wave your calculator like a wand over the numbers and have a product actually cost less.Furthermore, I think you haven't figured in the value of the product options. There is no another time like this on the market. I think we can put a factory price of $14.70 on it and customers will be eager to buy it at $29.40.
Tom, who had heard most of the discussion said he thought the $14.70 factory price was a much better idea. "Look", he said to Frank,"if you breakdown of fixed and variable costs is right- and I think is probably OK for the short run- then we'll only need to sell some smaller number of units at $14.70 to be as well off as we would be with your plan".
'Well" said Jim, " That may be right, but the more I look at this the more it seems to me that a little knowledge is a dangerous thing here. I do not think we really know how much the new timer is going to cost either in the short run or the long run".
Question
If, as Jim says, neither $14.70 nor $8.00 represents "the cost " of the ne timer, how would better figure be computed??