Response to the following:
?Do you agree with the cost analysis for the second order? Explain your answer:
Absolutely, I agree with the second cost analysis because it reflects the changes in costs due to unforeseen world circumstances. The primary objective of business is to make profits. This cost analysis reflects the higher price of materials from the increase in the price of dye as well as the increase in labor prices due to the new competition. Unfortunately it leaves Roe & Adler no choice but to increase their costs.
However, this could be detrimental if the company wishes to maintain their same profit margins.
?Should the two orders be accounted for as one job or as two jobs?
I believe it is in the best interest of both parties to keep the two orders separate. Ross & Adler should have no problem doing so as long as their contract with the ordering company does not include any stipulation where they could increase their order at the same selling price.
Since the first order was placed before the costs rose, Ross & Adler should honor the original selling price given for the first order and then offer a revised selling price commensurate to the rise in costs.
?What sales price per cover should they set for the second order? Explain why you selected this price, as well as the advantages and disadvantages of this price. The second selling price depends entirely on the company's decision regarding their profits.
If Ross & Adler want to keep the same profit margins obviously their selling price would rise. However, they could instead chose to eat the loss in profits and keep the same selling price of $107.50.
I would recommend raising the selling price for the second order so as to not set bad precedent for future sales as well as maintain the company's current incoming cash flows.
In order to best determine the selling price for the second order, we should first calculate the profit margins from the first order.
Selling Price per Seat - Total Cost per Seat = Total Profit $107.50 - $43.00 = $64.50 (Total Profit / Total Cost per Seat) x 100 = Profit Margin ($64.50/$43.00) x 100 = (1.5) x 100 = 150%
Calculating the new selling price per seat using 150% profit margin and the inputs from the new cost analysis: New Total Cost per Seat + (New Total Cost per Seat x 150%) = Selling Price per Seat $48.20 + (48.20 x 1.5)= $48.20 + $72.30 = $120.50 If Ross & Adler chose to keep the same selling price for the second order we can calculate their new profit margin as follows: $107.50 - $48.20 = $59.30 (Total Profit) ($59.30 / $48.20) x 100 = (1.230) x 100 = 123% Profit Margin This would be a reduction of 27% in profits per seat.
Attachment:- scenario.rar