Question: Downward demand spiral. Market.com is about to enter the highly competitive personal electronics market with a new type of tablet. In anticipation of future growth, the company has leased a large manufacturing facility and has purchased several expensive pieces of equipment. In 2017, the company's first year, Market.com budgets for production and sales of 50,000 units, compared with its practical capacity of 78,000. The company's cost data are as follows:
1. Assume that Market.com uses absorption costing and uses budgeted units produced as the denominator for calculating its fixed manufacturing overhead rate. Selling price is set at 140% of manufacturing cost. Compute Market.com's selling price.
2. Market.com enters the market with the selling price computed previously. However, despite growth in the overall market, sales are not as robust as the company had expected, and a competitor has priced its product at $102.00. Mr. Samuel Buttons, the company's president, insists that the competitor must be pricing its product at a loss and that the competitor will be unable to sustain that. In response, Market. com makes no price adjustments but budgets production and sales for 2018 at 43,800 tablets. Variable and fixed costs are not expected to change. Compute Market.com's new selling price. Comment on how Market.com's choice of budgeted production affected its selling price and competitive position.
3. Recompute the selling price using practical capacity as the denominator level of activity. How would this choice have affected Market.com's position in the marketplace? Generally, how would this choice affect the production-volume variance?