Problem
The Fastener Company manufactures office equipment for retail stores. Carol Watson, the vice president of marketing, has proposed that Fastener introduce two new products: an electric stapler and an electric pencil sharpener. Watson has requested that the Profit Planning Department develop preliminary selling prices for the two new products for her review.
Profit Planning has followed the company's standard policy for developing potential selling prices. It has used all data available for each product. The data accumulated by Profit Planning are as follows:
estimated annual demand in hints Electric Stapler 16,000 Electric Pencil Sharpener 12,000
Estimated unit manufacturing costs Electric Stapler $14.00 Electric Pencil Sharpener $15.00
Estaimated unit selling and administrative expenses Electric Stapler $3.00 Electric Pencil Sharpener Not available
Assets employed in manufacturing Electric Stapler $160,000 Electric Pencil Sharpener Not available
Fastener plans to use an average of $1,200,000 in assets to support operations in the current year. The condensed income statement that follow reflects the planned return on assets of 20 percent ($240,000 / $1,200,000) for the entire company for all products.
Fastener Company
Budgeted Income Statement
For the Year Ended May 31
( in thousands)
Revenue $2,400
Cost of goods sold 1440
gross profit $ 960
Selling and administrative expenses 720
Operating income $240
1. Calculate a potential selling g price for (a) the stapler, using return on assets, pricing, and (b) the pencil sharpener, using gross margin pricing.
2. Could a selling price for the electric pencil sharpener be calculated using return on assets pricing? Explain your answer.
3. Which of the two pricing methods-return on assets pricing or gross margin-pricing is more appropriate for the decision analysis? Explain your answer.
4. Discuss the additional steps Carol Watson is likely go take in setting an actual selling price for each of the two products after she received their potential selling prices (as calculated in requirement 1.) (CMA adapted)