ACCT 2102 1st Edition Lecture 24 Outline of Last LectureI. Comprehension Quiz (In Class) Special Order DecisionsII. Special Order ExampleOutline of Current Lecture:III. Pricing Decisions IV. Pricing Decisions ExampleCurrent Lecture: Relevant Costs for Short-Term Decisions, Part II (Chapter 8)III. Pricing DecisionsWhat is our target profit? - Certain profit that stockholders expect company to achieve. Affected by economic conditions, historical company earnings, industry risk, competition, and new business developments.How much will customers pay? - Depends on competition, product’s uniqueness, effectiveness of marketing campaigns, general economic conditions, etc.Are we a price-taker or a price-setter for this product?- Price-takero How do we gain control over pricing?o Products are not unique or heavy competitiono Target costing Revenue at market price – Desired profit = Targeted Total Costo Ex: food commodities, natural resources, generic consumer products and services- Price-settero Cost-plus pricingo Products are unique, which results in less competitiono Ex: original art/jewelry, patented perfume scents, custom-made furnitureThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.IV. Pricing Decision ExampleWillow produces facial tissues. Willow has $50 million in assets. Its yearly fixed costs are $12 million, and the variable cost of producing and selling each box of tissues is $0.25. Willow currently sells 30 million boxes of tissues. Generic facial tissues such as Willow’s product generally sell to retailers for $0.75 a box, while name brand names such as Kleenex sell to retailers for $1.00 per box. Willow stockholders expect a 10% return on the company’s assets.• Which pricing approach will Willow use? Why? Target Costing because Willow is a price-taker.• What is Willow’s target total cost?Fixed Costs $12,000,000Plus: Total VC ($.25*30 million) $7,500,000Current Total Costs $19,500,000Divided by number of units 30,000,000Current Cost per Unit $0.65Revenue at Market Price (30 mill*$0.75) $22,500,000Less: Desired Profit (10%*$50mill assets) $5,000,000Target Total Cost $17,500,000• Given Willow’s current costs, will its owners achieve their target profit? No. Willow’s current costs ($19,500,000) are $2,000,000 higher than the target cost. If Willow can’t cut costs, then it will not meet stockholders’ expectations.• Willow has identified ways to cut its fixed costs by $500,000. What is its new target variable cost per unit? Will Willow be able to reach its target profit?Fixed Costs $11,500,000Plus: Total VC ($.25*30 million) $7,500,000Current Total Costs $19,000,000Divided by number of units 30,000,000Current Cost per Unit $0.63Target Total Cost $17,500,000Less Fixed Costs: $11,500,000Target Total VC $6,000,000Divided by: Number of Units 30,000,000Target VC per Unit $0.20• Willow started an aggressive advertising campaign, costing $3 million, to transform its product into a name brand able to compete with Kleenex and Puffs. Willow doesn’t think that volume will be affected, but it hopes to gain more control over pricing. Calculate Willow “cost plus” price. Continue to assume that fixed costs have declined by $500,000. However, the company was unable to reduce its variable cost per unit below $0.25. Do you think Willow will be able to sell its facial tissues to retailers at the cost-plus price?Current Variable Costs $7,500,000Plus: Current Fixed Costs $11,500,000Current Total Costs $19,000,000Plus: Desired Profit $5,000,000Target Revenue $24,000,000Divided by: Number of Units 30,000,000Cost-Plus Price per Unit $0.80Yes, because other name brand companies are selling their products to retailers for
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