ACCT 2102 1st Edition Lecture 24 Outline of Last Lecture I Comprehension Quiz In Class Special Order Decisions II Special Order Example Outline of Current Lecture III Pricing Decisions IV Pricing Decisions Example Current Lecture Relevant Costs for Short Term Decisions Part II Chapter 8 III Pricing Decisions What 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 taker o How do we gain control over pricing o Products are not unique or heavy competition o Target costing Revenue at market price Desired profit Targeted Total Cost o Ex food commodities natural resources generic consumer products and services Price setter o Cost plus pricing o Products are unique which results in less competition o Ex original art jewelry patented perfume scents custom made furniture These 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 Example Willow 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 pricetaker What is Willow s target total cost Fixed Costs Plus Total VC 25 30 million Current Total Costs Divided by number of units Current Cost per Unit 12 000 000 7 500 000 19 500 000 30 000 000 0 65 Revenue at Market Price 30 mill 0 75 Less Desired Profit 10 50mill assets Target Total Cost 22 500 000 5 000 000 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 Plus Total VC 25 30 million Current Total Costs Divided by number of units Current Cost per Unit 11 500 000 7 500 000 19 000 000 30 000 000 0 63 Target Total Cost Less Fixed Costs 17 500 000 11 500 000 Target Total VC Divided by Number of Units Target VC per Unit 6 000 000 30 000 000 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 costplus price Current Variable Costs Plus Current Fixed Costs Current Total Costs Plus Desired Profit Target Revenue Divided by Number of Units Cost Plus Price per Unit 7 500 000 11 500 000 19 000 000 5 000 000 24 000 000 30 000 000 0 80 Yes because other name brand companies are selling their products to retailers for 1 00
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