What questions should managers answer when setting regular prices?
The managers must answer three major questions when setting regular prices: the company's target profit, the customer's ability to pay, and the perception of setting the price.
The term manager refers to a skilled individual who possesses knowledge of management and is appointed by an organization to manage its operations and human assets.
The managers should answer the following questions while setting the regular prices:
Grimm Company makes decorative wedding cakes. The company is considering buying the cakes rather than baking them, which will allow it to concentrate on decorating. The company averages 100 wedding cakes per year and incurs the following costs from baking wedding cakes:
Direct materials $500
Direct labor 1,000
Variable manufacturing overhead 200
Fixed manufacturing overhead 1,200
Total manufacturing cost $2,900
Number of cakes ÷ 100
Cost per cake $29
Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Grimm expects to retain the equipment. Grimm can buy the cakes for $25.
Thomas Company makes a product that regularly sells for $12.50 per unit. The product has variable manufacturing costs of $8.50 per unit and fixed manufacturing costs of $2.00 per unit (based on $200,000 total fixed costs at current production of 100,000 units). Therefore, the total production cost is $10.50 per unit. Thomas Company receives an offer from Wesley Company to purchase 5,000 units for $9.00 each. Selling and administrative costs and future sales will not be affected by the sale, and Thomas does not expect any additional fixed costs.
1. If Thomas Company has excess capacity, should it accept the offer from Wesley? Show your calculations.
2. Does your answer change if Thomas Company is operating at capacity? Why or why not?
Refer to Exercise E25-18. Cool Systems needs 79,000 optical switches. By outsourcing them, Cool Systems can use its idle facilities to manufacture another product that will contribute $225,000 to operating income.
1. Identify the expected net costs that Cool Systems will incur to acquire 79,000 switches under three alternative plans: make the switches, buy the switches and leave facilities idle, buy the switches and use the idle facilities to make another product.
2. Which plan makes the best use of Cool System’s facilities? Support your answer.
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