Pricing Decision
P 1. Ed Vetz & Company specializes in the assembly of home appliances. One division focuses most of its efforts on assembling a standard toaster oven. Projected costs of this product are as follows:
|
Cost Description |
Budgeted Costs |
|
Toaster casings |
$ 960,000 |
|
Electrical components |
2,244,000 |
|
Direct labor |
3,648,000 |
|
Variable indirect assembly costs |
780,000 |
|
Fixed indirect assembly costs |
1,740,000 |
|
Selling expenses |
1,536,000 |
|
General operating expenses |
840,000 |
|
Administrative expenses |
816,000 |
The projected costs are based on an estimated demand of 600,000 toaster ovens per year. The company wants to make a $1,260,000 profit. Competitors have just published their wholesale prices for the coming year. They range from $21.60 to $22.64 per oven. The Vetz toaster oven is known for its high quality and modern look. It competes with products at the top end of the price range. Even with its reputation, however, every $.20 increase above the top competitor’s price causes a drop in demand of 60,000 units below the original estimate. Assume that all price changes are in $.20 increments.
Required
1. Prepare a schedule of total projected costs and unit costs.
2. Use gross margin pricing to compute the anticipated selling price.
3. Based on competitors’ prices, what should the Vetz toaster sell for (assume a constant unit cost)? Defend your answer.
4. Would your pricing structure in requirement 3 change if the company had only limited competition at its quality level? If so, in what direction? Explain why.