Cost-Based Pricing
P 2. Centered Publishing Company specializes in health awareness books. Because the field of health awareness is very competitive, Jay Rosenbek, the company’s president, maintains a strict policy about selecting manuscripts to publish. Rosenbek wants to publish only books whose projected earnings are 20 percent above total projected costs. Three titles were accepted for publication during the year. The authors of those books are Tone, Tyme, and Klay. Projected costs for each book and allocation percentages for common costs are shown here.
|
Cost Categories |
Tone Book |
Tyme Book |
Klay Book |
Projected Costs |
|
Direct labor |
$146,250 |
$243,750 |
$97,500 |
$487,500 |
|
Royalty costs |
$36,000 |
$60,000 |
$24,000 |
120,000 |
|
Printing costs |
$74,580 |
$124,300 |
$49,720 |
248,600 |
|
Supplies |
$10,260 |
$17,100 |
$6,840 |
34,200 |
|
Variable production costs |
$42,600 |
$71,000 |
$28,400 |
142,000 |
|
Fixed production costs |
35% |
40% |
25% |
168,000 |
|
Distribution costs |
30% |
50% |
20% |
194,000 |
|
Marketing costs |
$61,670 |
$90,060 |
$42,270 |
194,000 |
|
General and administrative |
35% |
40% |
25% |
52,400 |
|
costs |
Expected sales for the year are as follows: Tone, 26,000 copies; Tyme, 32,000 copies; and Klay, 20,000 copies.
Required
1. Prepare a cost analysis that computes the desired profit for each of the three books and in total.
2. Use gross margin pricing to compute the selling price for each book. (Hint: Treat royalty costs as production costs.)
3. If the competition’s average selling price for a book similar to Klay’s is $22, should this influence the pricing decision? Explain.