Critics of full cost-plus pricing argue that using this approach may result in prices that have been arbitrarily set too high or too low, thereby sub-optimizing profits. They argue that the fundamental flaw of full cost-plus pricing is that irrelevant fixed costs—that will not differ under any of the pricing alternatives being considered—are included in the price computation. Furthermore, critics suggest that the full cost approach is based on the flawed assumption that a company’s customers will automatically choose to buy the projected volume of production at a price that covers all costs. 本文来自优'文,论-文·网原文请找腾讯3249-114
In the case of University Tees, the fixed costs are not relevant to the pricing decisions because they remain unchanged under all possible pricing scenarios. However, many students will be inclined to assign fixed overhead costs to each order to enable full cost-plus pricing. For example, the case states that Joe and Nick believe they can sell somewhere between 5000 and 15,000 t-shirts. Students may be inclined to use the midway point of 10,000 shirts as the denominator when calculating the fixed costs per shirt that must be covered by the price. Given the fixed costs of $27,000, the resulting rate is $2.70 of fixed costs per shirt. When this amount is added to the average order profile’s variable cost per shirt of $6.51, it yields a full cost of $9.21 per shirt. This type of analysis may cause students to suggest that the only viable price is $10.
This is a conceptually flawed thought process for two reasons. First, it assumes that customers would automatically be willing to buy 10,000 shirts at a price of $10 each. This is untrue because customers may choose to buy fewer than 10,000 shirts at that price. Second, it overlooks the fact that customers may buy more than 10,000 shirts if the price is less than $10. Using a full cost calculation to eliminate $9 as a viable price overlooks the fact that, depending on the customers’ price elasticity of demand, $9 may be the profit-maximizing price. In this case, the pricing strategy should be designed to maximize the contribution margin earned. Confounding the pricing decision with irrelevant fixed costs can only hinder the decision-making process. The answer to question 8 highlights the fact that using full cost-plus pricing to eliminate $9 as a viable price can potentially result in sub-optimal profits.
7. Assuming that all of University Tees’ sales conform to its average order profile, use your recommended selling price to determine the number of t-shirts that must be sold to break even. Also, prepare a contribution format income statement that shows University Tees’ net operating income if it sells 15,000 t-shirts at your recommended price.
Given that the price floor is $7 and the price ceiling is $10, students should have chosen one of four prices. The breakeven point in units for each of these four scenarios is shown below:
Recommended price $7.00 $8.00 $9.00 $10.00
Variable costs $6.51 $6.51 $6.51 $6.51
Contribution margin $0.49 $1.49 $2.49 $3.49
Fixed costs (a) $27,000 $27,000 $27,000 $27,000
CM per t-shirt (b) $0.49 $1.49 $2.49 $3.49
Breakeven in units (a) . (b) 55,103 18,121 10,844 7737
The contribution format income statements for these four scenarios are shown below:
Recommended price $7.00 $8.00 $9.00 $10.00
Sales $105,000 $120,000 $135,000 $150,000
Variable costs $97,650 $97,650 $97,650 $97,650
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Table – continued
Recommended price $7.00 $8.00 $9.00 $10.00
Contribution margin $7350 $22,350 $37,350 $52,350
Fixed costs $27,000 $27,000 $27,000 $27,000
Net operating income $19,650 $4650 $10,350 $25,350
The above two tables highlight the fact that choosing the lowest possible price that generates a positive contribution margin per unit is not necessarily the best pricing strategy. A price of $7 or $8 generates a positive contribution margin, but it does not generate a profit. The two viable prices appear to be $9 or $10 per unit. 本文来自优'文,论-文·网原文请找腾讯324.9114
8. Assume that all of University Tees’ sales conform to its average order profile. Prepare two contribution format income statements: (a) assume 12,000 units are sold at a price of $9 per t-shirt and (b) assume 8000 units are sold at a price of $10 per t-shirt. What insights about the relationship between price, quantity sold, and profits are revealed by these income statements?
The two income statements would be as follows:
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