Relevant-cost approach to pricing decisions.
Response to the following problem:
Burst, Inc., cans peaches for sale to food distributors. All costs are classified as either manufacturing or marketing. Burst prepares monthly budgets. The March 2012 budgeted absorption-costing income statement is as follows:
Revenues (1,000 crates * $117 a crate)..........$117,000
Cost of goods sold......................................65,000
Gross margin............................................52,000
Marketing costs.........................................30,000
Operating income....................................$ 22,000
Gross margin markup percentage: $52,000 A? $65,000= 80% of cost of goods sold (full manufacturing cost)
Monthly costs are classified as fixed or variable (with respect to the number of crates produced for manufacturing costs and with respect to the number of crates sold for marketing costs):
Fixed Variable
Manufacturing $30,000 $35,000
Marketing 13,000 17,000
Burst has the capacity to can 2,000 crates per month. The relevant range in which monthly fixed manufacturing costs will be "fixed" is from 500 to 2,000 crates per month.
Required:
1. Calculate the markup percentage based on total variable costs.
2. Assume that a new customer approaches Burst to buy 200 crates at $55 per crate for cash. The customer does not require any marketing effort. Additional manufacturing costs of $3,000 (for special packaging) will be required. Burst believes that this is a one-time-only special order because the customer is discontinuing business in six weeks' time. Burst is reluctant to accept this 200-crate special order because the $55-per-crate price is below the $65-per-crate full manufacturing cost. Do you agree with this reasoning? Explain.
3. Assume that the new customer decides to remain in business. How would this longevity affect your willingness to accept the $55-per-crate offer?Explain.