Problem: Cost-Plus Pricing.
Emerson Ventures is considering producing a new line of hang gliders. The company estimates that variable costs will be $325 per unit and fixed costs will be $330,000 per year.
Required to do:
Question 1: Emerson has a pricing policy that dictates that a product's price must be equal to full cost plus 60 percent. To calculate full cost, Emerson must estimate the number of unites it will produce and sell in a year. Emerson estimates at the beginning of the year that they will sell 1,500 gliders and sets their price according to that sales and production volume. What is the price?
Question 2: Right after the beginning of the year, the economy takes a dive and Emerson finds that demand for their gliders has fallen drastically; Emerson revises its sales and production estimate to just 1,000 gliders for the year. According to company policy, what price must they now set?
Question 3: What is likely to happen to the number of gliders sold if Emerson follows company policy and raises the glider price to that calculated in part b?
Question 4: Why is setting price by marking up cost inherently circular for a manufacturing firm?