Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 33

Pricing Decisions

Assume that Cold Rock sells ice cream for $4.80 per gallon. The cost of each gallon follows:

Materials	$1.80
Labor	60
Variable overhead	30
Fixed overhead ($24,000 per month, 20,000 gallons per month)	1.20
Total costs per gallon	$3.90

One of Cold Rock’s regular customers asked the company to fill a special order of 400 gallons at a selling price of $3.60 per gallon for a fund-raising picnic for a local charity. Cold Rock has capacity to fill it without affecting total fixed costs for the month. Cold Rock’s general manager was concerned about selling the ice cream below the cost of $3.90 per gallon and has asked for your advice.

Required

a. Prepare a schedule to show the impact on Cold Rock’s profits of providing 400 gallons of ice cream in addition to the regular production and sales of 20,000 gallons per month.

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b. Based solely on the data given, what is the lowest price per gallon at which the ice cream in the special order could be sold without reducing Cold Rock’s profits?

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c. What other factors might the general manager want to consider in setting a price for the special order?

Step 1 of 6

Pricing decisions:

A pricing decision is a mix of key aspects such as cost of production, marketing strategy, organization structure and the firm’s image. The following are the detailed understanding of the aspects:

• Cost of production: It is depends on the efficiency of the manufacturing process/productivity. Higher productivity can help the company to lower prices.

• Marketing strategy: It is depending on the strategy followed by the company to market its product; marketing expenses are built into the price. Hence by following a low cost strategy pricing can be lowered or by following a high cost strategy price has to be increased.

• Organization structure: It is depends on how the organization is structured and how the costs are allocated at various levels.

• Firm's image: It plays a crucial role in pricing. a reputed firm can command a higher pricing as compared to an unheard of firm.