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

Exercise 34

Pricing Decision

Mother’s Bottlers, Inc., is a small bottling company that bottles and sells cold teas for $5 per unit. The cost of each unit follows:

Materials	$1.50
Labor	1.00
Variable overhead	0.50
Fixed overhead ($20,000 per month, 20,000 units per month)	1.00
Total costs per unit	$4.00

One of Mother’s regular customers asked the company to fill a special order of 2,000 units at a selling price of $3.50 per unit. Mother’s can fill the order using existing capacity without affecting total fixed costs for the month. However, Mother’s manager was concerned about selling at a price below the $4.00 cost per unit and has asked for your advice.

Required

a.Prepare a schedule to show the impact of providing the special order of 2,000 units on Mother’s profits in addition to the regular production and sales of 20,000 units per month.

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b.Based solely on the data given, what is the lowest price per unit at which the bottled teas could be sold for the special order without reducing Mother’s profits?

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c.What other factors might Mother’s managers want to consider in setting a price for the special order?

Step 1 of 7

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.