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Westfield Graziers packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are as follows.
Product Material cost Estimated sales
Super Premium $16.00 2,000 tonnes
Premium $12.00 3,000 tonnes
Economy $10.00 5,000 tonnes
The indirect cost of operating the machinery used to package all three products is $40 000 per year. In the past, prices have been set by allocating the indirect costs to products on the basis of estimated sales in tonnes. The resulting total costs (material costs plus allocated fixed overhead) are then marked up by 100 per cent.
Required
Question a. Calculate the price per tonne for each grade of feed using the method described for setting prices.
Question b. Does the price in part (a) take into account how much customers are willing to pay for the product?
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