Setting price by marking up cost inherently circular

Assignment Help Finance Basics

Reference no: EM1353482

RoverPlus, a pet product superstore, is considering pricing a new RoverPlus labeled dog food. The company will buy the premium dog food from a company in Indiana that packs the product with a RoverPlus label. Rover pays $6 for a 50-pound bag delivered to its store. The company also sells Royal Dog food (under the royal dog food label), which it purchases for $9 per 50-pound bag and sells for $16.99. The company currently sells 25,000 bags of Royal dog food per month, but that is expected to change when the RoverPlus brand is introduced.
The company will continue to price the Royal Dog food brand at $16.99. The quantity of RoverPlus and the quantity of Royal dog food that will be sold at various prices for Royal are estimated as:

Price of RoverPlus Quantity RoverPlus Quantity Royal

$8.99 35,000 11,000

$9.99 34,500 11,300

$10.99 34,000 11,500

$11.99 33,000 12,000

$12.99 30,000 13,000

$13.99 25,000 14,000

$14.99 15,000 15,000

$15.99 10,000 19,000

$16.99 5,000 21,000

For example, if RoverPlus is priced at $8.99, the company will sell 35,000 bags of RoverPlus and 11,000 bags of Royal at $16.99. On the other hand, if the company prices RoverPlus at $16.99, it will sell 5,000 bags of RoverPlus and 21,000 bags of Royal at $16.99. This is a 4,000 fewer bags of Royal than is currently being sold.

Required

a. calculate the profit maximizing price for the RoverPlus brand taking into account the effect of the sales of RoverPlus on sales of the Royal Dog food brand.
b. At the price calculated in part a, what is the incremental profit over the profit earned before the introduction of the RoverPlus branded dog food?

8-6
Wendel Stove Company is developing a professional model stove aimed at the home market. The company estimates that variable costs will be $2,000 per unit and fixed costs will be $10,000 per year.

Required
a. suppose the company wants to set its price equal to full cost plus 30 percent. To determine cost, the company must estimate the number of units it will produce and sell in a year. Suppose the company estimates that it can sell 5,000 units. What price will the company set?
b. B. what is odd about setting the price based on an estimate of how many units will be sold?
c. Suppose the company sets a price as in part a, but the number of units demanded at that price turns out to be 4,000. Revise the price in light of demand for 4,000 units.
d. What will happen to the number of units that will be sold if the price is raised to the one you calculated in part c?
e. Explain why setting price by marking up cost is inherently circular for a manufacturing firm.

8-8
Emerson Ventures is considering producing a new line of hand gliders. The company estimates that variable costs will be $325 per unit and fixed costs will be $330,000 per year.

Required

a. Emerson has a pricing policy that dictates that a product's price must be equal to the full cost plus 60 percent. To calculate full cost, Emerson must estimate the number of units 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?
b. 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?
c. 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?
d. Why is setting price by marking up cost inherently circular for a manufacturing firm?

Reference no: EM1353482

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