Cutting Edge Company manufactures lawn equipment for retail stores. Ron Ellington, the vice president of marketing, has proposed that the company introduce two new products: a GPS lawn mower and a laser-guided lawn edger. Ellington has requested that the Profit Planning Department develop preliminary selling prices for the two new products for his review. Profit Planning has followed the company's standard policy for developing potential selling prices. It has used all data available for each product. The data accumulated by Profit Planning follows.

....................................................Lawn Mower.......................... Lawn Edger

Estimated annual demand in units.................. 20,000............................... 18,000

Estimated unit manufacturing costs................ $100.00............................... $30.00

Estimated unit selling and administrative expenses.. $5.00...................... Not available

Assets employed in manufacturing................ $480,000...................... Not available

Cutting Edge plans to use an average of $1,200,000 in assets to support operations in the current year. The condensed budgeted income statement that follows reflects the planned return on assets of 40 percent ($480,000 ÷ $1,200,000) for the entire company for all products

Cutting Edge Company

Budgeted Income Statement

For the Year Ended May 31

(in thousands)

Revenue................................................. $2,880

Cost of goods sold...................................... 1,600

Gross margin............................................ $1,280

Selling and administrative expenses.................... 800

Operating income....................................... $ 480

1. Use the budgeted income statement to calculate a potential selling price for (a) the lawn mower, using return on assets pricing, and (b) the lawn edger, using gross margin pricing.

2. Could a selling price for the lawn mower be calculated using return on assets pricing? Explain your answer.

3. Which of the two pricing methods-return on assets pricing or gross margin pricing-is more appropriate for decision analysis? Explain your answer.

4. Discuss the additional steps Ron Ellington is likely to take in setting an actual selling price for each of the two products after he receives their potential selling prices (as calculated in requirement 1.)