Offix Company manufactures office equipment for retail stores. Carole Windsor, the vice president of marketing, has proposed that Offix introduce two new products: an electric stapler and an electric pencil sharpener. Windsor has requested that the Profit Planning Department develop preliminary selling prices for the two new products for her 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.
.............................................Electric Stapler............Electric Pencil Sharpener
Estimated annual demand in units................... 16,000................................ 12,000
Estimated unit manufacturing costs................. $14.00................................ $15.00
Estimated unit selling and administrative expenses. $3.00....................... Not available
Assets employed in manufacturing................ $240,000....................... Not available
Offix 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 20 percent ($240,000 ÷ $1,200,000) for the entire company for all products.
Offix Company
Budgeted Income Statement
For the Year Ended May 31
(in thousands)
Revenue.......................................... $2,400
Cost of goods sold............................... 1,440
Gross margin...................................... $ 960
Selling and administrative expenses............. 720
Operating income................................. $ 240
Required
1. Use the budgeted income statement to calculate a potential selling price for (a) the stapler, using return on assets pricing, and (b) the pencil sharpener, using gross margin pricing. (Round to two decimal places.)
2. Accounting Connection ▶ Could a selling price for the electric pencil sharpener be calculated using return on assets pricing? Explain your answer.
3. Accounting Connection ▶ Which of the two pricing methods-return on assets pricing or gross margin pricing-is more appropriate for decision analysis? Explain your answer.
4. Accounting Connection ▶ Discuss the additional steps Carole Windsor is likely to take in setting an actual selling price for each of the two products after she receives their potential selling prices (as calculated in requirement 1.)