Developing standards for price setting Chemigreen Company performs lawn-spraying services using two types of materials. Hygreen is
Question:
Developing standards for price setting Chemigreen Company performs lawn-spraying services using two types of materials. Hygreen is a chemical fertilizer and Banweed is a combina- tion of fertilizer and weed killer. The company has been using the chemicals for 3 months and has collected the following data on its operations for the quarter:
Each spraying job requires some setup time regardless of lawn size. The average setup time per job is estimated at .5 hour for travel, .25 hour for setting up the equipment at the beginning of a job, and .25 hour at the end of each job for cleaning up and putting away equipment. The company estimates that its trucks cost $.60 per mile to operate, including depreciation.
The company believes it has accumulated enough data to establish a standard cost system to use for bidding on jobs. The data are representative of normal operations for one quarter. The company wants to bid on jobs on the basis of square feet of lawn plus a standard fixed amount for truck and setup expenses. It wants to establish a price per 1,000 square feet of lawn to include standard cost of direct material and labor plus a percentage to cover administrative expenses, and a profit. Management has established a target net income of $60,000 per year and wants to set prices at standard direct cost plus a percentage to achieve the target income.
Most of the company's work involves small residential lawns, but it has been asked to bid on two relatively large jobs. The first is a 21,000-square-foot lawn belonging to Marjorie Singer, a wealthy publishing tycoon, who wants her lawn sprayed with Banweed. The second job is a special order by the Don Mason Country Club, which has offered to have the company spray Hygreen on 900,000 square feet of golf course for $10,000. The company estimates that if it accepts the job it will have to pay some overtime and will incur some additional administrative expenses. These additional costs are expected to total $2,000. The job will require 3 days to complete. The country club has indicated that if it is satisfied with the results, it plans to use the company's services on a regular basis at a price to be negotiated.
The owners of Steno-Pool are not pleased with the firm's 1992 profit. Costs are expected to increase in 1993, but because of competition, the general manager sees no way to increase prices without some decline in sales volume. Despite the general manager's opinion, the owners are considering raising prices to $1.40 per page accompanied by a $10,000 advertising campaign.
All costs except typist wages and supplies are considered fixed costs. With no change in operations, wages and supply costs are expected to increase 10 percent in 1993. In addition, salaries are expected to increase 15 percent and utilities and miscellaneous are expected to rise 20 percent in 1993.
A management consulting firm hired by the owners suggested the company switch all of its work to computers. Because of time saved in all revision work and the extra speed of the electronic system, operators will average 20 pages per hour. By working two shifts, the number of computer-word processing stations could be held to 7 and the total lease cost of the new equipment would be $24,000 per year. Word processing operators would need to be hired at a cost of $12 per hour including employee benefits, and all typists would be terminated. Variable costs for paper, printer toner, and other supplies would average $.15 per page. The old typewrit- ers can be sold for $10,000.
Step by Step Answer:
