Relevant-cost approach to pricing decisions. Stardom, Inc., cans peaches for sale to food dis¬

tributors. All costs are classified as either manufacturing or marketing. Stardom prepares monthly budgets. The March 2007 budgeted absorption costing income statement is as follows:

Revenues (1,000 crates X $120 a crate) $120,000 100%

Cost of goods sold 72,000 60 Gross margin 48,000 40 Marketing costs 36,000 30 Operating income Normal markup percentage:

$48,000 $72,000 = 66.7% of absorption cost Monthly costs are classified as fixed or variable (with respect to the cans produced for manufacturing costs and with respect to the number of crates sold for marketing costs):
Fixed Variable Manufacturing $24,000 $48,000 Marketing 19,200 16,800 Stardom has the capacity to can 1,500 crates per month. The relevant range in which monthly fixed manufacturing costs will be “fixed” is from 500 to 1,500 crates per month.
Required v 1. Calculate the normal markup percentage based on total variable costs.
2. Assume that a new customer approaches Stardom to buy 200 crates at $66 per crate. The customer does not require additional marketing effort. Additional manufacturing costs of $2,400 (for special packaging) will be required. Stardom believes that this is a one-timeonly special order, because the customer is discontinuing business in six weeks’ time.
Stardom is reluctant to accept this 200-crate special order because the $66 per crate price is below the $72 per crate absorption cost. Do you agree with this reasoning? Explain.
3. Assume that the new customer decides to remain in business. How would this longevity affect $tardom’s willingness to accept the $66 per crate offer? Explain.