Price Setting: Multiple Products (LO2)

Augusta Golf, Inc. produces a wide variety of golfing equipment. In the past, product managers set prices using their professional judgment. Jack Woods, the new controller, believes this practice has led to the significant underpricing of some products (with lost profits) and the significant overpricing of other products (with lost sales volume). You have been asked to assist Woods in developing a corporate approach to pricing. The output of your work should be a cost-based formula that can be used to develop initial selling prices for each product. Although product managers are allowed to adjust these prices to meet competition and to take advantage of market opportunities, they must explain such deviations in writing. The following 2012 cost information from the accounting records is available:

oo a - Manufacturing Costs Selling and Administrative Costs NEIMEIONEWo Gn 6 & Comet Meee $350,000 $ 50,000 FAKCC Meter ieninsoias eyket ne e3 150,000 200,000 In 2012, Augusta Golf reported earnings of $120,000. However, the controller believes that proper pricing should produce earnings of at least $150,000 on the same sales mix and unit volume. Accordingly, you are to use the preceding cost information and a target profit of $150,000 in developing a cost-based pricing formula. Selling and administrative expenses are not currently associated with individual products.

However, you have obtained the following unit production cost information for the Tiger Irons:

Variable manufacturing costs.... $155 Fixed manufacturing costs...... 60 Ota Pare ies exo rca oa eee $215 Required

a. Determine the standard markup percentage for each of the following cost bases. Round answers to two decimal places.

I. Full costs, including fixed and variable manufacturing costs, and fixed and variable selling and administrative costs.

2. Manufacturing costs plus variable selling and administrative costs.

3. Manufacturing costs.

4. Variable costs.

5. Variable manufacturing costs.

b. Explain why the markup percentages become progressively larger from requirement (a), parts (1)

through (5).

Determine the initial price of a set of Tiger Irons using the manufacturing cost markup and the variable manufacturing cost markup.
Do you believe the controller’s approach to product pricing is reasonable? Why or why not? LO.1