Relevant-cost approach to pricing decisions. (30 minutes) @sterbro, AS, cans peaches for sale to food distributors. All costs are classified as either manufacturing or marketing. @sterbro prepares monthly budgets. The March 2000 budgeted absorption-costing income statement is as follows: lop25

@sterbro 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 1. Calculate the normal markup percentage based on total variable costs.
2. Assume that a new customer approaches @sterbro to buy 200 crates at DKr 55 per crate. The customer does not require additional marketing effort except that additional manufacturing costs of DKr 2,000 (for special packaging) will be required. @sterbro believes that this is a one-time-only special order because the customer is discontinuing business in 6 weeks’ time. @sterbro is reluctant to accept this 200-crate special order because the DKr 55 per crate price is below the DKr 60 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 your willingness to accept the DKr 55 per crate offer?
Explain.

Transcribed Image Text:

Sales (1,000 crates X DKr 100 a crate) Cost of goods sold Gross profit Marketing costs DKr 100,000 60,000 40,000 30,000 DKr 10,000 100% Operating profit Normal markup percentage: DKr 40,000 DKr 60,000 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 cans sold for marketing costs): Manufacturing Marketing FIXED VARIABLE DKr 20,000 DKr 40,000 16,000 14,000