CASE 20 - PRICING POLICY (20 pts) Steel Arts Company is a medium-sized machine shop that does customized work for industrial customers. Business is seasonal, with about four busy months, three lean months and the rest about an average. Steel Aits uses an an actual job-order costing system, assigning overhead to jobs at the end of each month based on the labor cost of each job. The owner sets the prices using the following format, with typical data: Estimated material cost Estimated labor cost Sub-total Allowance for overhead at 60% Sub-total Allowance for profit at 10% Price P32.50 16.80 P49.30 29.58 P78.88 7.89 P86.77 The owner developed the formula based on experience and on the financial results of the past few years. Overhead has averaged about 60% of the sum of materials and labor costs, and a 10% profit is reasonable in the industry. The owner has found that similar jobs seem to be more or less profitable depending on the month in which they are done. This bothers the owner, and she has begun to wonder whether her pricing policy is sensible. REQUIRED: a) In which months, busy or lean, will jobs appear more profitable? Why? b) Should the owner modify the pricing policy? What should the owner do? c) What other pricing strategies would you recommend? Justify! CASE 20 - PRICING POLICY (20 pts) Steel Arts Company is a medium-sized machine shop that does customized work for industrial customers. Business is seasonal, with about four busy months, three lean months and the rest about an average. Steel Aits uses an an actual job-order costing system, assigning overhead to jobs at the end of each month based on the labor cost of each job. The owner sets the prices using the following format, with typical data: Estimated material cost Estimated labor cost Sub-total Allowance for overhead at 60% Sub-total Allowance for profit at 10% Price P32.50 16.80 P49.30 29.58 P78.88 7.89 P86.77 The owner developed the formula based on experience and on the financial results of the past few years. Overhead has averaged about 60% of the sum of materials and labor costs, and a 10% profit is reasonable in the industry. The owner has found that similar jobs seem to be more or less profitable depending on the month in which they are done. This bothers the owner, and she has begun to wonder whether her pricing policy is sensible. REQUIRED: a) In which months, busy or lean, will jobs appear more profitable? Why? b) Should the owner modify the pricing policy? What should the owner do? c) What other pricing strategies would you recommend? Justify