Question
Jueguitos Ltd (JL), manufactures two games controllers. The two products are: the affordable SIMPLE and the advanced PRO. The home market for both products is
Jueguitos Ltd (JL), manufactures two games controllers. The two products are: the affordable SIMPLE and the advanced PRO. The home market for both products is very competitive. In recent years, the demand for the PRO has been rising, and demand for the SIMPLE has been falling.
JL currently uses traditional absorption costing and target pricing in order la try to meet pricing pressures. The company needs to make a gross profit of 32% to satisfy the requirements of the shareholders as well.
Budgeted information for both controllers, based upon last year's selling prices and using the absorption costing system, is as follows:
BASE | SUPER | |||
Selling price per unit | 65.28 | 124.65 | ||
Material usage per unit | 0.5 kg | 15.00 | 0.8 kg | 24.00 |
Labour per unit | 0.4 hrs | 12.00 | 0.65 hrs | 18.00 |
Production overheads pero unit | 19.37 | 38.74 | ||
Total production cost per unit | 46.37 | 80.74 | ||
Profit per unit | 18.91 | 43.91 |
The board of directors have been investigating alternative costing systems to help in their need for competitiveness. The management accounting team have carried out in-depth analysis and have prepared the following data:
Cost Drivers | ||
Machining costs | 799,600 | Machine hours |
Set up costs | 1,574,400 | Number of batches |
Store movement costs | 1,500,000 | Number of movements |
Total overhead | 3,874,000 |
The production team collected the following data:
Cost driver information | SIMPLE | PRO |
Budgeted production (units) | 110,000 | 45,000 |
Number of batches | 220 | 600 |
Number of store movements | 1500 | 1000 |
Number of machine hours/units | 1 | 2 |
a) Calculate the total cost per unit, and the profit per unit, for each product, using Activity Based Costing (ABC). You should assume that the directors would not immediately change the prices charged to customers. They would review prices after the marketing department has conducted further market research
b) Based upon the information now known from your calculations in (a) above and assuming that a gross profit margin of 32% would be applied to the revised ABC-based costing. Explain why JL could now compete in the market where the competitions' prices, as established from the marketing research. This research shows that the competitor prices for the SIMPLE equivalent is 63.60 and the PRO equivalent sells for 130.50.
c) JL is launching a new controller to enhance the piloting experience of drones, an entirely new market for the company. They do not anticipate any competition because their drone controller is the first to deploy artificial intelligence and GPS positioning based upon the Space satellite system. Discuss the most appropriate pricing strategy for the new drone controller, considering Ansoffs matrix and Porter's 5 forces theory as they relate to the short, medium, and longer terms.
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