P21-32. Price Setting: Multiple Products

Pipestem Golf produces a wide variety of golfing equipment. In the past, product managers set prices using their professional judgment. Samuel Snead, 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 Snead 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 cost information from the current year accounting records is available:

Manufacturing Costs Selling and Administrative Costs

Variable $335,000 $55,000

Fixed 245,000 365,000

During the year, Pipestem Golf reported earnings of $200,000. However, the controller believes that proper pricing should produce earnings of at least $250,000 on the same sales mix and unit volume. Accordingly, you are to use the preceding cost information and a target profit of $250,000 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 TW Irons:

Variable and Manufacturing Costs $145

Fixed manufacturing Costs 105

Total $250

Required

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

1. 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).

c. Determine the initial price of a set of TW Irons using the manufacturing cost markup and the variable manufacturing cost markup.

d. Do you believe the controller's approach to product pricing is reasonable? Why or why not?