PRICING DECISIONS AND CUSTOMER PROFITABILITY

THEORETICAL QUESTIONS TO CONSIDER:

Market-based approach vs cost-based approach

Influence of time horizon on price-setting

Customer profitability analysis

PRACTICAL QUESTIONS:

Question 1

Sunrise Ltd is approached by an agent for an overseas customer seeking to source a large one-time-only special order for a product similar to one offered to regular customers. Sunrise Ltd has excess capacity.

The following per unit data applies for sales to regular customers:

Direct materials$45.60

Direct manufacturing labour$25.90

Variable manufacturing overhead$50.00

Fixed manufacturing overhead$100.00

Mark-up (80%)

(a)What is the minimum acceptable price of this one-time-only special order?

(b)What price would be offered to long-term customers?