Proposal 1 - Price Increase
This course of action has been proposed because the Director of Sales believes that our
product is underpriced, and that the market would mostly absorb a price hike. The proposal
calls for an average price increase of $0.59 per unit. The marketing department estimates that
the increase would reduce demand for our product by 39,500 units.
Proposal 2 - Price Reduction
The Chief Operating Officer has proposed that an increase in volume that would result from
more competitive pricing would allow Griffin to spread its considerable fixed costs over more
units and cut its per-unit costs. The proposal calls for a $0.45 reduction in unit sales price,
which would result in an estimated 49,000 increase in unit sales.
Production Outlook
Griffin has 38,000 units of finished goods inventory on hand at December 31, 2020. If Proposal
1 is implemented, Griffin plans to reduce inventory levels, with 2021 ending inventory equal
to 3% of 2021 unit sales. If Proposal 2 is implemented, Griffin intends to increase finished
goods on hand to 45,000 units at 2021 year end.
Cost Estimates
The following cost estimates have been developed for 2020. Direct materials: $2.32 per unit,
direct labor: $1.32 per unit, variable overhead: $0.91 per unit. Fixed overhead is estimated to
be $1,665,000 for 2021.