The Understand Company is a family owned business started in 1980. The business specialises in manufacturing metal sunshade stands for both domestic and commercial use. Up until recent times the company has been highly successful, first with their sunshade stands for domestic customers and then branching out to commercial installations for luxury hotels and resorts. The Understand Company sells their product for domestic customers to wholesalers, who then on-sell to retail outlets. Whereas for the commercial installations the Understand Company deals directly with the customer. In an attempt to enter an emerging market, that is the sunshade stands for commercial use, the Understand Company recently introduced made-to-order installations for luxury hotels and resorts. There have been many new sunshade stand manufacturers entering the domestic market over the past ten years. After the Understand Company experienced a recent reduction in sales of domestic sunshade stands, there was a reduction in overall gross profit which led to the company employing a new CEO, John Sticks. John is not a member of the family that started the Understand Company but is a chartered accountant and has knowledge and experience with management accounting and costing in both manufacturing and service organisations.

Prior to the appointment of John as a CEO, a member of family that founded the Understand Company had been acting as CEO and had been responsible for costing and pricing the products the company sells. This family member has hands on knowledge of the production process but no formal accounting qualifications. The founding family were at a loss as to why the company was not as profitable when they knew that they are very experienced at making the domestic product compared with the new entrants to the market.

The new CEO noticed that the company has been recently selling more of the high-end commercial sunshade installations than their competitors and fewer of the sunshade stands for domestic use. This puzzled John as he knew that the Understand Company had many years of experience of making sunshade stands for domestic use and was very efficient at making this product. Whereas the Understand Company was less experienced at making the commercial sunshade stands and was still adjusting their manufacturing process.

The Understand Company used a "Just in Time" ordering and manufacturing process where they tried to minimise inventory of raw materials and stock on hand. The manufacturing process started when orders were received from customers. Manufacturing labour was a fairly small proportion of overall costs as much of the process was highly automated. The process involved cutting of steel with machines, soldering parts and extensive quality control inspections.

John Sticks - the new CEO found that the company was using a cost-plus pricing system adding a 50% mark up to the manufacturing costs of both the commercial and domestic sunshade stands to arrive at the sales price. The costing of the sunshade stands was based on the following information: