The Fastener Company manufactures office equipment for retail stores. Carol Watson, the vice president of marketing, has proposed that Fastener introduce two new products: an electric stapler and an electric pencil sharpener. Watson has requested that the Profit Planning Department develop preliminary selling prices for the two new products for her review. Profit Planning has followed the company’s standard policy for developing potential selling prices. It has used all data available for each product. The data accumulated by Profit Planning are as follows:

Fastener plans to use an average of $1,200,000 in assets to support operations in the current year. The condensed budgeted income statement that follows reflects the planned return on assets of 20 percent ($240,000 ÷ $1,200,000) for the entire company for all products.
Fastener Company
Budgeted Income Statement
For the Year Ended May 31
($000 omitted)
Revenue ................$2,400
Cost of goods sold .............. 1,440
Gross profit ................. $960
Selling and administrative expenses....... 720
Operating income .................. $240
1. Calculate a potential selling price for
(a) The stapler, using return on assets pricing, and
(b) The pencil sharpener, using gross margin pricing.
2. Could a selling price for the electric pencil sharpener be calculated using return on assets pricing? Explain your answer.
3. Which of the two pricing methods—return on assets pricing or gross margin pricing—is more appropriate for decision analysis? Explain your answer.
4. Discuss the additional steps Carol Watson is likely to take in setting an actual selling price for each of the two products after she receives their potential selling prices

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Electric Pencil Estimated annual demand in units Estimated unit manufacturing costs Estimated unit selling and Electric Stapler 16,000 $14.00 $3.00 Sharpener 12,000 $15.00 Not available administrative expenses Assets emploved in manufacturing S160,000 Not available