Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Accounting Posted 11 Jul 2017 My Price 13.00

short-run pricing decisions

Re l ev ant- c o s t app r oach to short-run pricing decisions.

Alexon SL is an electronics business with eight product lines. Profit data for one of the products (XT-107) for the month just ended (June 2008) are as follows:

 

Sales, 200 000 units at average

price of €100

Variable costs

  

€20 000 000

Direct materials at €35 per unit

€7 000 000

  

Direct manufacturing labour at

    

€10 per unit

2 000 000

  

Variable manufacturing overhead at

    

€5 per unit

1 000 000

Sales commissions at 15% of sales

3 000 000

Other variable costs at

  

€5 per unit

1 000 000

––––––––––––

  

T otal variable costs 14 000 000

––––––––––––

Contribution margin 6 000 000

Fixed costs 5 000 000

––––––––––––

Operating profit €1 000 000

––––––––––––

 

Xuclà Mecàniques Fluvià SA, an instruments company, has a problem with its preferred supplier of XT-107 component products. This supplier has had a three-week strike and will not be able to supply Xuclà 3000 units next month. Xuclà approaches the sales representa- tive, Angela Zamora, of Alexon SL about providing 3000 units of XT-107 at a price of €80 per unit. Zamora informs the XT-107 product manager, Francisco García-Salve, that she would accept a flat commission of €6000 rather than the usual 15% if this special order were accepted. Alexon has the capacity to produce 300 000 units of XT-107 each month, but demand has not exceeded 200 000 units in any month in the last year.

 

Required

1 If the 3000-unit order from Xuclà is accepted, what will be the effect on monthly operat- ing profit? (Assume the same cost structure as occurred in June 2008.)

2 Francisco ponders whether to accept the 3000-unit special order. He is afraid of the precedent that might be set by cutting the price. He says, ‘The price is below our full cost of €95 per unit. I think we should quote a full price, or Xuclà will expect favoured treat- ment again and again if we continue to do business with them.’ Do you agree with Francisco? Explain

Answers

Maurice Tutor
(5)
Status NEW Posted 11 Jul 2017 11:07 PM My Price 13.00

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