As an internal accounting professional working for the company, prepare an informal memo to the Vice President of City Sol detailing any numeric analysis supporting or not supporting the current pricing strategy and the potential impact upon market entry from Saskatchewan companies.
City Sol manufactures and sells three fantastic products. Management has set the prices as marked up 15% above cost. Product A requires three manual assembly operations, two machining steps, and no computer assembly steps; Product B requires five manual assembly operations, five machining steps, and ten computer assembly steps; while product C requires ten manual assembly operations, six machining steps, and six computer assembly steps. The projected costs and planned volumes are as follows;
The Manufacturing Overhead Costs are expected to be $106,000. See details in Table 2 below. Since the vice-president wants to know how much each product costs in order to set prices, the accountant decided that labour costs was the easiest indicator of capacity usage and as such it was decided to allocate the MOH based on labour costs.
Product A Product B Product C
Material per unit $6.00 $12.00 $18.00
Labour per unit $10.00 $6.00 $4.00
Planned production 1,000 500 1,500
Manufacturing overhead costs
Manual Assembly operations $ 50,000
Machining steps $ 15,000
Computer Assembly steps $ 41,000
Total MOH $106,000
Sales have been quite strong.
Now in evil Saskatchewan there were three separate companies preparing to start production and sale of the products that were similar and directly competitive to City Sol's. Each company specialized in one of the products. The following industry report provides the cost projections for each of the separate companies (See Table 3 below);
A Co. Product A B Co. Product B C Co. Product C
Planned production 500 250 750
Total materials costs $ 3,000 $ 3,000 $ 13,500
Total labour costs $ 5,000 $ 1,500 $ 3,000
Manufacturing overhead $ 20,000 $ 21,000 $ 13,000
Per Unit data
Material per unit $ 6.00 $ 12.00 $ 18.00
Labour per unit $ 10.00 $ 6.00 $ 4.00
Manufacturing overhead $ 40.00 $ 92.00 $ 34.67
Total Cost $ 56.00 $ 110.00 $ 56.67
Selling Price $ 67.20 $ 132.00 $ 68.00
Profit $ 11.20 $ 22.00 $ 11.33
This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.To: Vice President of City Sol
Attachment: Cost Computations
Subject: Comparison of Competitor’s Products
I am writing this memo as I have done a closer look at the current costs we incur in the production of Products A, B, and C. Since three companies are planning to enter our market, I believe it is best to share to you the results of my comparison of our competitors.
Currently, these companies are planning to produce units which are lower than our planned production. ...