Sammamish Brick, Inc., manufactures bricks using clay deposits on the company's property. Raw clays are blended and then extruded into molds to form unfired bricks. The unfired bricks are then stacked onto movable metal platforms and rolled into the kiln where they are fired until dry. The dried bricks are then packaged and shipped to retail outlets and contractors. The bottleneck in the
production process is the kiln, which is available for 2,850 hours per year. Data concerning the company's four main products appear below. Products are sold by the pallet.
Gross revenue per pallet
Contribution margin per pallet
Annual demand (pallets)
Hours required in the kiln per pallet
No fixed costs could be avoided by modifying how much is produced of any product.
1a. Calculate the total hours required in the kiln to satisfy demand for all products.
Total hours required in the drying kiln
1b. Is there sufficient capacity in the kiln to satisfy demand for all products?
2a. Calculate the profitability index for the company's four products.
2b. What is the production plan for the year that would maximize the company's profit? (Round answer to the nearest complete pallet (i.e., 12.3 pallets should be entered as 12.)
3. What would be the total contribution margin for the production plan you have proposed?
4. The kiln could be operated for more than 2,850 hours per year by running it after normal working hours. Up to how much per hour should the company be willing to pay in overtime wages, energy costs, and other incremental costs to operate the kiln additional hours?
Maximum amount to operate the kiln
5. The company is considering introducing a new product, glazed Venetian bricks, whose variable cost would be $865 per pallet and that would require 10 hours in the kiln per pallet. What is the minimum acceptable selling price for this new product?
Time required (hours)
Selling price 2
6. Salespersons are currently paid a commission of 5% of gross revenues. Will this motivate the salespersons to make the right choices concerning which products to sell most aggressively?
Problem A-4 The Economists' Approach to Pricing [LOA-1]
The postal service of St. Vincent, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The souvenir sheets usually contain several high-value St. Vincent stamps depicting a common theme, such as the life of Princess Diana. The souvenir sheets are designed and printed for the postal service by Imperial Printing, a
stamp agency service company in the United Kingdom. The souvenir sheets cost the postal service $0.70 each. St. Vincent has been selling these souvenir sheets for $7.00 each and ordinarily sells about 52,000 units. To test the market, the postal service recently priced a new souvenir sheet at $8.00 and sales dropped to 42,000 units.
1a. Calculate the contribution margin for sale price of $7.00 each or $8.00 each?
Cost of goods sold
1b.Does the postal service of St. Vincent make more money selling souvenir sheets for $7.00 each or $8.00 each?
2. Estimate the price elasticity of demand for the souvenir sheets. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 4 decimal places.)
Price elasticity of demand
3. Estimate the profit-maximizing price for souvenir sheets. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Exercise A-2 Absorption Costing Approach to Setting a Selling Price [LOA-2]
Martin Company is considering the introduction of a new product. To determine a selling price, the company has gathered the following information:
Number of units to be produced and sold each year
Unit product cost
Projected annual selling and administrative expenses
Estimated investment required by the company
Desired return on investment (ROI)
The company uses the absorption costing approach to cost-plus pricing.
1. Compute the markup required to achieve the desired ROI. ((Round your final answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
2. Compute the selling price per unit. (Round your intermediate and final answers to 2 decimal places.)
Unit product cost
Selling price per unit
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