Question

Question 6-32, Management Accounting 6th Edition

Pricing, customer profitability, managing customer relationships

Read the Wall Street Journal Article, “Survival Strategies: After Cost Cutting, Companies Turn toward Price Increases,” by Timothy Aeppel (September 18, 2002, p. A1). The article reports “an all-out search for new ways to change more money without raising prices.”

How did Jergens, Inc., use an activity-based costing approach to justify the price for an order of odd-size metal locating fasteners?

What issues arose in Goodyear Tire & Rubber’s Pricing to distributors? What was Goodyear’s response?

What was the outcome of Emerson Electric’s decision to depart from cost-based pricing? How can a product costing system contribute to under-costing a low-volume or customized product?

How did Wildeck influence customer to purchase products and services that are more profitable to Wildeck? What role should a cost-system play in such decisions?

Why was Union Pacific not concerned if it lost its less profitable customers? Will dropping unprofitable customers always lead to an immediate increase in profit?

Answer 1

(a) How did Jergens, Inc., use and activity-based costing approach to justify the price for an order of odd-size metal locating fasteners?

jergens ,Inc. can use Price based on the cost of producing the order of 10 odd-sized fasteners from scratchcost included setup for the odd size and overtime labor.

(b) What issues arose in Goodyear Tire & Rubber’s pricing to distributors? What was Goodyear’s response?

Following issue arose in Goodyear Tire & Rubber’s pricing to distributors

(1) The first one is that Channel stuffing occurs via inflated sales near year-end

(2) the second is that Incentive to deeply discount prices to large distributors

What was Goodyear’s response?

Goodyear is as under

•They cut discounts to large distributors

•They placed discount approval authority with Tactical Pricing Group

•Bonus incentives based on per tire revenue

(c) What was the outcome of Emerson Electric’s decision to depart from cost-based pricing? How can a product costing system contribute to undercosting a low-volume or customized product?

Emerson Electronic used Price of a good or service is based on the costs incurred and Cost up, Price up – used by Emerson to determine cost and mark. Now Emerson go for Pricing based on what customers are willing to pay

The out come of Emerson Electric’s decision to depart from cost-based pricing is as follow

Customers willing to pay 20% more and Emerson sold sensor for$3,150 as opposed to $2,650

How can a product costing system contribute to undercosting a low-volume or customized product

Traditional cost systems allocate plantwide or departmentaloverheadrates based on volume-based level drivers

ABC systems reflect costs for various activities, not just volume of products

(d) How did Wildeck influence customers to purchase products and services that are more profitable to Wildeck? What role should a cost system plan in such decisions?

Wildeck should Promote packages that included installing its products.

How did Wildeck respond to a competitor’s lower priced storage-rack protector?

Wildeck should developed “lite” version; priced lower than competitor