Question

Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlin would set up a booth at craft fairs and sell a few of the figurines along with jewelry that Caitlin made. Little by little, demand for the figurines, now called Mollycaits, grew, and the sisters began to reproduce some of the favorites in resin, using molds of the originals. The day came when a buyer for a major department store offered them a contract to produce 2,000 figurines of various designs for $12,000. Molly and Caitlin realized that it was time to get down to business. To make bookkeeping simpler, Molly had priced all the figurines at $8.00 each. Variable operating costs amounted to an average of $6.00 per unit. To produce the order, Molly and Caitlin would have to rent industrial facilities for a month, which would cost them $5,000.

1. At this time, Mollycaits come in 15 different varieties. Whereas the average variable cost per unit is $6.00, the actual cost varies from unit to unit. What recommendation would you have for Molly and Caitlin with regard to pricing and the numbers and types of units that they offer for sale?

Answer 1

Answer:

Recommendations:

Their business has grown and product varieties are 15. Actual cost varies from unit to units. As such it is not prudent to price all figurines at $8.00 each. Although current policies helps keeping bookkeeping simple, it may be detrimental to their business in future. As they have the same price for all figurines, they may loose sales of those figurines which are priced lower by competitors due to lower cost. This policy may lead to skewed sales. Customers may purchase those figurines which they are offering at lower prices than competitors. This will affect their margins in future.

To take care of growth in varieties and increase in volume, it is recommended that they follow Job Costing where in they cost separately each variety. This will help reflect more precise cost for each variety.

They should allocate overheads based on rational basis.

They should factor in costing of each variety and market price into their pricing decisions rather than having one price for all.

Simple book keeping may meet requirement of reporting but it will not give any useful information for monitoring and decision making.

Implementation of job costing will help in monitoring costs and decision making for pricing.