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    Factory Accounting and Overhead

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    What is better figure for this about in between $8.00 and $14.70?? Not sure...thanks

    At a factory price of $8.00 Frank figured they could sell 50,000 timers. He figured there should be a $50,000 advertising budget that would be spent regardless of sales volume. He figured the $1.00 per unit for general admin. And selling expense would just cover the advertsing cost and could be allocated to advertsing since other SG&A costs would be fixed.
    When Frank showed his proposal Jim, the latter flatly disagreed with the idea of cutting overhead."you start doing that" he said, " and pretty soon you've got lots of volume and no profit" . You can't just wave your calculator like a wand over the numbers and have a product actually cost less.Furthermore, I think you haven't figured in the value of the product options. There is no another time like this on the market. I think we can put a factory price of $14.70 on it and customers will be eager to buy it at $29.40.
    Tom, who had heard most of the discussion said he thought the $14.70 factory price was a much better idea. "Look", he said to Frank,"if you breakdown of fixed and variable costs is right- and I think is probably OK for the short run- then we'll only need to sell some smaller number of units at $14.70 to be as well off as we would be with your plan".
    'Well" said Jim, " That may be right, but the more I look at this the more it seems to me that a little knowledge is a dangerous thing here. I do not think we really know how much the new timer is going to cost either in the short run or the long run".


    If, as Jim says, neither $14.70 nor $8.00 represents "the cost " of the ne timer, how would better figure be computed??

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    Solution Preview

    Okay, here goes, from the information provided:

    Sales of 50,000 units at the factory price of $8.00 per unit yields a production cost of $400,000

    Advertising 50,000

    Solution Summary

    This solution is an analysis of an accounting problem from the world of manufacturing and the impact of the process of setting the price for the product.