Product Pricing and Gross Profit Margin
Not what you're looking for?
Note: Data provided in attachment.
Pressure Products, Inc., produces specialized industrial hoses for applications such as high-pressure hydraulics and the transference of highly corrosive materials. The company has recently implemented an ABC system for three of its products, and is interested in evaluating its effectiveness before converting to an ABC system for all products. To perform this evaluation the company compiled data for the three products using both the traditional system and the new ABC system. The traditional system used a single driver (direct material costs). The ABC system uses a variety of cost drivers related to the activities used to produce the hoses. The three products involved in the trial run of the ABC system were R-150, S-127, and M-63. The following data relate to these products, and unit data have been rounded to the nearest penny.
Questions:
a) Explain why the cost of M-63 product increased under the ABC system while the cost of R-150 decreased.
b) Assume that Pressure Products expects to produce a gross profit margin on each product of at least 40% of the selling price. Suggest what action management might take with respect to the discoveries resulting from the ABC versus traditional costing analysis.
c) Describe the production characteristics (for example, high-volume, specialty, etc.) of the three products manufactured by Pressure Products, Inc. in our case study.
d) Describe the characteristics of products which would suggest it would be better to use ABC as an indirect cost allocation method over a traditional method such as direct labor hours.
Purchase this Solution
Solution Preview
a) Explain why the cost of M-63 product increased under the ABC system while the cost of R-150 decreased.
Under ABC, products are allocated overhead based on their consumption/use of a number of activities (see example below), not just direct material costs. So, M-63 was likely a heavy user of something other than direct material (batches/machines) and so was allocated more when those other activities caused allocations. R-150 was likely a heavy user of direct materials and lighter user of other overhead activities and so when the overhead was split into activity pools, they received the same proportion of material related overhead but that pool was smaller. Imagine something like this:
......................................Traditional ...
Education
- BSc, University of Virginia
- MSc, University of Virginia
- PhD, Georgia State University
Recent Feedback
- "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
- "Thank, this is more clear to me now."
- "Awesome job! "
- "ty"
- "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Lean your Process
This quiz will help you understand the basic concepts of Lean.
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Marketing Management Philosophies Quiz
A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.