Cost–Based and Market–Based Prices, Minimum Acceptable Price
Q6
The OK Feed Store packages and distributes three grades of animal feed. The material cost per ton and estimated annual sales for each of the
products are listed here:
The fixed cost of operating the machinery used to package all three products is $20,000 per year. In the past, prices have been set by
allocating the fixed overhead to products on the basis of estimated sales in tons. The resulting total costs (material costs plus allocated fixed
overhead) are then marked up by 100%.
REQUIRED:
1. Determine the price per ton for each grade of feed using the method described for setting prices.
2. Does the price in part (A) take into account how much customers are willing to pay for the product? Explain.
3. Suppose a 10% increase in price would result in about a 40% decrease in the amount of the economy grade feed sold. Estimate the
price that would maximize profits on the economy grade feed.
4. Explain how the price for economy grade feed calculated in part (C) should be used.
5. Suppose a Canadian distributor would like to buy 200 tons of economy grade feed and has offered to pay $2,400 for the special order.
1. What is the relevant cost to OK feeds for this order?
2. Considering only quantitative factors, what is the minimum acceptable price per ton?
