Question

In the context of this course, you will be asked to address the issues/questions below for Costco Wholesale Corporation (COST), www.costco.com When addressing the issues/questions, be sure to do so in the context of this course and Costco. You have been appointed as the special assistant to the Chief Executive Officer, W. Craig Jelinek, who has asked you to address the following six situations:

   a) A fellow MBA alum from Lynn University, who now works in Admission at Lynn University would like to give each MBA student a benefit, which is programmed into the Lynn University ID card. This benefit would allow the student to buy the video game, Fortnite for $18. Normally the game sells for $30 and its full cost is $20. Discuss if this would be feasible, i.e. Costco is able to do this transaction without it being a donation.

b) Costco currently buys much of its shelving from a manufacturer in China. A representative from a company in Vietnam is offering to sell the shelving for 15% less than cost from the manufacturer in China. Discuss the issues that you would consider in deciding whether to accept this offer.

                        

c) Mr. Jelinek wishes to develop an incentive plan for the store managers.

                        Before the plan is implemented, he wishes you to make sure that budgeting

                        for the stores is done correctly. He has asked you to submit a document, which

discusses the key points related to budgeting that you have learned in MBA 640. Be as thorough as possible.

  

           d) Costco has only used absorption costing. Mr. Jelinek has asked you to explain the merits of using variable costing under certain circumstances.

e) Mr. Jelinek has asked you to explain how target costing/pricing would be used

                          in Costco’s pricing policies.

Answer 1

answer

:The context of this course, you will be asked to address the issues/questions below for Costco Wholesale Corporation (COST), www.costco.com When addressing the issues/questions, be sure to do so in the context of this course and Costco. You have been appointed as the special assistant to the Chief Executive Officer, W. Craig Jelinek

a. Yes, this would be feasible as Darden would still be earning a positive contribution margin even after selling the Pradina for $5 to the MBA students. Darden would be earnng $0.50 per Pradina ($5 - $4.5). Although their sale price (and thus profitability) will be lower in cases of sales to MBA students, Darden will stand to gain in the long run as it will be in a position to influence the consumption of these students and gain their loyalty. Once they graduate many of the students will become regular customers and pay the full price of $7.99.

b. In deciding whether to accept this offer or not the issues that would have to be considered are – credit terms being offered by the supplier in Vietnam, terms and conditions of the delivery, lead time, costs of transportation, warranty period, terms and conditions for repair and replacement and after sale service.

c. Before developing an incentive plan we will have to consider the company’s financial statements – income statement, balance sheet and cash flows – and its budgets to determine the financial impact of the incentive plan. Each store should have a proper plan and budget ready and should be doing quantitative as well as qualitative data analysis. This will help us to be in a better position to do data gathering, proposal preparation and report preparation.

d. The merits of using variable costing is that this method provides a better understanding of the effect of fixed costs on the net profits. Secondly the net operating income figure produced by variable costing is usually close to the flow of cash. This becomes highly useful when there are cash flow problems. Lastly under variable costing income of different periods do not change with the change of inventory levels (as it does in case of absorption costing system).

e. Darden can use target costing/pricing to decide in advance the price points, costs of the products, as well as profit margins that it wishes to achieve with regards to a new product. For example Darden can introduce new low priced products for the MBA students using the target costing/pricing approach