Pricing in an Imperfect Market (CMA, Adapted)
Stac Industries is a multiproduct company with several manufacturing plants. The Clinton Plant manufactures and distributes two household cleaning and polishing compounds—regular and heavy duty—under the Cleen-Brite label. The forecasted operating results for the first six months of 1998 when 100,000 cases of each compound are expected to be manufactured and sold are presented in the following table.
Cleen-Brite Compounds—Clinton Plant Forecasted Results of Operations For the Six-Month Period Ending June 30, 1998 ($000 omitted)
| |||
| REGULAR | HEAVY DUTY | TOTAL |
Sales | $2,000 | $3,000 | $5,000 |
Cost of sales | 1,600 | 1,900 | 3,500 |
Gross profit | $ 400 | $1,100 | $1,500 |
Selling and administrative expenses |
|
|
|
Flexible | $ 400 | $ 700 | $1,100 |
Committed* | 240 | 360 | 600 |
Total selling and administrative expenses | $ 640 | $1,060 | $1,700 |
Income (loss) before taxes | $ (240) | $ 40 | $ (200) |
*The fixed selling and administrative expenses are allocated between the two products on the basis of dollar sales volume on the internal reports.
The regular compound sold for $20 a case and the heavy duty sold for $30 a case during the first six months of 1998. The manufacturing costs per case of product are presented in the following table. Each product is manufactured on a separate production line. Annual normal manufacturing capacity is 200,000 cases of each product. However, the plant is capable of producing 250,000 cases of regular compound and 350,000 cases of heavy duty compound annually.
| COST PER CASE
| |
| REGULAR | HEAVY DUTY |
Raw materials | $ 7.00 | $ 8.00 |
Direct labor | 4.00 | 4.00 |
Flexible manufacturing overhead | 1.00 | 2.00 |
Committed manufacturing overhead* | 4.00 | 5.00 |
Total manufacturing cost | $16.00 | $19.00 |
Flexible selling and administrative costs | $ 4.00 | $ 7.00 |
*Depreciation charges are 50% of the fixed manufacturing overhead of each line.
The following table reflects the consensus of top management regarding the price/volume alternatives for the Cleen-Brite products for the last six months of 1998. These are essentially the same alternatives management had during the first six months of 1998.
REGULAR COMPOUND
| HEAVY DUTY COMPOUND | ||
ALTERNATIVE PRICES (PER CASE) | SALES VOLUME (IN CASES)
| ALTERNATIVE PRICES (PER CASE)
| SALES VOLUME (IN CASES)
|
$18 | 120,000 | $25 | 175,000 |
20 | 100,000 | 27 | 140,000 |
21 | 90,000 | 30 | 100,000 |
22 | 80,000 | 32 | 55,000 |
23 | 50,000 | 35 | 35,000 |
Top management believes the loss for the first six months reflects a tight profit margin caused by intense competition. Management also believes that many companies will be forced out of this market by next year and profits should improve.
Required
(1) What unit selling price should Stac Industries select for each of the Cleen-Brite compounds (regular and heavy duty) for the remaining six months of 1998?
(2) Assume the optimum price/volumealternatives for the last six months were a selling price of $23 and volume level of 50.000 cases for the regular compound and a selling price of $35 and volume of 35,000 cases for the heavy duty compound. Should Stac Industries consider closing down its operations until 1999 in order to minimize its losses?
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