Setting a Selling Price
LO 4 Setting a Selling Price
C 4. For the past four years, three companies have dominated the soft drink indus- try, holding a combined 85 percent of market share. Wonder Cola, Inc., ranks
second nationally in soft drink sales. Its management is thinking about introduc- ing a new low-calorie drink called Null Cola.
Wonder soft drinks are processed in a single department. All ingredients are added at the beginning of the process. At the end of the process, the beverage is poured into bottles that cost $0.24 per case produced. Direct labor and overhead costs are applied uniformly throughout the process.
Corporate controller Adam Daneen believes that costs for the new cola will
be very much like those for the company’s Cola Plus drink. Last year, he collected the following data about Cola Plus:
Units* Costs
Work in process inventory January 1 † 2,200
Direct materials costs
Conversion costs
December 31 ‡ 2,000
Direct materials costs
Conversion costs
Units started during year
Costs for year
Liquid materials added
Direct labor and overhead
*Each unit is a 24-bottle case. † 50% complete.
‡ 60% complete.
The company’s variable general administrative and selling costs are $1.10 per unit. Fixed administrative and selling costs are assigned to products at the rate of $0.50 per unit. Each of Wonder Cola’s two main competitors is already market- ing a diet cola. Company A’s product sells for $4.10 per unit; Company B’s, for $4.05. All costs are expected to increase by 10 percent in the next three years. Wonder Cola tries to earn a profit of at least 15 percent on the total unit cost.
1. What factors should Wonder Cola, Inc., consider in setting a unit selling price for a case of Null Cola?
2. Using the FIFO costing method, compute (a) equivalent units for direct materials, cases of bottles, and conversion costs; (b) the total production cost per unit; and (c) the total cost per unit of Cola Plus for the year.
3. What is the expected unit cost of Null Cola for the year?
4. Recommend a unit selling price range for Null Cola, and give the reason(s)
Chapter Assignments
that the production cost for each box of Smackaroos has increased approximately
22 percent in the last four months. Because the company is unable to increase the selling price for a box of Smackaroos, the increased production costs will reduce profits significantly.
Today, you received a memo from Gilbert Rom, the company president, ask- ing you to review your production process to identify inefficiencies or waste that can be eliminated. Once you have completed your analysis, you are to write a memo presenting your findings and suggesting ways to reduce or eliminate the problems. The president will use your information during a meeting with the top management team in ten days.
You are aware of previous problems in the Baking Department and the Pack- aging Department. Winslow has provided you with process cost reports for the two departments. He has also given you the following detailed summary of the cost per equivalent unit for a box of Smackaroos cereal:
April May June July
Baking Department Direct materials
Direct labor
Department totals
Packaging Department Direct materials
Direct labor
Department totals
Total cost per equivalent unit
1. In preparation for writing your memo, answer the following questions:
a. For whom are you preparing the memo? Does this affect the length of the memo? Explain.
b. Why are you preparing the memo?
c. What actions should you take to gather information for the memo? What information is needed? Is the information that Winslow provided suffi- cient for analysis and reporting?
d. When is the memo due? What can be done to provide accurate, reliable, and timely information?
2. Based on your analysis of the information that Winslow provided, where is the main problem in the production process?
3. Prepare an outline of the sections you would want in your memo.