Running Head: PRODUCT PRICING RECOMMENDATION

Product Pricing Recommendation

MBA-FPX5010-Accounting Methods for Leaders

Khaled Ghany

November 11, 2018

PRODUCT PRICING RECOMMENDATION

Product Pricing Recommendation

Why are some production costs fixed and some are variable?

When it comes to production costs, some are affected by the number of products that are
produced while others are not affected at all. Variable costs are costs that change due to the total
volume activity. Fixed costs on the other hand do not change as quick as variable costs and are
rather consistent when compared to variable costs (Marshall, McManus, & Viele, 2017).

Fixed costs are consistent and are not directly dependent upon the volume of products
that are being made. Examples of these costs are salaries, property taxes, rent and advertisement
costs. Variable costs are dependent upon the number of products that are produced. Such costs
include wages, production supplies, shipping costs and warranty costs (Marshall et al., 2017).

How would the production costs of Acme Pickle Company be recalculated?

The production costs of Acme Pickle company will be recalculated using a break-even
analysis. The costs that are needed to calculate a break-even analysis are fixed costs, variable
costs per unit and selling prices per unit. The new break-even point will be calculated based on
2,000 units instead of 9,000 units. The break-even analysis is then calculated by dividing the
fixed costs by the price of each unit minus the variable costs per unit (Marshall et al., 2017).

The production costs of the company are currently calculated based on 9,000 cases of
pickles being produced. Generally, costs per unit are calculated by adding variable costs and
fixed cost then dividing this cost by the number of units that are produced. Currently, the
variable costs for Acme Pickle Company contains the costs for cucumbers, spices and vinegar,
jars and lids, and direct labor which totals to $66,000. The variable cost comes to $7.33 per case.
When it comes to the fixed costs of Acme Pickle Company, it includes the salaries for line
supervisors, depreciation costs of the factory, property taxes on the factory and insurance costs
for the factory. The fixed costs for Acme Pickle Company total to be $24,000 (Marshall et al.,
2017).

What would the results of the recalculation be?

Acme’s current break-even point is 8,989 units (9,000). A new break-even point needs to
be calculated to determine if Super Deal’s is making a good offer at 2,000 units. The results of
the break-even analysis for Super Deal’s is that this company would need to purchase at least
11,060 units of pickles in order for Acme Pickle company to break even. With this, Super Deal’s
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would need to purchase double that in order for Acme Pickle company to profit in the same way
that they are currently profiting.

Example 1: Acme’s Current break-even point = $24,000 = 8,989 units

$10-$7.33

Example 2: Super Deal’s Break-even point = $24,000 = 11,060 units

$9.50-$7.33

Are there any benefits to the company of recalculating their cost?

There are a few benefits of recalculating Acme Pickle Company’s production costs.
Sometimes it’s better to think outside of the box. In many instances, it is wiser to take a tiny
financial cut in order to gain an increase in finances. The first benefit of recalculating the
production costs of the company would be better business opportunities with Super Deal’s.
Another benefit that the Acme Pickle Company would benefit from is having more cost-effective
prices. With this because their prices are lower, customers will probably be willing to buy more
of their products.

Another benefit of Acme Pickle Company recalculating their costs would be acquiring
clients that are long-term. By recalculating their costs, it is possible that customers will continue
to place larger orders because products are much cheaper than previous. Not only that, but as
time goes on it is very important for companies to analyze their costs in order to be more
competitive. If this doesn’t happen, it’s possible that some clientele could be loss.

How does the financial accounting of production costs differ from managerial
accounting of production cost? Are there any benefits or drawbacks to using these
accounting methods?

Financial accounting for production costs mostly involves using and understanding the
financial statements of a company. Overall, the financial accounting method is used to present
the company’s financial position to all interested parties (Droms &Wright, 2015). A benefit of
using this type of accounting method is that type it involves looking at a company’s past in order
to help its future. On the other hand, because accounting principles are so heavily imposed with
financial accounting, it is important to understand how to read historical data, know how to
measure results and understand that data has to be highly accurate with this type of accounting.
For these following reasons, this could be looked at as a drawback when it comes to the financial
accounting method (Marshall et al., 2017).

Managerial accounting deals more with the number of operating units that are available
within an organization. This accounting method is used to report, collect and interpret any data
that will help managers in the decision-making process (Droms &Wright, 2015). When it comes
to managerial accounting, it is mostly handled internally by members of management. A benefit
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of using this type of accounting method for production costs is that it mainly focuses on
supporting all of managements decisions and focusing on the internal future of the company. A
drawback to using this type of accounting method is that, precision isn’t as important as it is with
the financial method. With this, there are no regulations that are imposed on this method which
may make this method seem not as accurate as the financial accounting method. (Marshall et al.,
2017).

Acme Pickle Company’s recommendation plan of action to management regarding

Super Deals’ offer.

The recommendation that Acme Pickle company should consider is that though selling
2,000 units of pickles to Super Deal’s will not meet the company’s current break-even point that
a different counter offer could make all parties happy. Offering to sell Super Deal’s 11,060 units
at $9.50 per unit in 2,000-unit increments is better than completely saying no to Super Deal’s
offer. This transaction could also create a lifelong partnership between the two companies.

Also, in an effort for Acme Pickle company to make the same percentage of profits as
they are currently making, they could also have a second offer instead of the first offer. The
second offer would be for Super Deals to purchase 22,120 units of pickles in 2,000 unit
increments at $9.50 per unit. This deal would extend the number of transactions (purchasing
2000 units) that Super Deals would have to make from 5.5 transactions to 11 transactions for
Acme Pickle company to make the same profit percentages that they are currently making.
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References

Droms, W. G., & Wright, J. O. (2015). Finance and accounting for nonfinancial managers: All

the basics you need to know. New York, NY: Basic Books. The following chapter may

be particularly useful: Chapter 2, "The Tax Environment," pages 22–31.

Marshall, D., McManus, W., & Viele, D. (2017). Accounting: What the numbers mean (11th

ed.). New York, NY: McGraw-Hill Education. Available from the bookstore.