Integrative Exercise Relevant Costing, Cost-Based Pricing, Cost Behavior, and Net Present Value Analysis for NoFat Special Sales Offer Relevant Analysis NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFat's controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)—a toxic waste cleanup company—offered to buy 10,000 pounds of olestra from NoFat during December for a price of $2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that "This is another way to use our expensive olestra plant!" Variable costs per pound: Direct materials $ 1.00 Variable manufacturing overhead 0.75 Sales commissions 0.50 Direct manufacturing labor 0.25 Total fixed costs: Advertising $ 3,000 Customer hotline service 4,000 Machine setups 40,000 Plant machinery lease 12,000 In addition, Allyson met with several of NoFat's key production managers and discovered the following information: The special order could be produced without incurring any additional marketing or customer service costs. NoFat owns the aging plant facility that it uses to manufacture olestra. NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year. NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the $1,000 cost of the inspection team. Please answer the question: Cost-Based Pricing Assume for this question that NoFat rejected PU’s special sales offer because the $2.20 price suggested by PU was too low. In response to the rejection, PU asked NoFat to determine the price at which it would be willing to accept the special sales offer. For its regular sales, NoFat sets prices by marking up variable costs by 10%. 4. If Allyson decides to use NoFat’s 10% markup pricing method to set the price for PU’s special sales offer, a. Calculate the price that NoFat would charge PU for each pound of olestra. Round your answer to the nearest cent. _______________? $fill in the blank 8 per unit b. Calculate the relevant profit that NoFat would earn if it set the special sales price by using its mark-up pricing method. Enter loss, if any, as negative amount. (Hint: Use the estimate of relevant costs that you calculated in response to Requirement 1b.) ________________? $fill in the blank 9 c. Explain why NoFat should accept or reject the special sales offer if it uses its mark-up pricing method to set the special sales price. NoFat should the special sales offer if PU will agree to pay the price of ___________? $fill in the blank 11 per unit that results from NoFat’s cost-plus pricing formula
Integrative Exercise
Relevant Costing, Cost-Based Pricing, Cost Behavior, and
Special Sales Offer Relevant Analysis
NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFat's controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)—a toxic waste cleanup company—offered to buy 10,000 pounds of olestra from NoFat during December for a price of $2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that "This is another way to use our expensive olestra plant!"
| Variable costs per pound: | ||
| Direct materials | $ 1.00 | |
| Variable manufacturing |
0.75 | |
| Sales commissions | 0.50 | |
| Direct manufacturing labor | 0.25 | |
| Total fixed costs: | ||
| Advertising | $ 3,000 | |
| Customer hotline service | 4,000 | |
| Machine setups | 40,000 | |
| Plant machinery lease | 12,000 |
In addition, Allyson met with several of NoFat's key production managers and discovered the following information:
- The special order could be produced without incurring any additional marketing or customer service costs.
- NoFat owns the aging plant facility that it uses to manufacture olestra.
- NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year.
- NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra.
- PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the $1,000 cost of the inspection team.
Please answer the question:
Cost-Based Pricing
Assume for this question that NoFat rejected PU’s special sales offer because the $2.20 price suggested by PU was too low. In response to the rejection, PU asked NoFat to determine the price at which it would be willing to accept the special sales offer. For its regular sales, NoFat sets prices by marking up variable costs by 10%.
4. If Allyson decides to use NoFat’s 10% markup pricing method to set the price for PU’s special sales offer,
a. Calculate the price that NoFat would charge PU for each pound of olestra. Round your answer to the nearest cent. _______________?
$fill in the blank 8 per unit
b. Calculate the relevant profit that NoFat would earn if it set the special sales price by using its mark-up pricing method. Enter loss, if any, as negative amount. (Hint: Use the estimate of relevant costs that you calculated in response to Requirement 1b.) ________________?
$fill in the blank 9
c. Explain why NoFat should accept or reject the special sales offer if it uses its mark-up pricing method to set the special sales price.
NoFat should the special sales offer if PU will agree to pay the price of ___________? $fill in the blank 11 per unit that results from NoFat’s cost-plus pricing formula.
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