MBA-FPX5010 - Accounting Methods for Leaders: Product Pricing Recommendation (September 19, 2024)

Product Pricing Recommendation

 

Business Context

For eight years, Acme Pickle has operated in Jacksonville, Florida, supplying its pickle brand, Florida’s Best, to stores in southeastern states. The company produces an average of 8,000 to 10,000 cases of pickles a month, with the ability to manufacture 12,000 cases with the current equipment and personnel. Per the company’s previous financial report, the calculated cost per case of pickles is $10.00, and the regular selling price is $20.00 per case (Capella University, n.d.).

Product Pricing Scenario

Super Deals is a Wisconsin grocery chain of twenty retail stores. The owner would like to purchase 2000 cases of Florida’s Best for a promotion at his stores, where customers receive a free jar of pickles with a $40 purchase; however, the owner only offers to pay $9.50 per case. Since the regular sale price per case is $20, and the cost per case is $10,  management is concerned that the company will lose money if they agree to sell the pickles at a discounted price (Capella University, n.d.).

Table 1

Acme Pickle Company Cost Report

(Capella University, n.d.).

 The Acme Company obtained their $10 per case calculation from the Acme Pickle Company Cost Report. The report lists the costs associated with manufacturing and distributing 9,000 cases of pickles. Ingredient and packaging supplies like cucumbers are $15,000, spices and vinegar are $11,000, and jars and lids are $10,000, or $36.000. The direct labor and supervisor staffing costs are $40,000 combined. Depreciation on the factory is $10,000. The property taxes and insurance are $4,000 of the expenses. The total costs are $90,000. The total costs are divided by the number of cases to determine the cost per package. Therefore, $90,000 divided by 9,000 is $10.00 per case. However, costs are subjective to accounting purposes. This $10.00 cost is accurate for financial accounting purposes; however, managerial accounting may require breaking this information down to meet the needs of the smaller business departments. This presentation will explain through cost accounting why the company should take Super Deals’ offer.

Financial Accounting and Managerial Accounting Comparison

Companies use financial accounting and managerial accounting to make decisions. However, each method is beneficial depending on the circumstances. Financial accounting focuses on a company's historical financial data, so companies use this accounting method to report monthly, quarterly, or annual statements to the company, the SEC (U.S. Securities and Exchange Commission), creditors, and investors. These financial accounting reports are subject to Generally Accepted Accounting Principles (GAAP), the Financial Accounting Standards Board (FASB), and other regulations (Droms & Wright, 2015). Therefore, reliability and accuracy are paramount in financial accounting (Marshall et al., 2023).

Financial accounting is for external purposes, and the reports apply to the entire company, investors, and creditors. In contrast, a company uses managerial accounting for internal purposes like planning and controlling smaller business units (Marshall et al., 2023). Managerial accounting may consider financial statements; however, managerial accounting focuses more on the company's present and future needs and decisions.  Since managerial decision-making and planning are often urgent and must act before the end-of-period financial reports, the requirements for managerial reports are more lenient regarding accuracy due to the speed of necessity (Marshall et al., 2023).

The financial income statement is one of the core reports used in financial accounting. The income statement subtracts the company’s total expenses from revenue to obtain the gross profit and then subtracts the total expenses to obtain the net income (Marshall et al., 2023). Since financial accounting lists the costs into broad categories, it can obscure specific cost behaviors (Marshall et al., 2023).  This could lead to decisions based on overall profitability rather than analyzing the detailed cost structure, potentially missing opportunities for accepting beneficial sales at lower prices, such as Super Deals proposed deal. Cost accounting is one type of managerial accounting that calculates the total cost of production by assessing the fixed and variable costs (Tuovila, 2024). By analyzing the separate variable and fixed costs, managerial accounting allows Acme to conduct a detailed analysis of its production costs. Examining the costs in greater detail allows management to calculate the variable and fixed costs of producing additional cases of pickles to more accurately determine the cost per case. Acme can examine the costs closer to help decide if the company should take Super Deals’ $9.50 offer.

Managerial Accounting

Companies may separate their costs according to their needs; however, in Acme Company’s scenario, the costs will be sorted into two categories: fixed or variable. A variable cost changes as the volume of cases changes, and a fixed cost does not change as production increases (Marshall et al., 2023).

Table 2

 Cost Accounting Variable & Fixed Costs with Costs Per Case

(Capella University, n.d.).

In the case of Acme Pickles, the company can produce 12,000 cases of pickles without the cost of equipment or personnel changing (Capella University, n.d). Therefore, the costs for line supervisors are fixed if the number of cases Acme produces is 12,000 or less. However, the costs for direct labor are variable because they are paid per case. The materials required to make the pickles are variable because the amounts require adjustment to produce fewer or more pickles. So, cucumber, spices and vinegar, jars and lids are all variable costs. The remaining costs, depreciation on the factory, property taxes on the factory, and insurance on the factory) are also fixed because the output of cases does not impact those costs. So, for 9,000 cases, the total fixed costs are $24,000, and the total variable costs are $66,000. The fixed costs will remain the same, up to 12,000 cases. However, the variable costs change. Since these are the total fixed and variable costs per 9,000 cases, the costs per case are calculated by dividing the total by 9,000. The fixed cost per case is $2.67, and the variable cost is $7.33.

Table 3

 Calculated Profit Per 9,000 to 11,000 Cases Produced

 

(Adapted by the author from data from Capella University, n.d.).

The profit is calculated by subtracting the total costs from the revenue earned. For 9,000 cases sold at $10.00 per case, Acme generates a $90,000 profit. If the company sells the additional 2,000 cases at $9.50 per case sells the additional 2,000 cases, it will earn a total profit of $94,370, which is an additional profit of $4,370 from the discounted sale. Therefore, the recommendation is to agree to the $9.50 price. The company will generate a profit, and Acme Pickles can also expand into the Midwest, which is a new territory. Also, since the owner of Super Deals is a new customer and owns twenty stores in Wisconsin, this may lead to repeat purchases of the pickles at the full $20.00 cost after the promotion. Offering this initial discount will help create a good relationship with the owner of Super Deals.

References 

Capella University. (n.d.). Assessment 2 product pricing recommendation [Instructions]. https://courseroom.capella.edu/courses/27380/pages/assessment-2-instructions?module_item_id=1371747

Droms, W.G. & Wright, J.O. (2015). Finance and accounting for nonfinancial managers: All the basics you need to know (7^th ed.). Basic Books.

Marshall, D. H., McManus, W. W., & Viele, D. F. (2023). Accounting: What the numbers mean (13th ed.). McGraw-Hill.

Tuovila, A. (2024, July 29). Cost accounting: Definition and types with examples. Investopedia. https://www.investopedia.com/terms/c/cost-accounting.asp