Interpreting Managerial reports: Setting a Selling Price

Interpreting Managerial reports: Setting a Selling Price

C4. BUSINeSS applICatIoN ?For the past four years, three companies have dominated the soft drink industry, holding a combined 85 percent of market share. Won Cola, Inc., ranks second nationally in soft drink sales. Its management is thinking about introducing a new low-calorie drink called Uncalorie Cola.

Won 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 data that follow about Cola Plus.

Units*

Costs

Work in process inventory:

January 1**

2,200

Direct materials costs

$ 2,080

Conversion costs

620

December 31***

2,000

Direct materials costs

1,880

Conversion costs

600

Units started during year

458,500

Costs for year:

Liquid materials added

430,990

Direct labor and overhead

229,400

Bottles

110,088

* 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 Won Cola’s two main competitors is already marketing a diet cola. Com- pany 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. Won Cola tries to earn a profit of at least 15 percent on the total unit cost.

1. What factors should Won Cola, Inc., consider in setting a unit selling price for a case of Uncalorie 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 Uncalorie Cola for the year? (Round unit costs to the nearest cent.)

4. Recommend a unit selling price range for Uncalorie Cola, and give the reason(s) for your choice. (Round to the nearest cent.)