Chapter 25: Q25-12RQ (page 1406)
What is cost-plus pricing? Who uses it?
Answer
Cost-plus pricing is an approach of setting the target selling prices of products and services, and price-setter business concerns use the same.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
What is the decision rule concerning products to emphasize when facing a constraint?
What are sunk costs? Give an example.
What is target pricing? Who uses it?
What is a constraint?
Elm Petroleum has spent \(204,000 to refine 61,000 gallons of petroleum distillate, which can be sold for \)6.30 per gallon. Alternatively, Elm can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost \(1.80 per gallon of distillate. The cleaner fluid can be sold for \)9.10 per gallon. To sell the cleaner fluid, Elm must pay a sales commission of \(0.10 per gallon and a transportation charge of \)0.16 per gallon.
Requirements
1. Diagram Elm’s decision alternatives, using Exhibit 25-18 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Elm’s decision?
3. Should Elm sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
