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What questions should managers answer when considering special pricing orders?

Short Answer

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Answer

Managers must consider several factors, such as capacity required, qualitative factors, fixed costs, and more, before considering special pricing orders.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Special Orders

Special orders refer to orders placed at lower prices to a business entity. Such orders are generally awarded for a short period of time; and in the short term, do not affect the normal sale of the business.

02

Questions managers should answer when considering special pricing orders

Managers are required to consider the following points when making decisions associated with special orders:

  • Capacity required for the fulfillment of special ordersmust be considered.
  • Managers should check whether the price offered by the buyer covers the cost of production.
  • Fixed costsโ€™ role should be properly analyzed to determine the appropriateness of special pricing orders.
  • In addition, other qualitative factorsshould also be considered while concluding the analysis.

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Most popular questions from this chapter

What questions should managers answer when setting regular prices?

Explain why a segment with an operating loss can cause the company to have a decrease in total operating income if the segment is dropped.

Snappy Plants operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Snappy Plants has 5,100,000inassets.Itsyearlyfixedcostsare650,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total 1.90.SnappyPlantsโ€ฒsvolumeiscurrently500,000units.Competitorsofferthesameplants,atthesamequality,togardencentersfor4.25 each. Garden centers then mark them up to sell to the public for 9to12, depending on the type of plant.

Requirements

1. Snappy Plantsโ€™s owners want to earn a 11% return on investment on the companyโ€™s assets. What is Snappy Plantsโ€™s target full product cost?

2. Given Snappy Plantsโ€™s current costs, will its owners be able to achieve their target profit?

3. Assume Snappy Plants has identified ways to cut its variable costs to \(1.75 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?

4. Snappy Plants started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Snappy Plants does not expect volume to be affected, but it hopes to gain more control over pricing. If Snappy Plants has to spend \)105,000 this year to advertise and its variable costs continue to be $1.75 per unit, what will its cost-plus price be? Do you think Snappy Plants will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

When is nonfinancial information relevant?

Question: Explain the difference between price-takers and price-setters.

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