MBA FPX 5010 Assessment 2 Product Pricing Recommendation

Product Pricing Recommendation

Student name

Capella University

MBA FPX 5010

Professor Name

Submission Date

Slide 01

Hello everybody! ________. This proposal is a product pricing proposal of Acme Pickle Company that I am going to present today. The profitability, efficiency, and sustainability of an organization are highly dependent on pricing. The application of averaged costs of production in the pricing in the manufacturing world can be misleading in scenarios that involve special orders (Alventosa et al., 2023). The decision to accept a discounted purchase offer with Super Deals is evaluated based on the cost behaviour principles and managerial accounting to appraise the production cost and hence to facilitate sound decision-making by the Acme Pickle Company in this case study.

Company’s Overview

Slide 02

Acme Pickle Company is a prosperous company that has operated for the past eight years, and it markets its quality brand of Florida Best pickles using its manufacturing facility in Jacksonville, Florida. Retail customers of the company are located in the southeastern part of the United States, and it may offer its goods at the same price of 20 per case due to the regular quality of the goods and appropriate positioning of brands (Capella University, n.d.). The manufacturing is typically 8000 to 10000 cases per month, and the service has the potential to produce 12000 cases, with the exception of additional investment in equipment and labour. This excessive capacity is a significant aspect in determining the financial feasibility of special-order pricing opportunities.

Variable and Fixed Production Costs

Slide 03

The production cost is divided into variable and fixed costs in relation to the type of their responses to the fluctuations in production output. Variable costs are more expensive as the number of produced units rises and they include cucumbers, spices, jars, and direct labor (Kenton, 2024). Basic expenses like the salaries of supervisors, depreciation, property taxes, and insurance expenses are fixed and do not vary when production is held constant in the current capacity. The reason behind this is that some costs are directly proportional to the production output, whereas others are to maintain the production plant and labor regardless of production output. This distinction plays a critical role during decision-making processes, as the variable costs can only be used to calculate short-term special orders, but not the incremental profitability, as fixed costs are not pertinent in decision-making.

Costs of production are either direct or indirect, depending on the response to the change in the volume of production. Variable or direct costs vary directly with the output and include spices, vinegar, lids, etc., and direct labour, which is paid on a per-case basis. Such expenses increase in line with the rise in production. Although indirect costs do not change during the appropriate range of production and include the salaries of the first-line managers and insurance (Sinambela and Djaelani, 2022). The cost behaviour analysis shows that at current capacity, there is no increase in fixed costs; therefore, it cannot be applied in short-term decisions on price, such as special orders, since it does not utilise capacity.

Benefits of Recalculating the Cost of Pickle Production

Slide 04

It would be more appropriate to recalculate the production costs to have a clearer financial understanding of the financial impact of accepting the offer of Super Deals. In order to perform this recalculation, Acme will break down the total costs into variable and fixed costs. Variable costs included the cucumbers, spices, and vinegar, jars and lids, and direct labor, and they incurred the following costs: cucumbers 15,000, spices and vinegar 11, 000, jars and lids 10,000, and direct labor 30,000. The fixed costs include some salaries of the line supervisors, depreciation of the factory, insurance, and property taxes, which do not vary with the changes in production; therefore, they are not included in the computation of short-term pricing (Financial Accounting Foundation, 2024).

You can determine that the variable or marginal cost of producing 9, 000 cases is 7.33. This form of gradual differentiation will allow the management to determine whether the discounted offer will allow it to cover the actual costs of producing the additional units. The amount of money expended currently is of 10.00 per case, and the amount is determined through an average cost method, which allocates direct and indirect expenditures of the overall production. The concept of managerial accounting study is sensitive to the fact that special-order decisions should be made based on incremental costs but not on average costs since the firm will incur fixed costs whether the decision choice is made or not (Casas-Arce et al., 2022). In trying to differentiate the fixed costs and the variable costs, Acme will be in a position to predict the actual marginal cost of producing the additional cases, which does not rule out profitable opportunities by making untrue assumptions about costs.

Slide 05

Re-computation of production cost reveals that the total direct cost of the month is made up of 66 000 that consists of the raw materials and direct labour. Dividing this amount by 9,000 cases, the direct cost will be approximately 7.33 per case. The margin of special order is 2.17/case, with the proposed selling cost being 9.50/case. This will translate into an additional 4340 operating income on the 2000 cases order. Studies indicate that a special orders authorization at a price above the variable cost increases the profitability in the short-term and the optimal use of unutilized capacity in manufacturing firms (Pham et al., 2020). It is also a way of improving the quality of budgeting and assists in making decisions for future prices.

Computing the contribution margin of the special order, which is equal to 2.17/case, will indicate to the management the real incremental profit of the special order, i.e., 4,340 of 2,000 cases. This observation shows that despite the fact that the selling price is below the average cost of 10, the order can still be profitable, as it will just need to cover the variable costs. The special order acceptance is a good utilization of unused production capacity, boosts operating income in the short run, and offers an option of exploiting a new regional market. This type of cost recalculation helps in making informed decisions, is sustainable in terms of profitability, and indicates the importance of managerial accounting in determining special orders as opposed to using average costs.

Financial Accounting vs. Managerial Accounting of Production Costs

Slide 06

Financial accounting and managerial accounting differ in numerous aspects regarding purpose, scope, and user orientation. To ensure that the external users of the reports, like investors, lenders, and other regulatory bodies, are presented with accurate, transparent, and comparable reports, financial accounting principles should be used to prepare a report on standardization and information to external users. In this approach, the cost of production is determined and divided between the inventory and cost of goods sold, which are reported in the financial statements (Financial Accounting Foundation, 2024). This is how it is in the case of Acme, where the total cases were 9, 000 and the cost was 90,000, which comes to a unit cost of 10.00 per case, with the factors being 66,000 in variable cost, and 24, 000 in fixed cost. In the absence of financial accounting, it would not be able to prepare a tax report, determine net profit, or create an income statement since it would have reported a revenue of 180,000, cost of goods sold of 90,000, and pre-tax profit of 90,000.

Financial accounting plays the most vital part in compliance as well as external reporting, but it gives minimal information on operational decisions and consideration of special orders. Discounted orders may not be profitable at the unit cost in general, but may contribute to profits incrementally (Financial Accounting Foundation, 2024). This method is centered on profitability and, in general, complying with regulations as opposed to differentiating costs that vary with the volume of production, which is necessary when setting prices in the short run. Consequently, financial accounting might lead to the failure of the management to spot those lucrative opportunities that can be exploited, since the cost of such exploitative opportunities is analyzed. These will necessitate managerial accounting to be compulsory in determining the financial implications of the decisions, including the Super Deals special order.

Slide 07

Managerial accounting is more internalized in making decisions, and this is not limited only to GAAP; therefore, managers need to analyze costs in a way that will assist them in achieving operational and strategic objectives. These categories include the fixed and variable costs, and it is possible to calculate the contribution margins, incremental profit, and how a particular decision affects the finances (Casas-Arce et al., 2022). It is assumed that the variable cost per unit case is $7.33, fixed cost per unit case is 2.67 on the Super Deals special. The contribution margin of 9.50 per case will give a contribution margin of 2.17, which will result in an incremental profit of 4,340 at the order quantity of 2,000 cases. Such analysis is also useful in that the managers make sensible decisions concerning whether to make special orders or not, and in the process, take into account financial stability and fixed costs.

Managerial accounting is the opposite of financial accounting, as it seeks to consider the relevant costs and not just cumulative costs, but incremental costs. It will offer useful information that will enable the managers to put resources to the fullest, explore pricing policies, and unearth short-term profitability potential that would not have been seen under full absorption costing (Evianti et al., 2024). In managerial accounting, external reporting and taxation are irrelevant, like in financial accounting, but instead, it is founded on internal estimates that are well prepared. In a comparison of the two approaches, we can say that the former one is suitable for operational choice as well as profitability analysis, and the latter is employed to make sure that companies follow the rules and provide their general performance to other stakeholders. Among the key variations that should be considered are special orders and how capacity should be used in companies such as Acme.

Recommended Plan of Action

Slide 08

Based on the new evaluation of the working model of the Acme Pickle Company and the new calculation of the variable cost per case, the newly re-determined Super Deal special-order can be accepted. The analysis reveals that the price offered will lead to a positive contribution margin, not to mention the fact that it will help the company to put the unused production capacity to productive use (Capella University, n.d.). The order would also increase the operating income without an increase in the fixed production cost and would enable the introduction of the best pickles of Florida into the new regional market that would facilitate the long-run growth objectives (Istan et al., 2021).

This order will render the company more profitable in the short run since the order will generate a positive contribution margin of 2.17 per case, and the fixed cost will not be added. It also helps the company to efficiently utilize the idle production capacity, increase the utilization of resources, and build brand recognition in a new geographical market, thus leading the long-term growth agenda. The step that will be followed will be the following;

• Take the exclusive order presented by the Super Deals at a price of 9.50/case, since it is higher than the actual cost of production and has a positive contribution margin.
• The pricing will also incorporate the approximate fixed cost (which will be inclusive of the incremental profitability) of $7.33 per case that will not interfere with the fixed costs.
• The volume of production available can be utilized to meet the order without the necessity to employ more labour, equipment, and overhead.
• Market new geographical market/brand awareness in Wisconsin.
• Develop the contribution-based pricing analysis as part of the analysis of special orders in the future to help in the sustainable profitability, as well as the strategic decision-making.

Conclusion

Slide 09

The Special-order request on the Super Deals, which has been analysed according to the managerial accounting principles, has revealed that it is financially favourable. The computations of the new direct cost of 7.33 per instance are lower than the recommended selling price of 9.50 and will lead to a positive contribution margin and add-on operating income. The alternative that presupposes filling the orders will enable the Acme Pickle Company to effectively use the fixed costs of the unused production capacity, as well as in the process of entering into a new regional market. This proves that managerial accounting can be helpful in prudent pricing, expansion of short-term profitability, and expansion of business sustainability.

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