The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants. During the current year, the division produced 10,000 pots and incurred the following costs:*The equipment was purchased last year for $150,000 and has a current book value of $120,000, remaining useful life of four years, and a zero salvage value. If the equipment is not used to produce ceramic pots, it can be leased for $8,000 per year.**Includes supervisors' salaries and rent for manufacturing plant.Required:1) Assume Evergreen Industries uses a cost plus pricing strategy. What price should be charged for the ceramic pot product if

Question

the division sets its price 40 percent above the unit product cost?2) A potential overseas customer who would not compete with the division's existing customers would like to purchase 1,000 ceramic pots but is not willing to pay the regular price. At what selling price would the division be indifferent about accepting the special order?3) Suppose the division has the opportunity to purchase the ceramic pot from another manufacturer for $60.The supplier is willing to hold sufficient inventories to meet Evergreen's demand. Should the division outsource its ceramic pots? Why or why not?

What will be an ideal response?

Answer 1

1) The ceramic pot should sell at $78.12 computed as follows:



The cost per unit is $55.80 ($558,000 ÷ 10,000 units)
The selling price is $78.12 ($55.80 × 1.40%)

2) The incremental cost of making the 1,000 ceramic pots is computed as follows:



The division should be indifferent at a price of $51.00 ($51,000/1,000). Any price above $51 will generate profit for the division.

3) The relevant cost of making the ceramic pots is $55.40 computed as follows:



The relevant cost per unit is $55.40 ($554,000/10,000 units). Because the purchase price is $60, the division should not outsource this product.