Question

Pet Designs makes various accessories for pets. Their trademark product, PetBed, is perceived to be high quality but not extravagant, and is sold in a variety of pet stores. Wanda Foster, marketing manager, has convinced her boss that they are missing an important segment of the market. “We can increase the quality of the material and design and market PetBed to a higher-end clientele,” Wanda claims. “We won’t compete with our existing product. It’s win-win!” PetBeds sell for $51 each. Wanda estimates the gross margin at $34. After working with production engineers and the marketing research team, Wanda has designed a bed that she believes the new market segment will pay $80 for. The production engineers and accountants believe it will cost about $58 to make.

1. If Pet Designs uses cost-plus pricing and prices most products like the original PetBed, what should be the price of the high-end PetBed? (Round answer to 0 decimal places, e.g. 25,000.)

2. If Pet Designs wants to preserve the existing gross margin percentage, what is the target cost at a market price of $80? (Round answer to 0 decimal places, e.g. 25,000.)

Answer 1

a)
Cost of original pet bed = $51 – $34 =	17	per bed
Markup percentage = GP/COGS = 34/17=	200%	markup on cost of goods sold
Price of high-end bed = $58 × (1+ 200%) =	174	per bed
b)
Current Gross Margin = = GP/Sales = 34/51	66.67%
Cost of Good Sold = 1 - 66.67%	33.33%
High-end bed target cost of goods sold = 33.33%% × $80 =	$       26.67	Per bed