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 $35. After working with production engineers and the marketing research team, Wanda has designed a bed that she believes the new market segment will pay $78 for. The production engineers and accountants believe it will cost about $62 to make.

(a)

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.)

Price of the high-end PetBed

$ per bed

Answer 1

Cost plus Pricing method is a method to ensure that cost are recovered sufficiently and minimum acceptable rate of profit is available to the investor. It is calculated by adding Markup to Total cost of Direct Material, Direct Labor & Overhead Cost.

Given, Gross Margin of Non High end PetBed per bed = $35

Cost of High end PetBed = $62

Add: Available Markup =$35

Price of High end PetBed = $97

Although, Wanda believes that market will pay $ 78 per high end PetBed, it is advised to keep the price at $ 97 if Pet Designs wants to fix prices based on Cost plus Pricing Method.

Note:

Fixed Markup amount per unit is taken in the absence of any other suitable base available for calculation.