Paris Custom Tanks (PCT) designs and manufactures st. Connolly, the PCT general
ID: 2540668 • Letter: P
Question
Paris Custom Tanks (PCT) designs and manufactures st. Connolly, the PCT general manager, classifies PCT products into three groups: s. For planning purposes John 1. 2. 3. The basic tank with small cosmetic variations Size modifications of the basic tank Fully customized tanks Although PCT sales have been increasing margins have been declining steadily-a matter of considerable concern for John. John finds this particularly perplexing since sales of the high priced fully customized tanks have occupied an increasing share of the product mix. John uses a standard pricing formula that is common in the segment of the industry that PCT occupies. The pricing formula is to set price equal to 125% of computed product cost. Since the cost of the stainless steel used in each tank is the major component of total cost, the current costing system sets each product's total cost equal to 150% of the tank's steel cost. The value chain for the tanks is as follows 1. 2. The company's basic tank has a 1,000 gallon capacity. Tank production is highly automated. A computer controls the machine that cuts sheets of stainless steel into the pieces needed to make a particular tank Then another computer controlled machine bends the steel into shape and automatically makes any needed welds. Finally any external fittings are hand welded onto the tank. a. b. c. 3. For tanks other than the basic tanks plans have to be drawn up to meet the customer's requirements. A technician then uses the PCT CAD/CAM machine to render the drawings into
Explanation / Answer
Answer
In the current situation, the company is fixing the price of final products equal to 125% of computed product cost. Thus, the computation of correct product cost is very critical for the organisation and if the organisation fails to determine the correct product cost, the final price of the product will also be determined incorrectly and thus will effect the profitability of the organisation.
The organisation is determining the total cost equal to 150% of the tank's steel cost as the steel cost plays the major component of total cost. This indicates that the process followed by organisation for determining the total product cost is not correct. The computation of total product cost should be done by adding all the different cost incurred for production of the product. In the current case, the base tanks requires very less of other activities but the other 2 tanks requires various other cost. Thus, the cost of size modified basic tank and customised tank should be determined by evaluating and adding the cost incurred for different processes and then on the basis of cost determined, computation of sales price should be done
Thus, the organisation should change the method of determining the product cost and thus, the sales price will automatically increase and may prevent the organisation from incurring losses.