Sheet1packer Stoves Inc Is Designing A Commercial Style Stove F ✓ Solved

Packer Stoves Inc. is designing a commercial style stove for residential use. The stove includes a warming drawer, broiler unit, and high BTU burner. Packer Stoves Inc. believes it can sell the stoves for $4,700 and desires to earn a 25% profit on each stove. Variable costs are $2,900 per stove, and fixed costs are $1,800,000. Assume Packer estimates it can sell 3000 stoves.

1. Using cost+ pricing, calculate the price, given the cost and profit information.

2. Calculate the Target cost per stove. How many stoves must Packer Inc. sell to meet the target cost?

3. If Packer decides only 2000 stoves can be sold at $4,700 and, therefore, decides to eliminate the broiler unit thereby saving $650 per stove. With this feature dropped it is estimated that 2,600 units can be sold for $4,000. Will Packer be able to produce the stove at the new target cost?

Paper For Above Instructions

Packer Stoves Inc. is venturing into the production of a commercial-style stove intended for residential use. This endeavor encompasses several detailed financial calculations aimed at ensuring profitability and efficient cost management. The following sections tackle the essential financial dynamics surrounding the pricing, cost structures, and performance projections for this new product.

1. Cost+ Pricing Calculation

To accurately establish the selling price of the stove using cost-plus pricing, the first step is to determine the total cost incurred per stove. This includes both variable and a share of fixed costs. The variable cost per stove stands at $2,900. Fixed costs, amounting to $1,800,000, need to be allocated across the estimated production volume of 3,000 stoves.

First, we calculate the fixed cost per unit:

  • Fixed cost per stove = Total Fixed Costs / Estimated Number of Stoves = $1,800,000 / 3,000 = $600.

Next, we calculate the total cost per stove:

  • Total cost per stove = Variable Costs + Fixed Cost per Stove = $2,900 + $600 = $3,500.

Packer Stoves Inc. wishes to earn a profit margin of 25%. Hence, we will now calculate the desired profit:

  • Desired Profit = Total Cost per Stove × Profit Margin = $3,500 × 25% = $875.

Finally, the selling price can be derived as follows:

  • Selling Price = Total Cost per Stove + Desired Profit = $3,500 + $875 = $4,375.

Thus, Packer Stoves Inc. could set the price to approximately $4,375, if adhering strictly to the calculated profit margin. However, they believe they can command a price of $4,700, which indicates the potential for an even higher profit margin.

2. Target Cost Calculation

The concept of Target Costing is pivotal in competitive pricing strategies where the selling price is fixed, and companies strive to meet cost structures within that limitation. Given the intended selling price of $4,700, the required profit margin at 25% gives a target profit as follows:

  • Target Profit = Selling Price × Profit Margin = $4,700 × 25% = $1,175.

Now we can calculate the target cost per stove:

  • Target Cost = Selling Price - Target Profit = $4,700 - $1,175 = $3,525.

Next, to ascertain how many stoves Packer must produce to cover fixed costs while achieving the target cost, we need to determine the total contribution margin required to cover fixed costs:

  • Total Contribution Margin Required = Total Fixed Costs = $1,800,000.

With the contribution margin per stove being the difference between the target cost and variable cost:

  • Contribution Margin per Stove = Selling Price - Variable Costs = $4,700 - $2,900 = $1,800.

Now, we determine the number of stoves needed to be sold:

  • Required Number of Stoves = Total Fixed Costs / Contribution Margin per Stove = $1,800,000 / $1,800 = 1,000 stoves.

Therefore, Packer Stoves Inc. must sell at least 1,000 stoves to meet the target cost constraint.

3. Adjustment of Product Features and New Target Cost

As Packer aims to sell fewer stoves (2,000), the situation requires an analysis of cost adjustments. The potential elimination of the broiler unit saves $650 in variable costs, effectively adjusting the variable cost per stove to:

  • New Variable Cost = Original Variable Cost - Savings = $2,900 - $650 = $2,250.

The new selling scenario anticipates selling 2,600 units at a lowered price of $4,000, necessitating a similar target cost approach. The revised profit margin calculation remains:

  • New Target Profit = Selling Price – New Target Cost = $4,000 - New Target Cost.

Reevaluating the total required profit to cover fixed costs under the new volume and price structure leads to effective sales strategies. The revised profitability can be assessed on whether Packer Stoves can maintain production levels within the new financial expectations.

Ultimately, a well-structured analysis supports strategic decisions regarding product features and pricing strategies. These calculated adjustments can empower Packer Stoves Inc. to streamline production while maximizing profitability amidst changing market conditions.

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