Exercise 1 Making Special Pricing Decisions Suppose The Base

Exercise 1making Special Pricing Decisionssuppose The Baseball Hall Of

Exercise 1 making special pricing decisions suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Hungry-Cardz with a special order. The Hall of Fame wishes to purchase 55,000 baseball card packs for a special promotional campaign and offers $0.33 per pack, totaling $18,150. Hungry-Cardz’s total production cost is $0.53 per pack, and the company has sufficient excess capacity to handle this order. Additionally, for the hologram cards, Hungry-Cardz will spend $5,000 to develop this feature, which will be useless after the order is completed. The decision involves assessing whether to accept the order considering the differences in per-unit costs, fixed costs, and developmental expenses, with an emphasis on incremental analysis.

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Making strategic pricing decisions involves careful analysis of costs, capacity, and potential revenue. In the scenario where Hungry-Cardz considers accepting a special order from the Baseball Hall of Fame, the core question is whether the incremental benefits outweigh the incremental costs. The key factors include the offered price, variable costs, fixed costs, and additional development expenses associated with producing hologram cards.

Initially, the special order price stands at $0.33 per pack, significantly below the unit production cost of $0.53. This suggests a per-unit loss of $0.20 if the company were to produce only for this order. However, since the firm has excess capacity, accepting the order does not impact existing sales or fixed costs. The fixed costs are already covered and will remain unchanged regardless of accepting or rejecting the order. Therefore, the relevant consideration hinges on variable costs and additional expenses associated with the hologram feature.

The variable production cost per pack is $0.53, which is higher than the offered price of $0.33. This indicates a loss of $0.20 per pack if the order is produced at the current variable cost. For 55,000 packs, the total variable cost amounts to $29,150, while the revenue from the special order is only $18,150, resulting in a gross loss of $11,000.

However, the development of hologram cards incurs a one-time cost of $5,000, which is specific to this special order. This additional expense increases the total costs beyond the variable costs for the order. Including the hologram development cost, the total incremental cost for the order becomes $29,150 plus $5,000, totaling $34,150.

Since the total revenue from the order is $18,150, accepting the order would generate a net decrease in income of $16,000 ($18,150 - $34,150). Therefore, from a purely financial perspective, accepting the order at this pricing and cost structure would not be beneficial, as it would decrease overall profitability.

Nevertheless, some strategic considerations might influence the decision. For instance, accepting the order could provide promotional exposure or help establish a relationship with the Hall of Fame for future opportunities. If the company can negotiate a higher price, cover the hologram development costs, or reduce variable costs, the decision could change.

In conclusion, with current costs, prices, and development expenses, the differential analysis indicates that Hungry-Cardz should reject the order as it would reduce profits by approximately $16,000. Accepting such a loss-making order would not align with fundamental financial principles of incremental analysis unless additional strategic benefits justify the decision.

In the second scenario involving the DVD product line at Best Video, top managers are contemplating dropping the product due to operating losses. Based on the provided analysis, fixed costs are unaffected by discontinuing the DVD line, meaning only incremental costs and revenues should be considered. If the direct loss from operating the DVD line equals $43,000, elimination of the product would eliminate this negative contribution, likely improving overall profitability. However, managers should also consider potential qualitative factors such as customer loyalty, brand reputation, and future market prospects before making the final decision.

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