Pecos Printers, Inc. is a small manufacturing firm in Houston,Texas that manufactures color ink jet printers for the smallbusiness market. It has just launched the PP 7500.
A 50% markup is standard in this industry so that Pecos mustsell to distributors below $400 per printer to keep the retailprice below the industry top of $600 ($400 * 150% = $600). Paul Pecos, the founder and CEO of Pecos Printers, wants to keepthe price to distributors as low as possible so he has carefullyengineered his manufacturing process to be as efficient aspossible.
The model PP 7500 is an exceptionally desirable model with thefollowing features:
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A monthly capacity of 10,000 copies
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A print speed of 10 copies per minute for black and white and 5copies per minute for color.
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A lifetime capacity of 120,000 copies.
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The ability to accept readily available HP ink cartridges.
Lester Ledger, the Pecos Controller has developed the followingcost sheet for the model 7500:
| Cost Category |
Cost per Unit |
| Direct Materials (Variable) |
$145 |
| Direct Labor (Variable) |
60 |
| Overhead (Variable) |
40 |
| Overhead (Fixed)* |
45 |
| Total Unit Costs |
$290 |
*This is determined on a per unit basis as followed. Lester assumes that the annual fixed overhead costs for thisproduct will be $450,000 and that approximately 10,000 Model 7500'swill be produced during the current year. Pecos has thecapacity to produce 20,000 units per year without increasing fixedcosts.
Paul has determined that approximately 20% of the totalmanufacturing costs are necessary for a decent profit.
Based on these data, Paul has developed the following pricingrule for his sales staff: Accept any offer from distributorsof $300 or more and reject any offer below $300.
The sales staff is on salary with no commission paid for anysale. The salesmen negotiate with distributors who make firmoffers which the Pecos salesmen then either accept or reject. Last month the three salesmen reported the following offers andresults:
| Offer (perunit) |
Number ofUnits |
Accepted? |
| SamSmoothtalk |
| Offer No. 1 |
$310 |
200 |
Yes |
| Offer No. 2 |
$305 |
150 |
Yes |
| Offer No. 3 |
$295 |
300 |
No |
| HarryHustler |
| Offer No. 1 |
$305 |
50 |
Yes |
| Offer No. 2 |
$200 |
250 |
No |
| Offer No. 3 |
$300 |
100 |
Yes |
| Offer No. 4 |
$330 |
75 |
Yes |
| GaryGiftofgab |
| Offer No. 1 |
$305 |
250 |
Yes |
| Offer No. 2 |
$245 |
400 |
No |
| Offer No. 3 |
$325 |
100 |
Yes |
In addition, Ms. Glenda Goodperson, the office assistant managerreceived an offer from a new distributor for 700 units at$290. She felt this would be advantageous for Pecos andaccepted the offer. When Paul Pecos found out about thistransaction, he was furious that Ms. Goodperson had violated hisdecision rule and fired her on the spot. He then cancelledthe order with the new distributor.
Overall, Paul was satisfied with the month's salesresults. His sales staff had sold 925 units which translatedto an annual rate of over 11,000 units. This was 10% abovehis estimate of 10,000 annual sales.
Required:
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Evaluate Paul Pecos' decision rule.
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Evaluate Paul Pecos' reaction to Ms. Goodperson's sale.
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Prepare a contribution margin income statement for the monthwith two columns: in the first column, show the resultsfollowing Paul's decision rule. In the second column, showwhat the results would have been if you chose to revise thedecision rule and your revised decision rule had beenfollowed. For simplicity sake, ignore non-manufacturing costsand taxes.
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Do you have any other recommendations for Paul to improve hisoperations?