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Unformatted text preview: of Hot Mamma Salsa, which she sells at craft
festivals. She only makes and sells three types of salsa––peach, pear, and pineapple. The joint
costs of leasing her professional kitchen for manufacturing, travel to craft shows, insurance, and
so on are allocated on an equal basis to the three types of salsas sold. Last year’s sales figures and
allocated joint costs follow. Should Hot Mamma Salsa stop selling its pear salsa? Why or why
Less cost of goods
Gross margin Pear Salsa
5,000 Peach Salsa
5,000 Pineapple Salsa
5,000 ($1,000) $3,000 $4,000 ANS:
Hot Mamma Salsa should continue to produce and sell all three types of salsas. An investigation
of overall figures shows that a $6,000 profit was earned on the three items in the line:
Less cost of
The pear salsa should not be dropped just because it is currently showing a loss; the joint costs
would have to be allocated to the remaining two lines:
Less: cost of goods
Equal allocation of joint costs may not be the right way to distribute the costs. Other allocation
bases that may be used include weighting, market value, or quantity sold. Other allocation
methods would change the figures for each type of salsa, but not overall figures.
TOP: AACSB Analytic | AACSB Communication
MSC: BLOOMS Synthesis KEY: CB&E Model Pricing 18. When the economy is characterized by high inflation, special pricing tactics are often necessary.
One popular cost-oriented tactic is culling low-profit margin products from the product line. Why
might this tactic backfire? What two other cost-oriented tactics can be used to guard against
inflation? Describe these tactics.
Culling low-profit margin products from a product line may backfire because of (1) the high
volume and thus high profitability of a low profit margin item; (2) a loss of economies of scale as
certain products are eliminated, which lowers the margins on other items; or (3) a lowering of the
price–quality image of the entire line. Instead of culling these products, two other cost-oriented
tactics may be used: delayed-quotation pricing and escalator pricing.
DELAYED-QUOTATION PRICING. With this tactic, price is not set on the product until the
item is either finished or delivered. This is a popular tactic for builders of nuclear power plants, ships, and airports.
ESCALATOR PRICING. With this tactic, the final selling price will reflect cost increases
incurred between the time when the order is placed and delivery is made. This tactic is used for
complex products of long duration, with new customers, or with inelastic demand products.
KEY: CB&E Model Pricing OBJ: 20-5 TOP: AACSB MSC:...
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- Fall '13