Marketing Final Exam

Salsa which she sells at craft festivals she only

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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 not? Sales Less cost of goods sold Gross margin Pear Salsa $4,000 5,000 Peach Salsa $8,000 5,000 Pineapple Salsa $9,000 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: Pear Salsa Peach Salsa Pineapple Salsa Total Sales $4,000 $8,000 $9,000 $21,000 Less cost of 5,000 5,000 5,000 15,000 goods sold Gross margin ($1,000) $3,000 $4,000 $ 6,000 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: Peach Salsa Pineapple Salsa Total Sales $8,000 $9,000 $17,000 Less: cost of goods 7,500 7,500 15,000 sold Gross margin $ 500 $1,500 $ 2,000 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. PTS: 1 REF: 332 OBJ: 20-4 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. ANS: 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. PTS: 1 REF: 332-333 Communication KEY: CB&E Model Pricing OBJ: 20-5 TOP: AACSB MSC:...
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