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KEY: CB&E Model Pricing OBJ: 20-4 TOP: AACSB Reflective MSC: BLOOMS Application 97. Alissa Dunn is the owner and operator of Dunn’s Best Jams, which she sells at craft festivals. She
only makes and sells three types of jams––pecan pie jam, chocolate pie jam, and lemon tart jam.
The 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 jam sold. In other words, these costs
Joint costs are costs that are shared in the manufacturing and marketing of several products in a
KEY: CB&E Model Pricing OBJ: 20-4 TOP: AACSB Reflective MSC: BLOOMS Application 98. Which of the following factors can a manager IGNORE when deciding on prices for an entire product line?
e. Products in the line could be substitutes for
Buyer considers the brand or the price first.
Products share joint costs.
Products will affect demand for the other
products in the line.
Products in the line are complementary to one
another. ANS: B
The manager is trying to determine the relationships between the various products in the line and
is looking at the products, not the buyer.
KEY: CB&E Model Pricing OBJ: 20-4 TOP: AACSB Reflective MSC: BLOOMS Analysis 99. Kule, Inc. produces three different lines of car racks for transporting large, bulky items.
Less cost of goods
Total company net annual profit = $40,000 Included in the cost of goods sold is $12,000 of
annual rent (a fixed cost) that is distributed equally among the three product lines. As a consultant
to Kule, will you recommend that it drop the luggage rack line?
No, dropping the line will actually decrease
overall net profits.
Yes, dropping the line will increase company
No, dropping the line will result in increased
Yes, dropping the line will reduce joint costs.
Yes, dropping the line will reduce cost of
goods sold and increase revenues.
Current net profit is $40,000. Dropping the luggage rack line will increase profit by $10,000
initially, but the fixed rent costs ($4,000) that are being covered by that line will have to be
distributed to the other two lines. That means the cost of goods sold for each remaining line will
increase by $2,000 (or $4,000 ÷ 2). Cost of goods sold for the Bicycle line will increase to
112,000, resulting in profit of $28,000; cost of goods sold for the Ski line will increase to
142,000, resulting in a profit of $18,000. Total profit will be $46,000, or $6,000 more than if the
company kept the Luggage line. Therefore, Kule should drop the line.
KEY: CB&E Model Pricing...
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- Fall '13