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Chapter 25: 9RQ (page 1406)
Explain the difference between price-takers and price-setters.
Price-takers are the companies who accept the prices as permarket competition. In contrast, price-setters are companies that control the price setting of theirproducts and services.
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What are the two keys in short-term decision making?
Heavenly Dessert processes cocoa beans into cocoa powder at a processing cost of \(9,700 per batch. Heavenly Dessert can sell the cocoa powder as is, or it can process the cocoa powder further into either chocolate syrup or boxed assorted chocolates. Once processed, each batch of cocoa beans would result in the following sales revenue:
Cocoa powder \)14,500
Chocolate syrup 103,000
Boxed assorted chocolates 204,000
The cost of transforming the cocoa powder into chocolate syrup would be \(72,000. Likewise, the company would incur a cost of \)183,000 to transform the cocoa powder into boxed assorted chocolates. The company president has decided to make assorted boxed chocolates due to their high sales value and to the fact that the cocoa bean processing cost of $9,700 eats up most of the cocoa powder profits. Has the president made the right or wrong decision? Explain your answer. Be sure to include the correct financial analysis in your response.
Suppose Roasted Pepper restaurant is considering whether to (1) bake bread for its restaurant in-house or (2) buy the bread from a local bakery. The chef estimates that variable costs of making each loaf include \(0.52 of ingredients, \)0.27 of variable overhead (electricity to run the oven), and \(0.79 of direct labor for kneading and forming the loaves. Allocating fixed overhead (depreciation on the kitchen equipment and building) based on direct labor, Roasted Pepper assigns \)0.96 of fixed overhead per loaf. None of the fixed costs are avoidable. The local bakery would charge $1.78 per loaf.
Requirements
1. What is the full product unit cost of making the bread in-house?
2. Should Roasted Pepper bake the bread in-house or buy from the local bakery? Why?
3. In addition to the financial analysis, what else should Roasted Pepper consider when making this decision?
What questions should managers answer when setting regular prices?
What are the two keys in short-term decision making?
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