Overhead Fixed Costs I Have Prepared Term Paper

Pages: 5 (1341 words)  ·  Bibliography Sources: 0  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business - Advertising

Overhead Fixed Costs

I have prepared on page 1 a table containing the data available to Lester Ledger, Pecos' controller. It turns out that the 20% profit margin is maintained if the company sells more than the initially estimated 10,000 units, while, because of the allocation of the overhead fixed costs to a larger number of units, the total cost per unit goes down $4.5 for each additional thousand of units sold. Therefore, from an initial point-of-view, if Mr. Ledger's estimate had proved correct, the decision rule Mr. Pecos made was right (considering the fact that the 20% profit margin would not be broken under any circumstance).

However, as this month's sales are over the estimate made by Lester Ledger at the beginning of the year, it seems that Mr. Pecos has to adjust the rule accordingly and lower the minimum wholesale price to about $295 per unit. This still makes up for the 20% profit, but takes into account the new fixed overhead costs (the $450,000 is now divided by $11,000 instead of $10,000).

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Paul Pecos' rule is flawed because potentially profitable offers are rejected. The 300 unit offer that was rejected, for instance, was made for a price of $295. Suppose such an offer is made every month. That means an extra 3,600 units a year, which takes the price down to about $283 per unit. Therefore, each time a big offer is made, the initial estimate of 10,000 units has to be revised, and the possibility that such an offer be available each month, in a regular fashion be accounted for. If the offered price is better than the new minimal price, than the new offer should be accepted. That should have happened in the case of the 300 unit offer that salesman Sam Smoothtalk came with. It is obvious that an 11,300 unit price (293.788) is smaller than the $295 offered price, not even considering the chances that there might be similar offers each month.

TOPIC: Term Paper on Overhead Fixed Costs I Have Prepared on Assignment

2) as for Mr. Pecos' decision to fire Ms. Goodperson, some people would call it hasty. I wouldn't. It is not the price issue that needs to be taken into consideration, but Mr. Pecos' authority. If his secretary believes that Mr. Pecos' decisions are to be taken likely, that means that the staff doesn't really have trust in his ability to make decisions, so perhaps they should start their own company and make the judgments they like. Therefore, no matter under what circumstances, Mr. Goodperson should have been so good as to ask her employer (as in the person who pays her salary) before she took such a decision.

As for the financial soundness of her decision, suppose that the company sells about 11,000 units over the year. You might even add the 300 unit offer rejected by Sam Smoothtalk and the 700 unit offer accepted without hesitation by Ms. Goodperson and you would only get total amount of 12,000 units. The minimal cost for such a quantity is $291, which is more than the distributor would have paid. Therefore, the offer should have been rejected.

Of course, one might argue that, should a similar offer be found every month, the total quantity per year would rise by 8,400 units, so the $290 price would become convenient. However, since Ms. Goodperson was just a secretary, it is highly unlikely that she would have found offers of this type each month. Consequently, her decision would have brought minimal gain to the company, if not even losses. Combined with her lack of interest to ask Mr. Pecos first about such a decision, I think that Mr. Pecos' call to fire her was entirely justified. After all, if Ms. Goodperson is so qualified as a salesperson, she could perhaps have joined the sales department, instead of simply being a secretary.

3) the new rule of choosing offers is as follows: multiply the number of units in the offer by 12 (months), multiply the result by a probability factor (1 is the maximum, obviously), add… [END OF PREVIEW] . . . READ MORE

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