Monroe Clock Company
Jim Monroe, president of Monroe Clock Company, decided to sell a new household timing device. And this complete product would have to be sold through wholesalers and manufacturers’ representatives, which were new to Monroe Clock, so the price will be an important factor. Jim’s controller, Tom, had provided figures showing a full cost of $11. 60 and factory price of $14. 70, and Frank Tyler, his sales manager, had worked out a cost of $6. 30 excluding fixed overhead cost and factory price of $8. 00. So the main issue is about how much the timer is going to cost and how to treat the fixed overhead cost.
There are three alternative implications for the price setting as follows: 1). If they decided to choose $8. 00 as factory price, the estimated retail selling price will be $16. 00, which is lower than the similar sears model $19. 98 and less than most of substitutions. And they will pretty soon get lots of volume, but once they get more sales, they fixed overhead will become more and more important. For example, the company’s cost on machine maintenance, machine depreciation and plant administration (55%, 40% and 40% respectively) will increase.
So if the company keeps long run using $6. 30 as cost excluding fixed overhead, they eventually will make less profit even no profit. 2). If they decided to choose $14. 70 as factory price, which certainly would make more contribution profit than $8. 00 because they had same variable costs. But the problem was that the similar Sears model was selling at $19. 98, and others were not more than a dollar or two away from that. So it would be difficult to attract consumers to buy their expensive new timer unless its exclusive new function was really useful.
Other Consideration: Jim hadn’t figured out the value of the product options (a 48-hour or two different 24-hour cycles), which might have a lot more wiring and assembly work involved, and different timers may require more overhead. In addition, there were no other timers in the market, in other words, new timer might need different overhead than before. These all can contribute more overhead cost. 3). If they did as Tom recommended setting $8. 00 as factory price for the short run and then selling some smaller number of units at $14. 70.
That may be appropriate for both short run and long run, but how to make consumers accept the $6. 70 ($14. 70-$8. 00) difference for the same product is a problem. Maybe company can use some marketing method or more advertising. * Recommendations: In my opinion, company can’t omit the fixed overhead cost so that making lower product cost. Because long run will make fixed overhead more important and more influenced to profit. So I think Jim should figure out the value of the product options and recompute the overhead rate and set the household timer’s cost including the fixed costs.