Gostkowski Company is about to enter the highly competitive personal electronics market with a new optical reader. In anticipation of future growth, the company has leased a large manufacturing facility and has purchased several expensive pieces of equipment. In 2013, the company’s first year, Gostkowski budgets for production and sales of 24,000 units, compared with its practical capacity of 48,000. The company’s cost data are as follows:

1. Assume that Gostkowski uses absorption costing and uses budgeted units produced as the denominator for calculating its fixed manufacturing overhead rate. Selling price is set at 130% of manufacturing cost. Compute Gostkowski’s selling price.
2. Gostkowski enters the market with the selling price computed previously. However, despite growth in the overall market, sales are not as robust as the company had expected, and a competitor has priced its product $ 16 lower than Gostkowski’s. Enrico Gostkowski, the company’s president, insists that the competitor must be pricing its product at a loss and that the competitor will be unable to sustain that. In response, Gostkowski makes no price adjustments but budgets production and sales for 2014 at 18,000 units. Variable and fixed costs are not expected to change. Compute Gostkowski’s new selling price. Comment on how Gostkowsaki’s choice of budgeted production affected its selling price and competitive position.
3. Recompute the selling price using practical capacity as the denominator level of activity. How would this choice have affected Gostkowski’s position in the marketplace? Generally, how would this choice affect the production-volumevariance?

  • CreatedMay 14, 2014
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