Relevant-cost approach to pricing decisions. Stardom, Inc., cans peaches for sale to food distributors. All costs are classified as either manufacturing or marketing. Stardom prepares monthly budgets. The March 2009 budgeted absorption-costing income statement is as follows:

Monthly costs are classified as fixed or variable (with respect to the number of crates produced for manufacturing costs and with respect to the number of crates sold for marketing costs):

Stardom has the capacity to can 1,500 crates per month. The relevant range in which monthly fixed manufacturing costs will be “fixed” is from 500 to 1,500 crates per month.

1. Calculate the markup percentage based on total variable costs.

2. Assume that a new customer approaches Stardom to buy 200 crates at$55 per crate for cash. The customer does not require any marketing effort. Additional manufacturing costs of $2,000 (for special packaging) will be required. Stardom believes that this is a one-time-only special order because the customer is discontinuing business in six weeks’ time. Stardom is reluctant to accept this 200-crate special order because the $55-per-crate price is below the $60-per-crate absorption cost Do you agree with this reasoning? Explain.

3. Assume that the new customer decides to remain in business. How would this longevity affect your willingness to accept the $55-per-crate offer? Explain.

Revenues (1,000 crates x $100 a crate) Cost of goods sold Gross margin Marketing costs Operating income Normal markup percentage: $40,000 + S60,000 = 66.7% of absorption cost $100,000 60,000 40,000 $ 10,000