Standard costing—The human factor Kemp Corporation makes a protein supplement called Power Punch™. Its principal competitor for Power Punch is the protein supplement Superior Strength™, made by Jim Adams Company (JAC). Mr. Adams, a world-renowned weight-lifting champion, founded JAC. The primary market for both products is athletes. Kemp sells Power Punch to wellness stores, which sell it, other supplements, and health foods to the public. In contrast, Superior Strength is advertised in sports magazines and sold through orders generated by the ads.
Mr. Adams’s fame is an essential factor in his company’s advertising program. He is a dynamic character whose personality motivates people to strive for superior achievement. His demeanor not only stimulates sales but also provides a strong inspirational force for company employees. He is a kind, understanding individual with high expectations who is fond of saying that “mistakes are just opportunities for improvement.” Mr. Adams is a strong believer in total quality management.
Mr. Quayle, president of Kemp Corporation, is a stern disciplinarian who believes in teamwork. He takes pride in his company’s standard costing system. Managers work as a team to establish standards and then are held accountable for meeting them. Managers who fail to meet expectations are severely chastised, and continued failure leads to dismissal. After several years of rigorous enforcement, managers have fallen in line. Indeed, during the last two years, all managers have met their budget goals.
Even so, costs have risen steadily. These cost increases have been passed on to customers through higher prices. As a result, Power Punch is now priced significantly higher than Superior Strength. In fact, Superior Strength is selling directly to the public at a price that is below the wholesale price that Kemp is charging the wellness stores. The situation has reached a critical juncture. Sales of Power Punch are falling while Superior Strength is experiencing significant growth. Given that industry sales have remained relatively stable, it is obvious that customers are shifting from Power Punch to Superior Strength. Mr. Quayle is perplexed. He wonders how a company with direct marketing expenses can price its products so low.
Required
a. Explain why JAC has been able to gain a pricing advantage over Kemp.
b. Assume that you are a consultant whom Kemp’s board of directors has asked to recommend how to halt the decline in sales of Power Punch. Provide appropriate recommendations.