From the course: Accounting Foundations: Cost-Based Pricing Strategies
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Is $3.20 per shirt a good selling price?
From the course: Accounting Foundations: Cost-Based Pricing Strategies
Is $3.20 per shirt a good selling price?
- The cost of making one shirt is $2.78. We computed this number by carefully totalling the direct materials, direct labor, and manufacturing overhead cost to make 600,000 shirts. A large retailer has offered to buy shirts from us for $3.20. Here's the question. Should we accept this offer? Well, isn't this decision easy? Production cost is $2.78. Proposed selling price is $3.20. Selling price of $3.20 is greater than cost of $2.78. Is it that easy; no. The $2.78 production cost per shirt number is a good place to start, but here's where simple accounting computations have to make way for broader business judgment. First, are we sure that the production cost per unit is $2.78? We saw that the largest component of production cost was the overhead cost. And we also saw that we had to make an estimate to determine how much of that overhead cost to assign to shirt production. With a different assumption based on a…
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