The Strategy of Pecos Printers - Essay Example

XXXXX Number: XXXX XXXX XXXX XXXXX XX – XX – Pecos Printers This report aims at evaluating the decision rule set by Paul Peco regarding the minimum price for the sale of the new printer, PP 7500, to the distributors. Paul Peco has determined that the sales staff should accept all offers at or above $ 300 per unit and reject the other offers. He has fired one of his employees, Ms. Goodperson who had violated the decision rule and agreed to sell 700 units for $ 290 each. Demand for the Printer: It is evident that offers were made for a total of 1,875 units in the first month along with an additional offer for 700 units.

This translates to a demand for 2,575 units in a month which approximately equals 30,000 units in a year. As the company has the capacity to produce 20,000 units in a year, Paul Peco should focus on utilizing the firm’s maximum production capacity, as there is a high level of demand for the product. Contribution Margin: From the cost sheet model, the variable cost per unit incurred can be computed. Variable Cost per unit = Direct Materials + Direct Labor + Variable Overhead = $ 245 per unitPecos has the capacity to manufacture 20,000 units per year without any increase in the fixed costs.

The most profitable solution for Paul Peco would be to sell 20,000 units in a year so that the company’s maximum capacity is utilized. From this volume, the contribution required from a single unit to cover the fixed costs can be computed (Weston and Copeland). Required Minimum Contribution per unit = $ 450,000 / 20,000 = $ 22.50 per unit based on this contribution margin, the total cost of a printer can be estimated. Total cost = Variable cost per unit + Fixed cost cover per unit = $ 267.

50 per unit(Samuels, Wilkes, and Brayshaw)The profit margin originally set by Paul Peco was a minimum of $ 10 per unit. In the revised plan, a minimum profit of $ 12.50 per unit is fixed. Hence the revised minimum selling price is $ 280 per unit. Revised Income: Based on the revised decision rule, the sales staff statistics will be as follows: Sales StaffOffer (per unit)No. of UnitsAccepted?Pauls's Decision RuleRevisedSam Smoothtalk     Offer No. 1$310 200YesYes Offer No. 2$305 150YesYes Offer No.

3$295 300NoYesHarry Hustler   Offer No. 1$305 50YesYes Offer No. 2$200 250NoNo Offer No. 3$300 100YesYes Offer No. 4$330 75YesYesGary Giftofgab   Offer No. 1$305 250YesYes Offer No. 2$245 400NoNo Offer No. 3$325 100YesYesMs. Good person Offer$290 700NoYesTotal units sold9251,925It is evident that Paul Peco would have sold 1,925 units in the last month. Assuming a constant demand every month, Paul Peco will easily be able to sell 20,000 units in the first year. The last month’s contribution margin income statements for the two rules are presented below.

DetailsActual ResultsRevised IncomeNo. of Units9251925Revenue$286,500 $578,000 Variable Cost per unit245245Total Variable Costs$226,625$471,625Total Contribution$59,875 $106,375 Fixed Costs per month$37,500$37,500Net Income$22,375 $68,875 Recommendations: From the revised plan, it is evident that Ms. Goodperson’s decision to accept the contract at $290 per unit was profitable. Ms.Goodperson should be hired again. Also, based on the revised decision rule, Paul Peco should instruct his sales staff to accept orders at any price above $ 280 per unit.