DECISION MAKING: PECOS PRINTERS, INC.

Decision Making: Pecos Printers, Inc.

Relevant Information for Decision Making: Pecos Printers, Inc.

Case Scenario

Pecos Printers, Inc. is a small manufacturing firm in Houston, Texas that manufactures color ink jet printers for the small business market. It has just launched the PP 7500.

A 50% mark-up is standard in this industry so that Pecos must sell to distributors below $400 per printer to keep the retail price below the industry top of $600 ($400 * 150% = $600). Paul Pecos, the founder and CEO of Pecos Printers, wants to keep the price to distributors as low as possible so he has carefully engineered his manufacturing process to be as efficient as possible.

The model PP 7500 is an exceptionally desirable model with the following features:

A monthly capacity of 10,000 copies

A print speed of 10 copies per minute for black and white and 5 copies per minute for color.

A lifetime capacity of 120,000 copies.

The ability to accept readily available HP ink cartridges.

Lester Ledger, the Pecos Controller has developed the following cost sheet for the model 7500:

Cost Category

Cost per Unit ($)

Direct Materials (Variable)

145

Direct Labor (Variable)

60

Overhead (Variable)

40

Overhead (Fixed)*

45

Total Unit Costs

$290

*This is determined on a per unit basis as followed.

Lester assumes that the annual fixed overhead costs for this product will be $450,000 and that approximately 10,000 Model 7500's will be produced during the current year. Pecos has the capacity to produce 20,000 units per year without increasing fixed costs.

Paul has determined that approximately 20% of the total manufacturing costs are necessary for a decent profit.

Based on these data, Paul has developed the following pricing rule for his sales staff:

Accept any offer from distributors of $300 or more and reject any offer below $300.

The sales staff is on salary with no commission paid for any sale.

The salesmen negotiate with distributors who make firm offers which the Pecos salesmen then either accept or reject. Last month the three salesmen reported the following offers and results:

Offer (per unit)

Number of Units

Accepted?

Sam Smoothtalk

Offer No. 1

$310

200

Yes

Offer No. 2

$305

150

Yes

Offer No. 3

$295

300

No

Harry Hustler

Offer No. 1

$305

50

Yes

Offer No. 2

$200

250

No

Offer No. 3

$300

100

Yes

Offer No. 4

$330

75

Yes

Gary Giftofgab

Offer No. 1

$305

250

Yes

Offer No. 2

$245

400

No

Offer No. 3

$325

100

Yes

In addition, Ms. Glenda Goodperson, the office assistant manager received an offer from a new distributor for 700 units at $290. She felt this would be advantageous for Pecos and accepted the offer. When Paul Pecos found out about this transaction, he was furious that Ms. Goodperson had violated ...