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Use This Information to Answer the Following Question That Refer

question 116

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Use this information to answer the following question that refer to the PSI case. Pump Systems, Inc. (PSI) produces two major kinds of water pumps. The smaller pumps range in price from $5-$30, and are used in drinking fountains and soft-drink machines. Most of these pumps are bought by manufacturers of these machines and built into their product. PSI also builds larger pumps used in swimming pools and reservoirs. The prices of these items range from $250-$500. These are usually purchased by contractors, who build the pools and reservoirs.
PSI sells nationally through sales reps located in the large industrial centers. These reps handle the selling function for PSI in their geographic areas and provide market information. They usually do the same thing for 10 to 20 similar manufacturers of noncompeting products-and are paid on a commission basis.
There are no other producers of the smaller pumps in the United States-because PSI has patent protection. As a result of this, management has decided to follow a policy of pricing high-to maximize profits-while the patent lasts.
Several competitors are in the market for the larger pumps. Industry prices and profits of these pumps have dropped in the past few years as a result of firms trying to increase their market shares. The product design has remained fairly stable over the last few years-and one firm dropped out as it saw that it would lose more money with its "me-too" product. Industry sales are increasing-but at a very slow rate. The price of these products is determined by adding a standard markup percentage to the variable cost of the items-to cover fixed costs and profit. For instance, pump Z has variable costs of $250 per unit, and a markup of 40 percent of this cost is added to the $250 to get its selling price. Management has estimated that fixed costs applicable to this product are $200,000 per year.
PSI publishes a product catalog which is revised annually. Also, it exhibits in most trade shows. PSI follows a policy of charging the same price to all customers-so all will have the same costs at their own plants. All purchases are shipped directly from PSI's factory to its customers-and title passes at PSI's factory.
In the PSI case, into which product category do the small pumps (for customers who use them to replace worn pumps in their own machines) fit?

Definitions:

Absorption Costing

A product costing technique in accounting that involves adding direct materials, direct labor, and both kinds of manufacturing overhead—variable and fixed—to the product's cost.

Fixed Manufacturing Overhead

Costs that do not change with the level of production output, including rent, salaries of permanent staff, and depreciation of factory equipment.

Variable Costing

An accounting method that includes only variable production costs in the cost of goods sold, excluding fixed costs.

Net Operating Income

The earnings generated from a company's regular business operations, indicating the efficiency of management.