You Have Just Been Hired as the New Management Accountant

question 1

Essay

You have just been hired as the new management accountant for a pool chemical wholesaler.The company sells packages of pool chemicals to retail stores, consisting of all of the chemicals a typical pool would need for a week, for a price of $25, and a variable cost of $8.The company has fixed costs of $125,000.The previous accountant was promoted to an associated company but has left you her working papers for a project she was working on.The project involves advising management whether to accept an advertising arrangement with an industry publication.The arrangement being offered is a contract calling for a set payment per month (amount to be negotiated)for 6 months.The industry is cyclical and has no sales for 4 months [16 weeks] of the year.The previous accountant notes show her projection that this would result in an increase of 50 units per week, above the normal 1,000 units per week that the company sells currently.The increased demand would arise from more customers to existing outlets, and from new outlets as well.The advertiser is suggesting a monthly fee of $1,800.What is your advice, based on the previous accountant's notes and your own analysis?

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Definitions:

Intertemporal Price Discrimination

Practice of separating consumers with different demand functions into different groups by charging different prices at different points in time.

Coupons

Vouchers or codes that offer a discount on the purchase price of goods or services, usually issued by manufacturers or retailers to stimulate demand.

Two-part Tariff

A pricing strategy that involves a fixed charge plus a variable usage rate.

Marginal Profit

The increase in profit that results from selling one additional unit of a product.