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Abstract
As a leading bottle distributor, the Lipman Bottle Company (“Lipman”) of Albany, New York
reestablished business with the dual service of distributing pre-manufactured bottles with printed,
at clients’ request, labels on the bottles. This dual service necessitated the implementation of
Introduction
1909. As time passed, Lipman reestablished business with the dual service of
distributing pre-manufactured bottles with different shapes and sizes. Logos or labels
were printed on the bottles that were provided to clients who took advantage of the
convenience of these two services Lipman offered. This dual service necessitated the
Objective
The objective of this case study is to determine the appropriate pricing strategy for
the Lipman Bottle Company (“Lipman”) that will ensure that the company will remain
margin.
Lipman must determine the prices for printing in order to achieve the company’s goal of
Lipman must begin to look at variable costs to reach a 30% margin capacity. This
will assist the company in remaining profitable or finding a break-even point that is
defined as “total revenues and total costs are equal in which there is no profit but also no
loss made” (Garret, 2015). Insofar as variable costs are computed per 1,000 bottles based
on the different combinations given in the case, Lipman can develop and implement a
pricing strategy through managerial accounting formulation. Using full cost information
“to set printing prices” (Barber, n.d.) by analyzing the printing prices charged by industry
Lipman’s consultant, Thomas Shull, determined a variable cost analysis would be part of
the pricing strategy to determine the printing prices. This will enable Lipman to continue to be
profitable plus estimate the break-even volume for each bottle combination. Desiring a 30%
margin in printing labels, Lipman would have to consider per volume, the size of the bottles, and
separations herein.
30 % Margin
Lipman must apply effective methods to achieve the company’s goal of a 30% margin.
1. The equation method is “simple math that can answer numerous cost-volume-profit
questions” (Garret, 2015). This can help determine “selling prices, costs, or volume to
analyze cost behavior via scrap or shipping costs and the operating cost information”
(Galbreath, Caldwell, Booker, and Rooney, 2013). This method uses profits equals unit
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contribution margin (CM) times quantity sold (Q) minus fixed expenses or profit equals
2. To solve for the break-even point, the formula method can be used as a unit of sale to
3. The margin of safety in dollars equals total sales minus break-even sales.
Lipman to foresee “how many units of their products must be sold to ensure that total revenues
and total costs are equal in which there is no profit but also no loss made” (Garret,, 2015; Bala,
n.d.).
Pricing Strategies
Inasmuch as Lipman’s signals of distress were when “unit-sales volume growth slowed
down, discounts fail to drive incremental volume, competitors introduce new offerings, lower-
cost competitors entered the market, and competitors started their numbers” (Ryan, 2009, pgs.
49-52), the company developed a variable costs analysis to implement price lists for their
printing operation. The price lists calculation is done by computing the variable costs per
thousand bottles for one-separation and two-separation rounds; therein, a “cost-plus pricing or
target costing analysis is performed, which strategies are done through the use of markups”
Due to the fact that a variable costs analysis is widely used as a managerial accounting
tool, it is a perfect utility when forming a price strategy in addition to “understanding pricing
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concepts and issues because a variable costs analysis examines the financial impact of changing
pricings on operating profits” (Id.). In all, because this analysis includes changes in pricing (e.g.
sales price), each pricing method can be analyzed effectively in regards to the buyer and seller.
In support of this case study, tables below have been provide to illustrate variable costs
per thousand bottles for one-separation and two-separation rounds. Herein, is a brief discussion
1. Lipman’s order size at one-separation round range from 5000 – 9999 with median order
being 7, 500 and bottle size being 0-1 oz. variable costs are calculated for the Albany,
New York area (Table 1) as operating cost/thousand is $18.58, direct variable cost for
printed per-manufactured bottles is $21.21, scrap $1.40 with total direct cost being
$22.61.
2. The New York-New Jersey area (Table 2) order size for one-separation round ranged
from 5000 – 9999 with median order being 7, 500 and bottle size being 0-1 oz. variable
cost calculated as operating cost/thousand is $18.58, cost per thousand passes is $2.63,
direct cost to manufacture is $21.21, and shipping cost is $1.06 with total direct cost
being $22.27.
3. The two-separation round in the Albany, New York (Table 1) area with median order size
being 175,000 with order range of 100,000 – 249,999 and bottle size of 17-32 oz.
calculated variable costs are operating cost/thousand is $35.40, cost per thousand passes
is $5.26, direct cost to manufacture is $40.66, and scrap cost is $6.30 with total direct
4. The two-separation round in the New York-New Jersey (Table 2) area with median order
size being 175,000 with order range of 100,000 – 249,999 and bottle size of 17-32 oz.
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calculated variable costs are operating cost/thousand is $35.40, cost per thousand passes
is $.26, direct cost to manufacture is $40.66, and shipping cost is $26.19 with total direct
5. Ultimately, Table 3 shows that it is more profitable for Lipman to sell large size bottles at
small volumes under two separation rounds. This is seen via Lipman’s profit margin.
For example, one-separation round profit margin (order size range 5000 – 9999) with
bottle sized being 0-1 oz. is $15.34 while bottle sized at 17-32 oz. profit margin is $22.90
Conclusion
Conclusively, the Lipman Bottle Company goal is to gain a 30% margin (at capacity) by
cost-plus or target costing pricing. This should enable the company to remain profitable or
break-even. However, Lipman must meditate per volume, the size of bottles, and via
separations.
Recommendation
Further, in recommendation is that Lipman should sell large size bottles at small volumes
under the two separation rounds reflected in Table 3: Per Volume, Bottle Size, and Separations
Particulars One Separation Rounds Two Separation Round Two Separation Ovals
Bottle Size (BS) 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32
Set-up time (SUT) 2 hrs 2 hrs 2 hrs 2 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs
Hours per .27 .27 .01 .01 .53 .53 .02 .02 .53 .53 .02 .02
thousand bottles
(HTB=SUT/MOS)
Total 1.27 1.27 1.01 1.01 2.93 2.93 2.42 2.42 2.29 2.29 1.78 1.78
time/thousand
(TT=HTB+RT)
Operating $18.58 $18.58 $14.78 $14.78 $42.87 $42.87 $35.40 $35.40 $33.50 $33.50 $26.04 $26.04
cost/thousand
(TT x $14.63)
Cost per 2.63 2.63 2.63 2.63 5.26 5.26 5.26 5.26 5.26 5.26 5.26 5.26
thousand passes
Direct cost to $21.21 $21.21 $17.41 $17.41 $48.13 $48.13 $40.66 $40.66 $38.76 $38.76 $31.30 $31.30
manufacture
Scrap $ 1.40 $ 2.90 $ 1.40 $ 2.90 $3.30 $6.30 $3.30 $6.30 $3.30 $6.30 $3.30 $6.30
Shipping
Total direct cost $22.61 $24.11 $18.81 $20.31 $51.43 $54.43 $43.96 $46.96 $42.06 $45.06 $34.60 $37.60
(Escarro, n.d.).
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Particulars One Separation Rounds Two Separation Round Two Separation Ovals
Bottle Size (BS) 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32
Set-up time (SUT) 2 hrs 2 hrs 2 hrs 2 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs
Hours per .27 .27 .01 .01 .53 .53 .02 .02 .53 .53 .02 .02
thousand bottles
(HTB=SUT/MOS)
Total 1.27 1.27 1.01 1.01 2.93 2.93 2.42 2.42 2.29 2.29 1.78 1.78
time/thousand
(TT=HTB+RT)
Operating $18.58 $18.58 $14.78 $14.78 $42.87 $42.87 $35.40 $35.40 $33.50 $33.50 $26.04 $26.04
cost/thousand
(TT x $14.63)
.63 .63 .63 .26 .26 .26 .26 .26 .26 .26
Direct cost to $21.21 $21.21 $17.41 $17.41 $48.13 $48.13 $40.66 $40.66 $38.76 $38.76 $31.30 $31.30
manufacture
Scrap
Shipping $1.06 $26.19 $1.06 $26.19 $1.06 $26.19 $1.06 $26.19 $1.06 $26.19 $1.06 $26.19
Total direct cost $22.27 $47.40 $18.47 $43.60 $49.19 $74.32 $41.72 $66.85 $39.82 $64.95 $32.36 $57.49
(Id.)
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Bottle Size (BS) 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32
Price – New 37.64 70.30 32.70 65.36 72.63 105.3 62.92 95.59 60.45 93.12 50.75 83.42
York/New Jersey
Total direct cost – $22.27 $47.40 $18.47 $43.60 $49.19 $74.32 $41.72 $66.85 $39.82 $64.95 $32.36 $57.49
Variable Cost New
York New Jersey
Profit Margin 15.34 22.90 14.23 21.76 23.44 30.98 21.2 28.74 20.63 28.17 18.39 25.93
(Id.).
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