Exam 13: Pricing Decisions and Cost Management

Julian Pharma manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,650 and fixed costs of $1,200 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds. A competitor is introducing a new hospital bed similar to Deluxe that will sell for $3,800. Management believes it must lower the price to compete. The marketing department believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Deluxe beds it can produce. Required: a.What is the annual operating income from Deluxe at the current price of $5,000? b.What is the annual operating income from Deluxe if the price is reduced to $3,800 and sales in units increase by 25%? c.What is the target cost per unit for the new price if target operating income is 30% of sales?

Explain the differences between short-run pricing decisions and long-run pricing decisions.

The value customers place on a product and the prices charged for competing products affect demand and the cost of producing and delivering the product affect supply.

The cost-plus pricing approach is generally in the form ________.

Three major influences on pricing decisions are ________.

Gracius Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Gracius Manufacturing has a policy of adding a 10% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers: For Gracius Manufacturing, what is the minimum acceptable price of this one-time-only special order?

Grounded Coffee Products manufactures coffee tables. Grounded Coffee Products has a policy of adding a 20% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month: For long-run pricing of the coffee tables, what price will most likely be used by Grounded Coffee?

Which of the following examples would have as its purpose the allocation of costs to motivate employees?

After conducting a market research study, Magnificent Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $250. The annual target sales volume for interior doors is 28,000. Magnificent has target operating income of 40% of sales. What is the target operating income?

Which of the following explains the cost-plus approach to pricing decisions?

Block Island TV currently sells large televisions for $380. It has costs of $290. A competitor is bringing a new large television to market that will sell for $310. Management believes it must lower the price to $310 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 110,000 televisions per year. What is the target cost per unit if target operating income is 35% of sales?

Claudia Geer, controller, discusses the pricing of a new product with the sales manager, James Nolan. What major influences must Claudia and James consider in pricing the new product? Discuss each briefly.

If U.S dollar strengthens against the Japanese Yen, Japanese producers selling goods in U.S markets will have to increase the prices of products to recover the extra cost arising from currency fluctuation.

A company operating in a perfectly competitive market has more leeway to set higher prices than a firm that is a monopolist.

Which of the following costs can be classified into both value-added and non-value-added costs?

A re-design of a product so that it requires fewer components to decrease ordering, receiving, testing, and inspection costs is an example of value-engineering.

A graph comparing locked-in costs with incurred costs will have ________.

Environmental costs that are incurred over several years of the product's life cycle are often locked in at the product- and process-design stage.

In setting prices for products and services, managers may attempt to charge what the customer is willing to pay however, too high a price may ________.

Sandra Clothing Company has invested $51,000,000 in its business. The target rate of return for the company is 12%. It has long-term assets of $23,000,000. Cost of debt for the company is 8%. It expects to sell 12,000 units in the upcoming year. What will be the target operating income per unit for Sandra Clothing Company?