Exam 13: Pricing Decisions and Cost Management

In long-run pricing, decisions should consider all manufacturing and non-manufacturing costs but should consider all future direct and indirect costs as irrelevant.

Grace Greeting Cards Incorporated is starting a new business venture and are in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows: -Sixteen times each year, a new card design will be put into production. Each new design will require $700 in setup costs. -The parchment grade card product line incurred $75,000 in development costs and is expected to be produced over the next four years. -Direct costs of producing the designs average $0.50 each. -Indirect manufacturing costs are estimated at $50,000 per year. -Customer service expenses average $0.10 per card. -Current sales are expected to be 2,500 units of each card design. Each card sells for $4.00. -Sales units equal production units each year. Required: a.What are the estimated life-cycle revenues? b.What is the estimated life-cycle operating income for the first year? c.What is the estimated life-cycle operating income per year for the years after the first year? d.What is the total estimated life-cycle operating income?

Which of the following is true of long-run pricing?

What advice would you give a company to avoid the appearance of predatory pricing?

Companies operating in competitive markets generally use the cost-plus approach to price products.

Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $420 as opposed to the current market price charged of $520 per unit. Granite City Products Inc. has decided to revise its sales price to $420. The annual sales target volume of the product after price revision is 280 units. Granite City Products Inc. wants to earn 30% on its sales amount. What is the target operating income?

An Indian company selling a product in the United States at a price below the market value of the product in India is an example of collusive pricing.

Price discrimination is the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service.

Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year: Wilde has an annual target operating income of $990,000. The markup percentage for setting prices as a percentage of the full cost of the product is ________.

Faraway Corporation is located in Providence, RI and manufactures a product that costs $100 and charges McLeod Company, a Massachusetts based retailer, $300 but charges a customer located in China $310 as it costs more to ship the product oversees. This is an example of illegal price discrimination under the U.S. Robinson-Patman Act of 1936.

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 $320. Management believes it must lower the price to $320 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 120,000 televisions per year. What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)?

A life-cycle budget is usually prepared to budget for costs and production for a period of one year.

Zolas' Heaters is approached by Ms. Leila, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Zolas' Heaters has excess capacity. The following per unit data apply for sales to regular customers: If Ms. Leila wanted a long-term commitment, and not a one-time-special order, for supplying this product, calculate the most likely price to be quoted assuming the markup remains the same?

Zolas' Heaters is approached by Ms. Leila, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Zolas' Heaters has excess capacity. The following per unit data apply for sales to regular customers: For Zolas' Heaters, what is the minimum acceptable price of this one-time-only special order?

Xtech Games Inc. has a new video game cassette for the upcoming holiday season. It is trying to determine the target cost for the game if the selling price per unit will be set at $70, the going price for video games, and the firm wants to earn a target operating income of 30% of sales. What will be the target cost per unit for the new game?

Real Wood Structures Company has invested $1,040,000 in a plant to build small tool sheds. The target operating income desired from the plant is $156,000 annually. The company plans annual sales of 1200 sheds at a selling price of $1100 each. What is the target rate of return on investment for Real Wood Structures Company?

Price dumping occurs when a domestic company is trying to get rid of out-of-style products at a substantially reduced price.

Ocean Grove Vending Company has invested $980,000 in a plant to make vending machines. The target operating income desired from the plant is $196,000 annually. The company plans annual sales of 1600 vending machines at a selling price of $1100 each. What is the cost base of each vending machine for Ocean Grove Vending Company?

Hitz Video Rental is evaluating rental prices. Historical data show that Friday and Saturday have twice the rentals of other days of the week. The following information pertains to the store's normal operations per week: The store manager wants to charge more for rentals on Friday and Saturday. What is the minimum price that should be charged during peak rental days?

Explain the difference between locked in costs and costs incurred. Which of these types of costs does a traditional accounting system emphasize? At which stage of the value chain are most costs locked-in? At which stage of the value chain are most costs incurred? What implication does this have for good cost management?