Exam 12: Pricing Decisions, Product Profitability Decisions, and Cost Management

Larry Bett is considering building a budget hotel that offers clean small rooms with bathrooms.He anticipates that his 120 rooms will rent for 36,000 room-nights per year.The market price for equivalent rooms is $60 per night.Larry estimates that the capital cost will be $7,900,000 and he would like an annual return of 15%.Following are the estimated annual operating costs: Required: a.What is the full cost per room-night? b.Can Larry meet the targeted return on investment based on the estimated costs and revenue? Show your calculations. c.A tour operator has offered $30 per night for 20 rooms during a time of the year that there is likely to be at least that many rooms vacant.Should Larry accept this offer?

Backwoods Incorporated manufactures rustic furniture.The cost accounting system estimates manufacturing costs to be $80 per table, consisting of 70% variable costs and 30% fixed costs.The company has surplus capacity available.It is Backwoods' policy to add a 50% markup to full costs.Required: a.Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables.What is the lowest price Backwoods should bid on this one-time-only special order? b.A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style.Backwoods Incorporated is invited to submit a bid to the hotel chain.What is the lowest price per unit Backwoods should bid on this long-term order?

Seneca Company has invested $1,000,000 in a plant to make gas pumps for service stations.The average long-run income desired from the plant is $150,000 annually.The annual cost base for each pump is $1,000.What should be the prospective selling price for each pump if the company uses a target return on investment as the markup base?

Janice Long is considering building a budget hotel that offers clean small rooms with bathrooms.She anticipates that her 120 rooms will rent for 39,600 room-nights per year.The market price for equivalent rooms is $60 per night.Janice estimates that the capital cost will be $6,500,000 and she would like an annual return of 10%.Following are the estimated annual operating costs: Required: a.What is the full cost per room-night? b.Can Janice meet the targeted return on investment based on the estimated costs and revenue? Show your calculations. c.A tour operator has offered $30 per night for 20 rooms during a time of the year that there is likely to be at least that many rooms vacant.Should Janice accept this offer? Show your calculations.

For the current year, Sally Anne Ltd., forecast sales of 32,000 units and production of 30,000 units.Other budget information for the year included: The standard costs remained the same as in the previous year.Sally Anne Ltd.is considering various cost bases.The company management require a 15% return on an investment base of $2,500,000; and, wants this cost built into all cost base options.Required: a.Compute the cost-plus price per unit using direct costing. b.Compute the cost-plus price per unit using absorption costing. c.Compute the cost-plus price per unit using the full product cost.

Use the information below to answer the following question(s).Satellite Inc.is in the process of evaluating its new products.A new signal receiver has two production runs each year, each with $20,000 in setup costs.The new receiver incurred $60,000 in development costs and is expected to be produced for three years.The direct costs of producing the receivers are $80,000 per run of 5,000 receivers.Indirect manufacturing costs charged to each run are $90,000.Destination charges for each receiver average $2.00.Customer service expenses average $0.40 per receiver.The receivers are going to sell for $50 the first year and increase by $6 each year thereafter.Sales units equal production units each year. -What are the Satellite Inc.life cycle budgeted costs?

In target costing, what are at least two techniques used to achieve target costing goals?

Use the information below to answer the following question(s).N-C Associates is in the process of evaluating its new client services for the business consulting division.Estate Planning, a new service, incurred $600,000 in development costs and employee training.The direct costs of providing this service, which is all labour, averages $100 per hour.Other costs for this service are estimated at $2,000,000 per year.The current program for estate planning is expected to last for two years.At that time a new law will be in place which will require new operating guidelines for the tax consulting.Customer service expenses average $400 per client, with each job lasting an average of 400 hours.The current staff expects to bill 40,000 hours for each of the two years the program is in effect.Billing averages $140 per hour. -What is the N-C Associates' life-cycle budgeted revenue?

Dumping is closely related to predatory pricing and occurs when

Use the information below to answer the following question(s).Patton Company budgeted the following costs for the production of its one and only product, bells, for the next fiscal year: Patton has a target profit of $750,000. -If total invested capital is $3,000,000, what is the company's target rate of return on investment?

Survey evidence suggest that most companies use which type of cost when making pricing decisions?

A company uses a long-run time horizon to price its product, an electronic component used in aircraft.To produce a normal production run for a year of 100,000 units direct materials are $90,000; direct labour is $180,000; and, rent on leased equipment is $106,000 per year.Currently re-work is running at 4% of production, after testing.The company has the capacity to test 10 units per hour.Manufacturing Overhead has two cost drivers: testing (cost driver is testing hours at $2.50 per hour); and, rework (cost driver is units reworked at $80 per unit re-worked).Calculate current total manufacturing costs for 100,000 units.

Ski Vallet provides materials that let people teach themselves how to snow ski.It has six different skill-level programs.Each one includes visual and audio learning aids along with a workbook that can be submitted to the company for grading and evaluation purposes, if the person so desires.The accounting system of Ski Vallet is very traditional in its reporting functions with the calendar year being the company's fiscal year.It does include an abundance of information that can be used for various reporting purposes.The company has found that any new idea soon runs its course with an effective life of about three years.Therefore, the company is always in the development stage of some new program.Program development requires experts in the area to provide the know-how of the item being developed and a development team that puts together the video, audio, and workbook materials.The actual costs of reproducing the packages is relatively cheap when compared to the development costs.Required: How might product-life-cycle reporting aid the company in improving its overall operations?

Use the information below to answer the following question(s).Block Island TV currently sells large televisions for $360.It has costs of $280.A competitor is bringing a new large television to market that will sell for $300.Management believes it must lower the price to $300 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 100,000 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)?

Predatory pricing is a type of price discrimination that

Life-cycle budgeting differs from life-cycle costing in that

Brady Lumber Company, a producer of oak lumber for furniture companies has an offer to supply a special load of lumber for an exporter.It will take three months to fill the order of 1,000,000 board metres.During the three months half of its production capacity will be utilized for the special order.The total fixed costs for the three months will be $6,000,000.Variable costs per 1,000 board metres will be $2,500.The marketing manager believes that half of the capacity taken up by the special order can be utilized with regular business which will generate income of $240,000.Required: Determine the minimum price that needs to be charged for the special order.

Answer the following question(s)using the information below.Frank's Computer Monitors Inc..currently sells 17" monitors for $270.It has costs of $210.A competitor is bringing a new 17" monitor to market that will sell for $225.Management believes it must lower the price to $225 to compete in the market for 17" monitors.Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market.Frank's sales are currently 10,000 monitors 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)?

Nancy Company has budgeted sales of $300,000 with the following budgeted costs: Factory overhead: Selling and administrative expenses: Compute the average markup percentage for setting prices as a percentage of: a.The full cost of the product b.The variable cost of the product c.Variable manufacturing costs d.Total manufacturing costs

What is the primary reason a firm would adopt target costing?