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

At a management meeting, you just finished presenting your cost analysis report, showing unit costs last year for 60,000 widgets produced were $435.00.The sales manager then complained that she was going to lose a special overseas sale because the customer had indicated they could only pay $425.00.She knew from sources that no competitor would be bidding below $440, and she complained that if the company had better cost control, there would be more profit for everyone.The production manager also would like to take the extra job, since even with the extra production, the plant would be under-capacity.Required:What type of information would you need in order to be able to determine if the extra order could be profitably produced if the selling price was held to $425 per unit?

Companies that produce high quality products do not have to pay attention to the actions of their competitors.

Customer life-cycle costs

Collusive pricing occurs when companies in an industry conspire in their pricing and output decisions to achieve a price above the competitive price.

Relevant pricing information for the short-run and long-run should be the same.

Answer the following question(s)using the information below.Welch 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.Welch 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: -What is the full cost of the product per unit?

Including unit fixed costs for pricing is often used because of its simplicity.

Answer the following question(s)using the information below.After conducting a market research study, Potter Products decided to produce an electric coffee pot to complement its line of kitchen products.It is estimated that the new coffee pot can be sold at a target price of $46.The annual target sales volume for the coffee pot is 300,000.Potter has target operating income of 18% of sales. -What are the target sales revenues?

When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions.

Relevant costs for pricing decisions include manufacturing costs, but not costs from other value-chain functions.

Dumping occurs when a company is trying to get rid of out-of-style products and substantially reduces their prices.

When target costing and target pricing are used together

Muskoka Travel offers guided tours through the lake system.Muskoka Travel provides a guide, necessary equipment, and food for a fee of $75 per person per day.Currently the company is providing an average of 600 guide-days per month.Based on available equipment and guides the maximum capacity is 950 guide-days (customers taken on the equivalent of an all day tour)per month.Variable costs per guide-day for the year were as follows: Fixed costs per month during the year were as follows: Required: A group of foreign tourists has offered Muskoka Travel a proposal of 300 guide-days in July if they will cut the fee to $67.50 per guide-day.They have their own food and do not want to use the Muskoka Travel menus.Muskoka Travel will incur $300 in additional costs for busing the tourists back and forth to the camp site.If fixed costs would not increase, should Muskoka Travel accept the special offer?

The Maize Eagles are evaluating ticket prices for its basketball games.Studies show that Friday and Saturday night games average more than twice the fans of games on other days.The following information pertains to the stadium's normal operations per season: The stadium is open for 5 operating hours on each day a game is played.All employees work by the hour except for the administrators.A maximum of one game is played per day and each fan has only one ticket per game.Required: What is the unit cost when establishing a long-run price for ball games assuming all tickets are priced the same?

The three major influences on pricing decisions are: costs, competitors, and customers.

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: Required: a.What are the estimated life-cycle revenues? b.What is the estimated life-cycle operating income if the product life cycle is one year? c.What is the estimated life-cycle operating income per year for the years after the first year if all of the development costs are charged to the first year? d.What is the total estimated life-cycle operating income?

Answer the following question(s)using the information below.Welch 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.Welch 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 Welch Manufacturing, what is the minimum acceptable price of this one-time-only special order?

Reverse engineering has the objective of reducing costs while still satisfying customer needs.

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. -Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division. What is the estimated life-cycle operating income for both years combined?

Target pricing includes: (1)developing a needed product, (2)choosing a target price, (3)deriving a target cost per unit, and (4)performing cost analysis.