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

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 $600 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 $3.50. • 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 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?

Use the information below to answer the following question(s). Pershing Company budgeted the following costs for the production of its one and only product, blades, for the next fiscal year: Pershing has a target profit of $150,000. -Johnson Petroleum Company is considering pricing its 5,000 litre petroleum tanks using either variable manufacturing or full product costs as the base. The variable cost base provides a prospective price of $2,800 and the full cost base provides a prospective price of $2,850. The difference between the two prices is

Knowledge of long-run product costs helps guide decisions about entering or remaining in the market for a given product when in a highly competitive price-setting situation.

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

In a graph with cumulative costs per unit as the Y-axis, with two curves, one being the cumulative costs locked-in, and a second curve showing the cumulative costs per unit incurred in different business functions, which of the following is true?

Robert's Medical Equipment Company manufactures hospital beds. Its' most popular model, Deluxe, sells for $5,000. It has variable costs of $2,800 and fixed costs of $1,000 per unit, base 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 $4,000. Management believes it must lower the price to compete. Marketing 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 and normal production? b. What is the annual operating income from Deluxe if the price is reduced to $4,000 and sales in units increase by 25%? c. What is the target cost per unit for the new price if target operating income is 20% of sales?

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

Use the information below to answer the following question(s). Pershing Company budgeted the following costs for the production of its one and only product, blades, for the next fiscal year: Pershing has a target profit of $150,000. -What is the target cost for each coffee pot?

A business that engages in predatory pricing violates Canadian law.

Answer the following question(s) using the information below. Rogers' Heaters is approached by Ms. Yukki, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Rogers' Heaters has excess capacity. The following per unit data apply for sales to regular customers: -For Rogers' Heaters, what is the minimum acceptable price of this one-time-only special order?

A price-bidding decision for a one-time-only special order includes an analysis of

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.

Use the information below to answer the following question(s). Pershing Company budgeted the following costs for the production of its one and only product, blades, for the next fiscal year: Pershing has a target profit of $150,000. -What are target sales revenues?

Use the information below to answer the following question(s). Pershing Company budgeted the following costs for the production of its one and only product, blades, for the next fiscal year: Pershing has a target profit of $150,000. -The current selling price for the Pluto, a mid-sized car, is $19,000. For next year it is anticipated that Pluto will have a $12,000 cost base. What is its prospective selling price, using cost-plus pricing, if the company desires a markup component of 15 percent?

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

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?

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?

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

Life-cycle budgeting is necessary before a company can determine the product life cycle of a given product.

Decisions on the price to bid on a one-time-only special order should include