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

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?

All costs are relevant in short-run pricing decisions.

Steven Corporation manufactures fishing poles that have a price of $42.00.It has costs of $32.64 A competitor is introducing a new fishing pole that will sell for $36.00.Management believes it must lower the price to $36.00 to compete in the highly cost-conscious fishing pole market.Marketing believes that the new price will maintain the current sales level.Steven Corporation's sales are currently 200,000 poles per year. Required: a.What is the target cost for the new price if target operating income is 20% of sales? b.What is the change in operating income for the year if $36.00 is the new price and costs remain the same? c.What is the target cost per unit if the selling price is reduced to $36.00 and the company wants to maintain its same income level?

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?

A business that engages in predatory pricing violates Canadian law.

Most of a product's life-cycle costs are locked in by decisions made during the ________ business function of the value chain.

Answer the following question(s)using the information below. Sheltar's TV currently sells small televisions for $180.It has costs of $140.A competitor is bringing a new small television to market that will sell for $150.Management believes it must lower the price to $150 to compete in the market for small televisions.Marketing believes that the new price will cause sales to increase by 10%,even with a new competitor in the market.Sheltar's sales are currently 100,000 televisions per year. -What is the target cost if target operating income is 25% of sales?

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)?

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 change in operating income if marketing is correct and only the sales price is changed?

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 is the Satellite Inc.life cycle budgeted revenue?

Valley West Amusement Park is evaluating its ticket prices.It is open during the summer months for 15 weeks.The following information pertains to last year's tourist season. Costs are expected to remain the same for this year. Required: What is the unit cost when establishing a long-run price for tour tickets?

Use the information below to answer the following question(s). Acorn Products currently sells small boats for $360.It has costs currently assigned to it of $280.A competitor is bringing a new small boat to market that will sell for $300.Management believes it must lower the price to $300 to compete in the market for small boats.Marketing believes that the new price will cause sales to increase by 10 percent,even with a new competitor in the market.Acorn's sales are currently 100,000 per year. -Under cost-plus pricing,what is the required selling price to achieve a 15% markup?

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

Nancy Company has budgeted sales of $300,000 with the following budgeted costs: 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

Value engineering is a time-and-motion system that can result in: improvements in product designs,changes in material specifications,or modifications in process methods.

For long-run pricing decisions,using stable prices has the advantage of

The target rate of return on investment is the target operating income that an organization must earn divided by invested capital.

Do-It Company manufactures sinker molds for fishing.A sinker mold has a price of $7.00,and costs currently assigned to it of $5.44.A competitor is introducing a new sinker mold that will sell for $6.00.Management believes it must lower the price to $6.00 in order to compete in the highly cost-conscious sinker mold market.Marketing believes that the new price will maintain the current sales level.Do-It Company's sales are currently 200,000 molds per year. Required: a.What is the target cost for the new price if target profit is 20 percent of sales? b.What is the target selling price if costs cannot be reduced and target profit is changed to 15 percent of sales? c.What is the change in operating income for the year if $6.00 is the new price and costs remain the same? d.What is the target cost per unit if the selling price is reduced to $6.00 and the company wants to maintain its same income level?

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?

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?