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

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. -What is Acorn's target selling price if costs cannot be reduced and target profit is changed cost plus 20 percent?

Reuter Avionics currently sells radios for $1,800.It has costs of $1,400.A competitor is bringing a new radio to market that will sell for $1,600.Management believes it must lower the price to $1,600 to compete in the market for radios.Marketing believes that the new price will cause sales to increase by 10%,even with a new competitor in the market.Reuter's sales are currently 1,000 radios per year. Required: a.What is the target cost if target operating income is 25% of sales? b.What is the change in operating income if marketing is correct and only the sales price is changed? c.What is the target cost if the company wants to maintain its same income level,and marketing is correct?

Dumping is closely related to predatory pricing and occurs when

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

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

Central Dental Company manufactures dental chairs.Its most popular model,Deluxe,sells for $2,500.It has variable costs totaling $1,400 and fixed costs of $500 per unit based on an average production run of 5,000 units.It normally has four production runs a year with $200,000 setup costs each time.Plant capacity can handle up to six runs a year for a total of 30,000 chairs. A competitor is introducing a new dental chair similar to Deluxe that will sell for $2,000.Management believes it must lower the price in order to compete.Marketing believes that the new price will increase sales by 25 percent a year.The plant manager thinks that production can increase by 25 percent with the same level of fixed costs.The company currently sells all the Deluxe chairs it can produce. Required: What is the target cost per unit for the new price if target profit is 20 percent of sales?

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?

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: -If the European customer wanted a long-term commitment for supplying this product,what price would most likely be quoted?

Answer the following question(s)using the information below. After conducting a market research study,Schultz Manufacturing decided to produce a new interior door to complement its exterior door line.It is estimated that the new interior door can be sold at a target price of $60.The annual target sales volume for interior doors is 20,000.Schultz has target operating income of 20% of sales. -What are target sales revenues?

Under section 50(1)of the Competition Act companies cannot engage in price discrimination between two customers with the intent to reduce or obstruct competition among customers.Provide the four key elements of the price discrimination laws in Canada.

The strategy in which companies systematically evaluate all aspects of the value-chain business functions with the objective of reducing costs to meet customers' needs is referred to as

Eliminating non-value added activities by reducing their cost drivers,is referred to as

Taylor Stadium is evaluating ticket prices for its baseball games.Studies have shown that Monday and Tuesday ball games average less than half 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 hours on each day a game is played.The stadium is available for some type of use 300 days a year.All employees work by the hour except for the administrators.In addition,only one game is played per day and each fan would have 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?

Peak-load pricing focuses on direct costs when setting prices for peak and nonpeak periods.

Stone and Bicker are starting a new business venture and are in the process of evaluating their product lines.Information for one new product,hand-made lamps,is as follows: ∙ Every six months a new lamp pattern will be put into production.Each new pattern will require $11,200 in setup costs. ∙ The lamp product line incurred $48,000 in development costs and is expected to be produced over the next six years. ∙ Direct costs of producing the lamps average $144 each.Each lamp requires 12 labour-hours and 2 machine-hours. ∙ Indirect manufacturing costs are estimated at $160,000 per year. ∙ Customer service expenses average $16 per lamp. ∙ Current sales are expected to be 2,000 units of each lamp pattern.Each lamp sells for $224. ∙ 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?

Explain the differences between short-run pricing decisions and long-run pricing decisions.

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 the company wants to maintain its same income level,and marketing is correct (rounded to the nearest cent)?

Bicker,Inc. ,is in the process of evaluating a new product using the following information: ∙ A new transformer has two production runs each year,each with $10,000 in setup costs. ∙ The new transformer incurred $30,000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing the transformers are $40,000 per run of 5,000 transformers each. ∙ Indirect manufacturing costs charged to each run are $45,000. ∙ Destination charges for each transformer average $1.00. ∙ Customer service expenses average $0.20 per transformer. ∙ The transformers are selling for $25 the first year and will increase by $3 each year thereafter. ∙ 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?

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

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?