Variable Cost and Contribution Margin

CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT 12-1The leash major find outs on set decisions be 1. Customers 2. Competitors 3. be 12-2Not necessarily. For a one- judgment of conviction- exclusively limited rule-g both(prenominal) overnedise, the relevant be be further those monetary nurture that provide metamorphose as a result of accept the rank. In this case, right crossing exists pull up stakes seldom be relevant. It is more than likely that everyplaceflowing proceeds gravel up leave be relevant be for long-run set decisions. 12-3Two examples of imp breezement decisions with a brusque-run stress 1. Pricing for a one-time-only finicky identify with no long-term implications. . Adjusting result shuffle and volume in a hawkish commercialiseplace. 12-4Activity- storeyd addressing helps managers in determine decisions in two ways. 1. It gives managers more accu stray product- speak to learning for making determine decisions. 2. It helps managers to manage be during honour design by identifying the approach doctor of eliminating, reducing, or changing different activities. 12-5Two alternative starting points for long-run set decisions be 1. Market- ground pricing, an important form of which is direct pricing.The market-based snuggle asks, Given what our guests want and how our competitors pull up stakes react to what we do, what legal injury should we efflorescence? 2. follow-based pricing which asks, What does it address us to make this product and, hence, what wrong should we charge that pull up stakes reimburse our be and strive a show consequence on postment? 12-6A taper personify per whole is the portendd long-run exist per building block of a product (or usefulness) that, when ex transplant at the organise toll, enables the company to deliver the beloveds the s long tone pited run(a) income per social whole. 2-7Value engineering is a domineering evaluation of summar izely aspects of the value-chain furrow hunts, with the bottom argona of reducing be speckle squ atomic quash 18(a) customer invites. Value engineering via progression in product and process designs is a principal technique that companies use to fulfill tar come damage per social unit of measurement of measurement. 12-8A value-added appeal is a constitute that customers grasp as adding value, or public utility company, to a product or service. Examples argon be of materials, direct industry, tools, and toolry.A nonvalue-added damage is a monetary value that customers do non cover as adding value, or utility, to a product or service. Examples of nonvalue-added court atomic number 18 comprise of re bestow, scrap, expediting, and breakdown cin one casern. 12-9No. It is important to distinguish among when be atomic number 18 locked in and when represent are incurred, be apparent movement it is difficult to alter or turn off be that submit already been locked in. 12-10 bell-plus pricing is a pricing feeler in which managers add a markup to bell in beau monde to determine toll. 2-11Cost-plus pricing methods vary depending on the bases utilize to forecast wrongs. Examples are (a) variant manufacturing be (b) manufacturing function represent (c) versatile product be and (d) dependable product be. 12-12Two examples where the difference in the be of two products or go is ofttimes sm b new(prenominal) than the differences in their prices cost 1. The difference in prices ae calculated for a telephone call, hotel manner, or car renting during busy versus slack periods is often much greater than the difference in be to provide these service. 2.The difference in cost for an airplane seat sold to a passenger motivate on barter or a passenger traveling for joyousness is roughly the same. However, airline companies price discriminate. They routinely charge logical argument travelersthose who are likely to start and complete their travel during the same week excluding the weekenda much higher price than sport travelers who generally stay at their destinations over at least one weekend. 12-13Life- wheel around bud perplexing is an estimate of the r regular(a)ues and cost attri scarcelyable to individually product from its initial R&D to its final examination customer servicing and raise. 2-14Three benefits of utilize a product spirit-cycle reporting format are 1. The amply set of revenues and cost associated with severally product becomes more visible. 2. Differences among products in the voice of conglomeration cost committed at early stages in the life cycle are highlighted. 3. Interrelationships among vocation function cost categories are highlighted. 12-15Predatory pricing occurs when a credit line delibe investly prices below its cost in an effort to drive competitors out of the market and restrict grant, and consequently raises prices rather than amplify engage.Under U . S. laws, dumping occurs when a non-U. S. company sells a product in the get together States at a price below the market value in the country where it is produced, and this visit price materially injures or threatens to materially injure an manufacture in the social united States. Collusive pricing occurs when companies in an industry conspire in their pricing and production decisions to achieve a price higher up the competitive price and so spring trade. 12-16(2030 min. ) Relevant-cost approach to pricing decisions, circumscribed order. . Relevant revenues, $4. 00 ( 1,000$4,000 Relevant be require materials, $1. 60 ( 1,000$1,600 Direct manufacturing fag out, $0. 90 ( 1,000900 variant manufacturing overhead, $0. 70 ( 1,000700 versa cover interchange be, 0. 05 ( $4,000 cc marrow relevant cost 3,400 increment in in operation(p) income$ 600 This calculation assumes that a. The periodic touch on manufacturing overhead of $cl,000 and $65,000 of periodic flash-froze n selling cost volition be unchanged by acceptance of the 1,000 unit order. b.The price charged and the volumes sold to former(a) customers are non affected by the picky order. Chapter 12 uses the phrase one-time-only special order to describe this special case. 2. The professorships argument is defective on at least two counts a. The inclusion body of moot beassuming the monthly mend manufacturing overhead of $150,000 leave behind be unchanged it is irrelevant to the decision. b. The exclusion of relevant cost protean selling be (5% of the selling price) are excluded. 3. Key issues are . Will the existing customer base essential price reductions? If this 1,000-tape order is non independent of other gross revenue, cutting the price from $5. 00 to $4. 00 sewer select a macroscopical negative tack together on complete revenues. b. Is the 1,000-tape order a one-time-only order, or is in that respect the possibility of sales in succeeding months? The fact that the customer is not in Dill Companys general marketing channels does not necessarily mean it is a one-time-only order. Indeed, the sale could nearly open a bare-ass marketing channel.Dill Company should be reluctant to trust only short-run variable be for pricing long-run business. 12-17(2030 min. )Relevant-cost approach to short-run pricing decisions. 1. Analysis of special order Sales, 3,000 units ( $75$225,000 shifting be Direct materials, 3,000 units ( $35$105,000 Direct manufacturing labor, 3,000 units ( $1030,000 uncertain manufacturing overhead, 3,000 units ( $618,000 early(a) variable be, 3,000 units ( $515,000 Sales complaint 8,000 complete variable be 176,000 portion valuation account$ 49,000 bring up that the variable be, except for commissions, are affected by production volume, not sales dollars. If the special order is accepted, in operation(p) income would be $1,000,000 + $49,000 = $1,049,000. 2. Whether McMahons decision to citation full price is corre ct depends on numerous factors. He is incorrect if the qualification would otherwise be idle and if his documental is to increase operate income in the short run. If the offer is rejected, San Carlos, in effect, is automatic to invest $49,000 in immediate gains forgone (an opportunity cost) to defend the long-run selling-price structure.McMahon is correct if he thinks future competition or future price concessions to customers provide hurt San Carloss operating income by more than $49,000. there is likewise the possibility that Abrams could become a long-term customer. In this case, is a price that covers only short-run variable cost adapted? Would Holtz be willing to accept a $8,000 sales commission (as distinguished from her regular $33,750 = 15% ( $225,000) for every Abrams order of this size if Abrams becomes a long-term customer? 12-18(15-20 min. short-run pricing, cogency constraints. 1. Per kggram of to a great extent cease Milk (8 liters pic $2. 00 per lite r) $16 Direct manufacturing labor 5 variant manufacturing overhead 4 quick-frozen manufacturing cost allocated 6 tote up manufacturing cost $31 If Colorado Mountains dairy can get all the Holstein take out it needs, and has sufficient production capacity, whence the negligible price per kilo it should charge for the unassailable stop is the variable cost per kilo = $16 + $5 + $4 = $25 per kilo. 2. If take out is in short supply, then each kilo of warm give up displaces 2 kilos of soft cheese (8liters of milk per kilo of hard cheese versus 4 liters of milk per kilo of soft cheese). Then, for the hard cheese, the minimum price Colorado Mountains should charge is the variable cost per kilo of hard cheese plus the plowshare bank from 2 kilos of soft cheese, or, 25 + (2 pic $10 per kilo) = $45 per kilo That is, if milk is in short supply, Colorado Mountains should not barrack to produce any hard cheese un little the buyer is willing to pay at least $45 per kilo. 12 -19 (2530 min. ) Value-added, nonvalue-added costs. 1. kin Examples Value-added costs a. Materials and labor for regular freshen ups $800,000 Nonvalue-added costs b.Re flow costs $ 75,000 c. Expediting costs caused by work delays 60,000 g. Breakdown maintenance of equipment 55,000 extreme $190,000 aged area d.Materials intervention costs $ 50,000 e. Materials procural and critique costs 35,000 f. Preventive maintenance of equipment 15,000 union $ speed of light,000 Classifications of value-added, nonvalue-added, and canescent area costs are often not clear-cut. Other classifications of some of the cost categories are as well plausible. For example, some students may include materials handling, materials procurement, and inspection costs and preventive maintenance as value-added costs (costs that customers perceive as adding value and as being necessary for good repair service) rather than as in the gray area.Preventive maintenance, for instance, might be regarded as value-added because it helps prevent nonvalue-adding breakdown maintenance. 2. heart and soul costs in the gray area are $100,000. Of this, we assume 65%, or $65,000, are value-added and 35%, or $35,000, are nonvalue-added. organic value-added costs $800,000 + $65,000 $ 865,000 bestow nonvalue-added costs $190,000 + $35,000 225,000 core costs$1,090,000 Nonvalue-added costs are $225,000 ? $1,090,000 = 20. 64% of heart and soul costs.Value-added costs are $865,000 ? $1,090,000 = 79. 36% of tote up costs. 3. feat on Costs Classified as Value- enlargeed Nonvalue- comeed Gray class Area (a) Quality improvement programs to inflict rework costs by 75% (0. 5 ( $75,000) $ 56,250 fasten expediting costs by 75% (0. 75 ( $60,000) 45,000 reduce materials and labor costs by 5% (0. 5 ( $800,000) $ 40,000 keep down effect $ 40,000 $101,250 (b) Working with suppliers to reduce materials procurement and inspection costs by 20% (0. 0 ( $35,000) reduce materials handling costs by 25% $ 7,000 (0. 25 ( $50,000) wide-cut effect 12, viosterol Transferring 65% of gray area costs (0. 5 ( 19,500 $19,500 = $12,675) as value-added and 35% (0. 5 ( $19,500 = $6,825) as nonvalue-added Effect on value-added and nonvalue-added costs $ 12,675 $ 6,825 + 19,500 $ 12,675 $ 6,825 $ 0 (c) upkeep programs to increase preventive maintenance costs by 50% (0. 0 ( $15,000) +$ 7,500 reducing breakdown maintenance costs by 40% (0. 40 ( $55,000) $ 22,000 jazz effect 22,000 + 7,500 Transferring 65% of gray area costs (0. 65 ( $7,500 = $4,875) as value-added and 35% (0. 5 ( $7,500 = $2,625) as nonvalue-added Effect on value-added and nonvalue-added costs +$ 4,875 + 2,625 7,500 +$ 4,875 $19,375 $ 0 congeries effect of all programs $ 47,800 $127,450 Value-added and nonvalue-added costs calculated in requisite 2 Expected value-added and nonvalue-added costs as a res ult of implementing these 865,000 225,000 programs $817,cc $ 97,550 If these programs had been implemented, total costs would meet lessen from $1,090,000 (requirement 2) to $817,200 + $97,550 = $914,750, and the percentage of nonvalue-added costs would decrease from 20. 64% (requirement 2) to $97,550 ? 914,750 = 10. 66%. These are significant improvements in Marinos performance. 12-20(25(30 min. ) marker operating income, value-added costs, service company. 1. The classification of total costs in 2012 into value-added, nonvalue-added, or in the gray area in surrounded by follows ValueGrayNonvalue- congeries workedAreaadded(4) = (1) (2) (3) (1)+(2)+(3)Doing calculations and preparing drawings 77% ? $390,000$300,300$300,300 Checking calculations and drawings 3% ? $390,000$11,70011,700 Correcting errors found in drawings 8% ? $390,000$31,20031,200 Making changes in solvent to client requests 5% ? $390,000 19,50019,500 Correcting errors to meet presidency building mark , 7% ? $390,000 27,300 27,300 entire headmaster labor costs 319,800 11,700 58,500 390,000 Administrative and agree costs at 44% ($171,600 ? $390,000) of lord labor costs cxl,712 5,148 25,740 171,600 Travel 15,000 15,000 Total$475,512$16,848$84,240$576,600Doing calculations and responding to client requests for changes are value-added costs because customers perceive these costs as necessary for the service of preparing architectural drawings. Costs incurred on correcting errors in drawings and making changes because they were inconsistent with building codes are nonvalue-added costs. Customers do not perceive these costs as necessary and would be backward to pay for them. Calvert should seek to eliminate these costs by making sure that all associates are well-informed regarding building code requirements and by training associates to improve the graphic symbol of their drawings. Checking calculations and drawings is in the gray area (some, but not all, checking may be needed ). There is room for disagreement on these classifications.For example, checking calculations may be regarded as value added. 2. decline in superior labor-hours by a. Correcting errors in drawings (8% ? 7,500)600 hours b. Correcting errors to conform to building code (7% ? 7,500) 525 hours Total 1,125 hours Cost savings in professional labor costs (1,125 hours ? $52)$ 58,500 Cost savings in variable administrative and abet costs (44% ? $58,500) 25,740 Total cost savings$ 84,240 Current operating income in 2012$124,650 Add cost savings from eliminating errors 84,240 operational income in 2012 if errors eliminated$208,890 3. Currently 85% ? 7,500 hours = 6,375 hours are bill to clients generating revenues of $701,250.The remaining 15% of professional labor-hours (15% ? 7,500 = 1,125 hours) is deep in thought(p) in making corrections. Calvert bills clients at the rate of $701,250 ? 6,375 = $ cx per professional labor-hour. If the 1,125 professional labor-hours presently not bein g calculate to clients were billed to clients, Calverts revenues would increase by 1,125 hours ? $110 = $123,750 from $701,250 to $825,000 ($701,250 + $123,750). Costs remain unchanged lord labor costs$390,000 Administrative and support (44% ? $390,000) 171,600 Travel 15,000 Total costs$576,600 Calverts operating income would be Revenues$825,000 Total costs 576,600 operating(a) income$248,400 12-21(2530 min. object lens prices, target costs, activity-based costing. 1. peppys operating income in 2011 is as follows Total for 250,000 Tiles Per social unit (1) (2) = (1) ? 250,000 Revenues ($4 ( 250,000) $1,000,000 $4. 00 Purchase cost of roofing tiles ($3 ( 250,000) 750,000 3. 0 Ordering costs ($50 ( 500) 25,000 0. 10 Receiving and storage ($30 ( 4,000) one hundred twenty,000 0. 48 exaltation ($40 ( 1,500) 60,000 0. 24 Total costs 955,000 3. 82 operate income $ 45,000 $0. 18 2. impairment to retailers in 2012 is 95% of 2011 price = 0. 95 ( $4 = $3. 80 cost per ti le in 2012 is 96% of 2011 cost = 0. 96 ( $3 = $2. 88. Snappys operating income in 2012 is as follows Total for 250,000 Tiles Per social unit (1) (2) = (1) ? 250,000 Revenues ($3. 80 ( 250,000) $950,000 $3. 0 Purchase cost of tiles ($2. 88 ( 250,000) 720,000 2. 88 Ordering costs ($50 ( 500) 25,000 0. 10 Receiving and storage ($30 ( 4,000) 120,000 0. 48 Shipping ($40 ( 1,500) 60,000 0. 24 Total costs 925,000 3. 0 operational income $ 25,000 $0. 10 3. Snappys operating income in 2012, if it makes changes in ordering and material handling, will be as follows Total for 250,000 Tiles Per unit (1) (2) = (1) ? 50,000 Revenues ($3. 80 ( 250,000) $950,000 $3. 80 Purchase cost of tiles ($2. 88 ( 250,000) 720,000 2. 88 Ordering costs ($25 ( 200) 5,000 0. 02 Receiving and storage ($28 ( 3,125) 87,500 0. 35 Shipping ($40 ( 1,500) 60,000 0. 4 Total costs 872,500 3. 49 operate income $ 77,500 $0. 31 Through better cost management, Snappy will be able to achieve its target operating income of $0. 30 per tile despite the fact that its revenue per tile has decreased by $0. 20 ($4. 00 $3. 80), while its purchase cost per tile has decreased by only $0. 12 ($3. 00 $2. 88). 12-22 (20 min. ) posterior costs, effect of product-design changes on product costs. 1. and 2.Manufacturing costs of HJ6 in 2010 and 2011 are as follows 2010 2011 Per UnitPer Unit Total (2) = Total (4) = (1)(1) ? 3,500 (3)(3) ? 4,000 Direct materials, $1,200 ? 3,500 $1,100 ? 4,000$4,200,000$1,200$4,400,000$1,100 Batch-level costs, $8,000 ? 70 $7,500 ? 80 560,000 160 600,000 150 Manuf. trading trading operations costs, $55 ? 21,000 $50 ? 22,000 1,155,000 330 1,100,000 275 Engineering change costs, $12,000 ? 14 $10,000 ? 10 168,000 48 100,000 25 Total$6,083,000$1,738$6,200,000$1,550 3. pic= pic ? 90% = $1,738 ? 0. 90 = $1,564. 20 Actual manufacturing cost per unit of HJ6 in 2011 was $1,550.Hence, Medical Instruments did achieve its target manufacturing cost per unit of $1, 564. 20 4. To reduce the manufacturing cost per unit in 2011, Medical Instruments lessen the cost per unit in each of the four cost categoriesdirect materials costs, batch-level costs, manufacturing operations costs, and engineering change costs. It also rock-bottom machine-hours and bend of engineering changes madethe quantities of the cost drivers. In 2010, Medical Instruments used 6 machine-hours per unit of HJ6 (21,000 machine-hours (3,500 units). In 2011, Medical Instruments used 5. 5 machine-hours per unit of HJ6 (22,000 machine-hours ( 4,000 units). Medical Instruments trim engineering changes from 14 in 2010 to 10 in 2011.Medical Instruments achieved these gains through value engineering activities that retained only those product features that customers treasured while eliminating nonvalue-added activities and costs. 12-23(20 min. )Cost-plus target impart on investment pricing. 1. Target operating income = target hand on investment ( invested capital letter Target o perating income (25% of $900,000)$225,000 Total unflinching costs 375,000 Target component part bank$600,000 Target parcel per room- iniquity, ($600,000 ? 15,000) $40 Add variable costs per room-night 5 price to be charged per room-night $45 validation Total room revenues ($45 ( 15,000 room-nights)$675,000 Total costs Variable costs ($5 ( 15,000)$ 75,000 Fixed costs 375,000Total costs 450,000 operating(a) income$225,000 The full cost of a room = variable cost per room + indomitable cost per room The full cost of a room = $5 + ($375,000 ? 15,000) = $5 + $25 = $30 Markup per room = letting price per room adept cost of a room = $45 $30 = $15 Markup percentage as a fraction of full cost = $15 ? $30 = 50% 2. If price is reduced by 10%, the number of dwell Beck could rent would increase by 10%. The bracing price per room would be 90% of $45 $ 40. 50 The number of rooms Beck expects to rent is 110% of 15,000 16,500 The contribution strand per room would be $40. 50 $5$ 35. 5 0 component mete ($35. 50 ( 16,500)$585,750Because the contribution bank of $585,750 at the reduced price of $40. 50 is less than the contribution strand of $600,000 at a price of $45, Blodgett should not reduce the price of the rooms. timbre that the fix costs of $375,000 will be the same under the $45 and the $40. 50 price alternatives and hence, are irrelevant to the analysis. 12-24(20(25 min. )Cost-plus, target pricing, working backwards. 1. Investment$8,400,000 think on investment18% operational income (18% ( $8,400,000)$1,512,000 Operating income per unit of XR500 ($1,512,000 ( 1,500)$1,008 Full cost per unit of XR500 (1,008 ? 0. 09)$11,200 exchange price (($11,200 + $1,008))$12,208 Markup percentage on variable cost ($1,008 ( $8,450)11. 93%Total fixed costs = (Full cost per unit Variable cost per unit) ( Units sold = ($11,200 $8,450) ( 1,500 units = $4,125,000 2. role tolerance per unit = $12,208 $8,450 = $3,758 Increase in sales = $10% ( 1,500 units = 150 units Increase in contribution bound = $3,758 ( 150 units =$563,700 little Advertising costs 500,000 Increase in operating income$ 63,700 Road Warrior should spend $500,000 in advertising because it increases operating income by $63,700. 3. Revenues ($12,208 ? 1,400 units) $17,091,200 Target full cost at 9% markup ($17,091,200 ? 1. 9) $15,680,000 Less Target total fixed costs ($4,125,000 $125,000) 4,000,000 Target total variable costs $11,680,000 Divided by number of units ? 1,400 units Target variable cost per unit $ 8,342. 86 12-25(20 min. ) Life-cycle product costing. 1. pic plowshare margin per unit = sell price Variable cost per unit = $50 $25 = $25 Total fixed costs over = Design fixed costs + ware fixed + marketing and distribution life of robot costs fixed costs = $650,000 + $3,560,000 + $2,225,000 = $6,435,000 BEP in units = pic 2a. Option A Revenues ($50 pic 500,000 units) $25,000,000 Variable costs ($25 pic 500,000 units) 12,500,000 Fixed costs 6,435 ,000 Operating income $ 6,065,000 2b. Option B Revenues Year 2 ($70 pic 100,000 units) $ 7,000,000 historic period 3 & 4 ($40pic600,000 units) 24,000,000 Total revenues 31,000,000 Variable costs ($25 pic 700,000 units) 17,500,000 Fixed costs 6,435,000 Operating income $ 7,065,000 Over the products life-cycle, Option B results in an overall higher operating income of $1,000,000 ($7,065,000 $6,065,000). 12-26(30 min. )Relevant-cost approach to pricing decisions. 1. Revenues (1,000 crates at $117 per crate) $117,000 Variable costs Manufacturing $35,000 market 17,000 Total variable costs 52,000 portion margin 65,000 Fixed costs Manufacturing $30,000 Marketing 13,000 Total fixed costs 43,000 Operating income $ 22,000 Normal markup percentage $65,000 ? $52,000 = 125% of total variable costs. 2. Only the manufacturing-cost category is relevant to considering this special order no redundant marketing costs will be incurred. Variable manufacturing cost per crate = $35,000 ? 1,000 crates = $35 per crate.The relevant manufacturing costs for the 200-crate special order are Variable manufacturing cost per unit $35 ( 200 crates$ 7,000 Special packaging 3,000 Relevant manufacturing costs$10,000 Any price above $50 per crate ($10,000 ? 200) will make a positive contribution to operating income. Therefore, based on pecuniary considerations, Stardom should accept the 200-crate special order at $55 per crate that will scram revenues of $11,000 ($55 ( 200) and relevant (incremental) costs of $10,000. The reasoning based on a simile of $55 per crate price with the $65 per crate absorption cost ignores monthly cost-volume-profit relationships.The $65 per crate absorption cost includes a $30 per crate cost component that is irrelevant to the special order. The relevant range for the fixed manufacturing costs is from 500 to 2,000 crates per month the special order will increase production from 1,000 to 1,200 crat es per month. Furthermore, the special order requires no incremental marketing costs. 3. If the clean customer is likely to remain in business, Burst should consider whether a rigorously short-run focus is appropriate. For example, what is the likelihood of need from other customers increase over time? If Burst accepts the 200-crate special offer for more than one month, it may preclude accepting other customers at prices exceeding $55 per crate.Moreover, the existing customers may learn to the highest degree Bursts willingness to set a price based on variable cost plus a littler contribution margin. The perennial the time compile over which Burst keeps selling 200 crates of canned peaches at $55 a crate, the more likely it is that existing customers will approach Burst for their own special price reductions. If the cutting customer wants the keep down to extend over a longer time period, Burst should negotiate a higher price. 12-27(2530 min. )Considerations other than cost in pricing decisions. 1. Guest nights on weeknights 18 weeknights ? 100 rooms ? 0% = 1,620 Guest nights on weekend nights 12 weekend nights ? 100 rooms ? 20% = 240 Total knob nights in April = 1,620 + 240 = 1,860 Breakfasts served 1,620 weeknight lymph g reduce nights ? 1. 0 = 1,620 240 weekend lymph gland nights ? 2. = 600 Total eats served in April = 1,620 + 600 = 2,220 Total costs for April dispraise $ 20,000 Administrative costs 35,000 Fixed housework and supplies 12,000 Variable housekeep and supplies (1,860 ? $25) 46,500 Fixed eat costs 5,000 Variable breakfast costs (2,220 ? 5) 11,100 Total costs for April $129,600 Cost per leaf node night ($129,600 ? 1,860) $69. 68 Revenue for April ($68 ? 1,860) $126,480 Total costs for April 129,600 Operating income/(loss) $ (3,120) 2. bran-new weeknight guest nights 18 weeknights ? 100 rooms ? 5% = 1,530 in the raw weekend guest nights 12 weeknights ? 100 rooms ? 50% = 600 Total guest nights in April = 1,530 + 600 = 2,130 Breakfasts served 1,530 weeknight guest nights ? 1. 0 = 1,530 600 weekend guest nights ? 2. = 1,500 Total breakfasts served in April = 1,530 + 1,500 = 3,030 Total costs for April disparagement $20,000 Administrative costs 35,000 Fixed housekeeping and supplies 12,000 Variable housekeeping and supplies (2,130 ? $25) 53,250 Fixed breakfast costs 5,000 Variable breakfast costs (3,030 ? $5) 15,150 Total costs $140,400 Revenue (1,530 ? $80) + (600 ? 50) $152,400 Total costs for April 140,400 Operating income $ 12,000 Yes, this pricing system of rules would increase operating income by $15,120 from an operating loss of $3,120 to an operating income of $12,000 ($12,000 + $3,120 = $15,120). 3. The weeknight guests are business travelers who receive to stay at the hotel on weeknights to conduct business for their organizations. They are in all probability not paying personally for their hotel stays, and they are mo re interested in the hotels location in the business lay than the price of the stay, as long as it is reasonable. The contend of business travelers is inelastic.In contrast, the weekend guests are families who are staying at the hotel for joy and are paying for the hotel from their personal incomes. They are willing to consider other hotel plectrums or even not travel at all if the price is high and unaffordable. The demand of pleasure travelers is elastic. Because of the differences in preferences of the weeknight and weekend guests, Executive Suites can price discriminate between these guests by charging $30 more on weeknights than on weekends and still befuddle weeknight travelers stay at the hotel. 4. Executive Suites would need to charge a minimum of $35 per night for the last minute rooms, an amount equal to the variable cost per room. Variable cost per room night = $25 per room night + $5 ? breakfasts = $35. Any price above $35 would increase Executive Suites operating i ncome. 12-28 (25 min. ) Cost-plus, target pricing, working backward. 1. In the following table, work backwards from operating income to calculate the selling price Selling price $ 10. 14 (plug) Less Variable cost per unit 3. 75 Unit contribution margin $ 6. 39 Number of units produced and sold ? 00,000 units function margin $3,195,000 Less Fixed costs 3,000,000 Operating income $ 195,000 a)Total sales revenue = $10. 14 pic 500,000 units = $5,070,000 b)Selling price = $10. 14 (from above) Alternatively, Operating income $ 195,000 Add fixed costs 3,000,000 ploughshare margin 3,195,000 Add variable costs ($3. 75 ? 500,000 units) 1,875,000 Sales revenue $5,070,000 pic )Rate of return on investment = pic d)Markup % on full cost Total cost = ($3. 75 pic 500,000 units) + $3,000,000 = $4,875,000 Unit cost = pic Markup % = pic Or pic 2. bare-assed fixed costs =$3,000,000 $200,000 = $2,800,000 refreshed variable costs = $3. 75 $0. 60 = $3. 15 pertly total cost s = ($3. 15 ? 500,000 units) + $2,800,000 = $4,375,000 bran-new total sales (5% markup) = $4,375,000 pic 1. 4 = $4,550,000 New selling price = $4,550,000 ? 500,000 units = $9. 10 Alternatively, New unit cost = $4,375,000 ? 500,000 units = $8. 75 New selling price = $8. 75 pic 1. 04 = $9. 10 3. New units sold = 500,000 units ? 90% = $450,000 units Budgeted Operating Income for the Year Ending December 31, 20xx Revenues ($9. 10 pic 450,000 units) $4,095,000 Variable costs ($3. 15 pic 450,000 units) 1,417,500 Contribution margin 2,677,500 Fixed costs 2,800,000 Operating income (loss) $ (122,500) 12-29(4045 min. ) Target prices, target costs, value engineering, cost incurrence, locked-in cost, activity-based costing. 1. Old CE100 New CE100 Cost Change Direct materials costs $182,000 $2. 20 pic 7,000 = $15,400 less $166,600 Direct manufacturing labor costs 28,000 $0. 50 pic 7,000 = $3,500 less 24,500 Machining costs 31,500 same(predicate) because capacit y same 31,500 screening costs 35,000 (20% pic 2. 5 pic 7,000) ? 2 = $7,000 28,000 Rework costs 14,000 (See Note 1) 5,600 Ordering costs 3,360 (See Note 2) 2,100 Engineering costs 21,140 Unchanged because capacity same 21,140 Total manufacturing costs $315,000 $279,440 Note 1 10% of old CE100s are reworked. That is, 700 (10% of 7,000) CE100s made are reworked. Rework costs = $20 per unit reworked ( 700 = $14,000. If rework move to 4% of New CE100s fabricate, 280 (4% of 7,000) New CE100s manufactured will require rework. Rework costs = $20 per unit ( 280 = $5,600. Note 2 Ordering costs for New CE100 = 2 orders/month ( 50 components ( $21/order = $2,100Unit manufacturing costs of New CE100 = $279,440 ? 7,000 = $39. 92 2. Total manufacturing cost reductions based on new design= $315,000 $279,440 = $35,560 Reduction in unit manufacturing costs based on new design= $35,560 ? 7,000 = $5. 08 per unit. The reduction in unit manufacturing costs based on the new design can also be calculated as Unit cost of old design, $45 ($315,000 ? 7,000 units) Unit cost of new design, $39. 92 = $5. 08 Therefore, the target cost reduction of $6 per unit is not achieved by the redesign. 3. Changes in design have a considerably larger impact on costs per unit proportional to improvements in manufacturing efficiency ($5. 08 versus $1. 50).One explanation is that many costs are locked in once the design of the radio-cassette is completed. Improvements in manufacturing efficiency cannot reduce many of these costs. Design choices can influence many direct and overhead cost categories, for example, by reducing direct materials requirements, by reducing defects requiring rework, and by designing in fewer components that translate into fewer orders located and lower ordering costs. 12-30(25 min. )Cost-plus, target return on investment pricing. 1. Target operating income = Return on capital in dollars = $13,000,000pic10% = $1,300,000 2. Revenues* $6,000,000 Variable costs ($3. 5 0 + $1. 0)pic500,000 cases 2,500,000 Contribution margin 3,500,000 Fixed costs ($1,000,000 + $700,000 + $500,000) 2,200,000 Operating income (from requirement 1) $1,300,000 * solve backwards for revenues Selling price = pic$12 per case. Markup % on full cost Full cost = $2,500,000 + $2,200,000 = $4,700,000 Unit cost = $4,700,000 ? 500,000 cases = $9. 40 per case Markup % on full cost = pic27. 66% 3. Budgeted Operating Income For the year ending December 31, 20xx Revenues ($14 pic 475,000 cases*) $6,650,000 Variable costs ($5 pic 475,000 cases) 2,375,000 Contribution margin 4,275,000 Fixed costs 2,200,000 Operating income $2,075,000 *New units = 500,000 casespic95% = 475,000 casesReturn on investment = pic15. 96% Yes, increasing the selling price is a good idea because operating income increases without increasing invested capital, which results in a higher return on investment. The new return on investment exceeds the 10% target return on investment. 12-31(20 min. )Co st-plus, time and materials, ethics. 1. As shown in the table below, station will specialise Briggs that she will have to pay $460 to get the air conditioning system repaired and $440 to get it replaced. COST toil Materials Total Cost cover extract (5 hrs. pic $30 per hr. $100) $150 $100 $250 Replace excerption (2 hrs. pic $30 per hr. $200) 60 200 260 PRICE (100% markup on labor cost 60% markup on materials) Labor Materials Total Price Repair option ($150 pic 2 $100 pic 1. 6) $300 $160 $460 Replace option ($60 pic 2 $200 pic 1. 6) 120 320 440 2.If the repair and replace options are evenly effective, Briggs will choose to get the air conditioning system replaced for $440 (rather than spend $460 on repairing it). 3. R&C Mechanical will earn a greater contribution toward overhead in the repair option ($210 = $460 $250) than in the replace option ($ clxxx = $440 $260). Therefore, Garrison will recommend the repair option to Briggs which is not the one she woul d prefer. Recognizing this conflict, Garrison may even present only the repair option to Ashley Briggs. Of course, he runs the danger of Briggs walking away and thinking of other options (at which point, he could present the replace option as a compromise). The problem is hat Garrison has superior information nearly the repairs needed but his incentives may cause him to not reveal his information and sooner use it to his advantage. It is only the sellers desire to build a reputation, to have a long-term relationship with the customer, and to have the customer recommend the seller to other potential buyers of the service that encourages an honest word of honor of the options. The ethical course of action would be to honestly present both options to Briggs and have her choose. To have their employees act ethically, organizations do not reward employees on the basis of the cyberspace earned on various jobs. They also develop codes of conduct and core value and beliefs that specify appropriate and inappropriate behaviors. 12-32(25 min. )Cost-plus and market-based pricing. 1.calcium Temps full cost per hour of supplying adjure labor is Variable costs$13 Fixed costs ($168,000 ? 84,000 hours) 2 Full cost per hour$15 Price per hour at full cost plus 20% = $15 ( 1. 20 = $18 per hour. 2. Contribution margins for different prices and demand realizations are as follows Contribution shore per Variable Cost per second Hour Demand in Hours Total Contribution Price per Hour (2) (3) = (1) (2) (4) (5) = (3) ? 4) (1) $16 $13 $3 124,000 $372,000 17 13 4 104,000 416,000 18 13 5 84,000 420,000 19 13 6 74,000 444,000 20 13 7 61,000 427,000 Fixed costs will remain the same regardless of the demand realizations.Fixed costs are, therefore, irrelevant since they do not differ among the alternatives. The table above indicates that California Temps can increase contribution margin ($444,000) and operating income by charging a price of $19 per hour. 3. The inde terminate approach to pricing in requirement 1 does not explicitly consider the effect of prices on demand. The approach in requirement 2 models the interaction between price and demand and determines the optimal level of profitability using concepts of relevant costs. The two different approaches leash to two different prices in requirements 1 and 2. As the chapter describes, pricing decisions should consider both demand or market considerations and supply or cost factors.The approach in requirement 2 is the more match approach. In most cases, of course, managers use the cost-plus method of requirement 1 as only a starting point. They then modify the cost-plus price on the basis of market considerationsanticipated customer reaction to alternative price levels and the prices charged by competitors for similar products. 12-33Cost-plus and market-based pricing. 1. Single rate = pic $11. 91 per test-hour (TH) Hourly billing rate for HTT and ACT = $11. 91pic1. 45 = $17. 27 2. Labor an d supervision = pic= $4. 64 per test-hour apparatus and facility costs = pic= $503. 275 per setup-hour Utilities = pic= $36. 80 per machine-hour (MH) 3. HTT ACT Total Labor and supervision $295,104 $196,736 $ 491,840 ($4. 64? 63, 600 42,400 test-hours)1 Setup and facility cost 100,655 301,965 402,620 ($503. 275? 200 600 setup-hours)2 Utilities 184,000 ($36. 80? ,000 5,000 machine-hours)3 184,000 368,000 Total cost $579,759 $682,701 $1,262,460 Number of interrogation hours (TH) ? 63,600 TH ? 42,400 TH Cost per examen hour $9. 12 per TH $ 16. 10 per TH Mark-up ? 1. 45 ? 1. 5 guardianship rate per testing hour $ 13. 22 per TH $ 23. 35 per TH 1106,000 test-hours pic 60% = 63,600 test-hours 106,000 test-hourspic40% = 42,400 test-hours 2800 setup-hours ? 25% = 200 setup-hours 800 setup-hours ? 75% = 600 setup-hours 310,000 machine-hours ? 50% = 5,000 machine-hours 10,000 machine-hours ? 50% = 5,000 machine-hours The billing rates based on the activi ty-based cost structure make more sense.These billing rates shine the ways the testing procedures consume the firms resources. 4. To stay competitive, Best try on needs to be more cost-efficient in glacial testing. Roughly 44% of arctic testings total cost pic occurs in setups and facility costs. perhaps the setup activity can be redesigned to achieve cost savings. Best Test should also look for savings in the labor and supervision cost per test-hour and the total number of test-hours used in arctic testing, as well as the utility cost per machine-hour and the total number of machine hours used in arctic testing. This may require redesigning the test, redesigning processes, and achieving efficiency and productivity improvements. 12-34(2530 min. )Life-cycle costing. 1. Total Project Life- beat Costs Variable costs Metal extraction and bear upon ($100 per ton ? 50,000 tons) $5,000,000 Fixed costs Metal extraction and processing ($4,000 ? 24 months) 96,000 Rent on temp orary buildings ($2,000 ? 7 months) 54,000 Administration ($5,000 ? 27 months) 135,000 Clean-up ($30,000 ? 3 months) 90,000 consume restoration 475,000 Selling land 150,000 Total life-cycle cost $6,000,000 2. Projected Life Cycle Income Statement Revenue ($150 per ton pic 50,000 tons) $7,500,000 Sale of land (plug after inputting other numbers) 500,000 Total life-cycle cost (6,000,000) Life-cycle operating income ($40 per ton ? 50,000 tons) $2,000,000 Mark-up percentage on protrude life-cycle cost = pic pic = 33? % 3. Revenue ($140 per ton pic 50,000 tons) $7,000,000 Sale of land 400,000 Total revenue $7,400,000 Total life-cycle cost at mark-up of 33? % $5,550,000 ($7,400,000 ? 1. 33333) New Life would need to reduce total life-cycle costs by $ 450,000 ($6,000,000 $5,550,000) Check Revenue $7,000,000 Sale of land 400,000 Total life-cycle cost (5,550,000) Life-cycle operating income $1,850,000 Mark-up percentage = pic= 33? 12-35(30 min. ) atmospheric stateline pricing, considerations other than cost in pricing. 1. If the have a go at it is $500, a. Air shoot would expect to have 200 business and 100 pleasure travelers. b. Variable costs per passenger would be $65. c. Contribution margin per passenger = $500 $65 = $435. If the fare is $2,100, a. Air shoot would expect to have 180 business and 20 pleasure travelers. b. Variable costs per passenger would be $clxxv. c. Contribution margin per passenger = $2,100 $175 = $1,925. Contribution margin from business travelers at prices of $500 and $2,100, respectively, follow At a price of $500 $435 ? 200 passengers = $ 87,000At a price of $2,100 $1,925 ? 180 passengers= $346,500 Air eagle would maximize contribution margin and operating income by charging business travelers a fare of $2,100. Contribution margin from pleasure travelers at prices of $500 and $2,100, respectively, follow At a price of $500 $435 ? 100 passengers= $43,500 At a price of $2,100 $1,925 ? 20 p assengers= $38,500 Air Eagle would maximize contribution margin and operating income by charging pleasure travelers a fare of $500. Air Eagle would maximize contribution margin and operating income by a price differentiation strategy, where business travelers are charged $2,100 and pleasure travelers $500.In decision making between the alternative prices, all other costs such as evoke costs, allocated annual lease costs, allocated ground services costs, and allocated flight crew salaries are irrelevant. why? Because these costs will not change whatever price Air Eagle chooses t