Solutions/solution Manual15
Solutions/solution Manual15
Solutions/solution Manual15
(1) Customer demand: Management must consider customers demand for their
product, which reflects the price that customers are willing to pay for the
product.
(2) Actions of competitors: When pricing its product, management must consider
the likely pricing decisions and product design decisions of competing firms.
(3) Costs: No organization or industry can price its product below total production
costs indefinitely.
(4) Political, legal, and image-related issues: Management must consider the way
the public perceives the firm and must adhere to certain laws when setting
prices.
15.2 The statement that prices are determined by production costs is too simplistic.
Although firms must price their products and services above their total costs in the
long run, management cannot ignore demand issues and the economic
environment. Setting prices generally is a balance between cost-related issues
and economic market forces.
15.3 In the long run, every organization must price its product or service above the
total cost of production. While the market for the product also is critically
important, costs cannot be ignored.
15.4 It is crucial to define the firms product when considering the reaction of
competitors, so that the competitors can be identified. For example, is a firm that
produces glass bottles competing only with other firms that produce glass bottles,
or is the firm competing with all companies that produce containers? Defining the
product as glass bottles or containers is an important step in identifying who the
firms competitors are.
15.6 The profit-maximizing price is the price for which the associated quantity is
determined by the intersection of the marginal cost and marginal revenue curves.
This intersection is shown in Exhibit 15-3 in the text.
(b) Marginal revenue: The amount by which total revenue increases when one
additional unit is sold.
(e) Cross-elasticity: The extent to which a change in a products price affects the
demand for substitute products.
(b) Marginal cost: Additional cost when one more unit is produced.
(1) The firms demand and marginal revenue curves are difficult to determine with
precision.
(3) Cost-accounting systems are not designed to measure the marginal changes
in cost incurred as production and sales increase unit by unit. To measure
marginal cost would entail a very costly information system.
15.10 Determining the best approach to pricing requires a cost-benefit trade-off. While
the marginal-cost, marginal-revenue paradigm results in a profit-maximizing price,
only a sophisticated and costly information system can collect marginal-cost data.
Thus, the firm will incur greater cost in order to obtain better decisions.
The price is equal to cost plus a markup. Depending on how cost is defined, the
markup percentage may differ. Several different definitions of cost, each
combined with a different markup percentage, can result in the same price for a
product or service.
15-12 The four cost bases commonly used in cost-plus pricing are the following:
absorption manufacturing cost, total cost, variable manufacturing cost, and total
variable cost. Each of these cost bases can result in the same price under cost-
based pricing if the markup percentage used in the cost-plus pricing formula is
changed. For example, a lower markup percentage would be applied to total cost
than would be applied to total variable cost.
15.13 Four reasons often cited for the widespread use of absorption cost as the cost
base in cost-plus formulas are as follows:
(1) In the long run, the price must cover all costs and a normal profit margin.
(2) Absorption-cost and total-cost pricing formulas provide a justifiable price that
tends to be perceived as equitable by all parties.
(3) When a companys competitors have similar operations and cost structures,
cost-plus pricing based on full costs gives management an idea of how
competitors may set prices.
(1) Variable-cost data do not obscure the cost behavior pattern by unitizing fixed
costs and making them appear variable.
(2) Variable-cost data do not require allocation of common fixed costs to individual
product lines.
McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,
Inc.
Managerial Accounting, 5e 15- 3
(3) Variable-cost data are exactly the type of information managers need when
facing certain decisions, such as whether to accept a special order.
15.16 The behavioral problem that can result from the use of a variable-cost pricing
formula is that managers may perceive the variable cost of a product or service as
the floor for the price. They may tend to set the price too low for the firm to cover
its fixed costs.
15.17 Return-on-investment pricing is an approach under which the price is set so that it
will cover costs and also earn a profit that will provide a target return on the
invested capital.
15.18 Price-led costing refers to the process under target costing of first determining the
acceptable market price for a product or service and then determining the cost at
which the product or service must be produced.
15.21 Tear-down methods can be used in a service-industry firm just as they are used in
the manufacturing industry. The various steps in providing a service can be
analyzed for cost improvements just as a products materials and manufacturing
operations can be analyzed for the same purpose.
15.22 Under time-and-material pricing, the price includes a cost-based charge for labor,
a cost-based charge for material, and generally a markup on one or both of these
production-cost factors.
15.23 When a firm has excess capacity, there is no opportunity cost in accepting an
additional production job. Therefore, it is not necessary to reflect such an
opportunity cost in setting a bid price. On the other hand, if the firm is already at
full capacity, there is an opportunity cost to accepting another production job. In
this case, it is appropriate to include in the price an estimate of the opportunity
cost associated with the job for which the bid is being prepared.
15.25 (a) Skimming pricing: Setting a high initial price for a new product in order to reap
short-run profits. Over time, the price is reduced gradually.
(b) Penetration pricing: Setting a low initial price for a new product in order to
penetrate a market deeply and gain a large and broad market share.
(c) Target costing: Conducting market research to determine the price at which a
new product will sell and then, given the likely sales price, computing the cost
for which the product must be manufactured in order to provide the firm with
an acceptable profit margin. Then engineers and cost analysts work together
to design a product that can be manufactured for the allowable cost. This
process is used widely in the development stages of new products.
15-26 (a) Unlawful price discrimination: Quoting different prices to different customers
for the same product or service, even though the different prices cannot be
justified by differences in the cost incurred to produce, sell, and deliver the
product or service.
(b) Predatory pricing: Temporarily cutting a price to broaden demand for a product
with the intention of later restricting the supply and raising the price again.
20 ................................
$1,000 ........................................................................
$20,000
40 950
................................ 38,000 } ................. $18,000
........................................................................
60 900
................................ 54,000 } ................. 16,000
........................................................................
80 850
................................ 68,000 } ................. 14,000
........................................................................
100 800
................................ 80,000 } ................. 12,000
........................................................................
$70,000
$60,000
$50,000
Curve is increasing
throughout its range,
$40,000 but at a declining rate
$30,000
$20,000
$10,000
Quantity sold
20 40 60 80 100 per month
$90,000
Total cost
$80,000
$70,000
$60,000
$40,000
$30,000
$20,000
Total cost increases
at an declining rate
$10,000
Quantity sold
20 40 60 80 100 per month
Column (1) times average cost per unit given in the preceding exercise.
**Column (3) minus column (4).
3. Of the five candidate prices listed, $900 is the optimal price. This price produces
a monthly profit of $4,800, which is greater than the profit at the other four
candidate prices.
Total cost
$80,000
Total revenue
$70,000
$60,000
Total profit at the profit-
maximizing quantity and
$50,000
price.
$40,000
$30,000
$20,000
$10,000
Quantity sold
20 40 60 80 100 per month
Dollars
Total cost
Total revenue
Marginal cost
p*
Demand (average
revenue)
Marginal revenue
Quantity sold
q* per month
Answers will vary widely, depending on the company and the product chosen. The
answer should include a general discussion of the use of target costing in setting a
price for a new product. The target-costing approach includes the following key
features: price-led costing; focus on the customer; focus on product design; focus
on process design; use of cross-functional teams; analysis of life-cycle costs; and
a value-chain orientation. Target costing makes extensive use of value engineering
to reduce production costs and bring them into line with the target cost.
EXERCISE 15-34 (30 MINUTES)
= 131.25%
Thus the Wave Darters price would be set equal to $925, where
$925 = $400 + ($400 131.25%).
$60,000 $72,000
= $312,000
= 42.31% (rounded)
Thus the Wave Darters price would be set equal to $925, where
$925 = $650 + ($650 42.31%) with rounding.
The other amounts used in this formula were defined in requirement (1).
variable
Allocated fixed total all selling and
=
selling and unit manufacturing administrative
administrative cost cost costs cost
= $40
Explanatory Notes:
a
($400 $200) $200 = 100%
b
($400 $270) $270 = 48.15% (rounded)
c
($400 $350) $350 = 14.29% (rounded)
d
($400 $230) $230 = 73.91% (rounded)
1. The manufacturing overhead rate is $18.00 per standard direct-labor hour, and the
standard product cost includes $9.00 of manufacturing overhead per pressure
valve. Accordingly, the standard direct-labor hours per finished valve is 1/2 hour
($9 $18). Therefore, 30,000 units per month would require 15,000 direct-labor
hours.
Totals for
120,000
Per Unit Units
Incremental revenue ..................................................... $19 .00 $2,280,000
Incremental costs:
Variable costs:
Direct material ...................................................... $ 5 .00 $ 600,000
Direct labor ........................................................... 6.00 720,000
Variable overhead ................................................. 3 .00 360,000
Total variable costs ........................................... $14 .00 $1,680,000
Fixed overhead:
Supervisory and clerical costs
(4 months @ $12,000) ............................................ 48,000
Total incremental costs ................................................. $1,728,000
Total incremental profit ................................................. $ 552,000
Shipping
Sales commission
3. The minimum unit price that Badger Valve and Fitting Company could accept
without reducing net income must cover the variable unit cost plus the additional
fixed costs.
4. Badgers management should consider the following factors before accepting the
Glasgow Industries order:
The companys relevant range of activity and whether or not the special order
will cause volume to exceed this range.
Other possible production orders that could come in and require the capacity
allocated to the Glasgow job.
$8,000
= 1,000,000
= $.008
2. As in requirement (1), 500 direct-labor hours are required for the job.
$14,950
= 1,000,000
1. Target costing is more appropriate. MPE is limited in terms of what price it can
charge due to market conditions. A cost-plus-markup approach will use the
desired markup for the company; however, the resulting price may too high and
not competitive. In such an environment it makes more sense to use target
costing, which begins with the price to be charged and works backward to
determine the allowable cost.
Since total revenue must equal $4,610,000, the revenue per hour must be
$184.40 ($4,610,000 25,000 hours).
No. A 14% return requires that MPE generate revenue per service hour of
$198.80 ($4,970,000 25,000 hours), which is clearly in excess of the $175
market price.
5. To achieve a 14% return and a $175 revenue-per-hour figure, the company must
trim its costs. MPE could use value engineering, a technique that utilizes
information collected about a services design and associated production process.
The goal is to examine the design and process and then identify improvements
that would produce cost savings.
Direct $
material... 30
Direct 7
labor 5
Manufacturing 5
overhead 0
Selling and administrative 2
expenses. 5
Total $18
cost. 0
Markup ($180 x 25%) 4
... 5
Selling $22
price... 5
3. Lenos markup is $45, which is 20% of the current $225 selling price ($45
$225). To achieve a 20% markup on a $195 selling price, the company must
reduce its costs by $24.
Selling $19
price.. 5
McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,
Inc.
15-24 Solutions Manual
Less: 20% markup ($195 x 20%) 3
. 9
Target $15
cost 6
Current $18
cost.. 0
Less: Target 15
cost. 6
Required cost $
reduction 24
4. Yes. The company should focus its efforts on trimming non-value-added costs.
These costs are associated with non-value-added activities (i.e., activities that are
either (a) unnecessary and dispensable or (b) necessary, but inefficient and
improvable).
5. If costs cannot be reduced below $180, Leno will have to reduce its markup to
remain competitive. Assuming a desire to achieve the going market price of $195,
the markup must equal $15 ($195 - $180), or 8.33 % of cost ($15 $180). Given
that the current markup on cost is 25%, a reduction of 16.67% is needed (25.00%
- 8.33%).
6. The statement means that selling prices are a function of market conditions;
however, the selling prices must cover a companys costs in the long run. Also, in
a number of industries, prices are based on costs. Yet, the prices are subject to
the reaction of customers and competitors.
1. Target costing is market driven, beginning with a determination of the selling price
that customers are willing to pay. That price is dependent on the product they
purchase and the products features. It is only natural that a marketing team
becomes heavily involved in this process, since customer feedback is crucial to
the design process.
2. Add cabinet doors: [(10 x 1) + (20 x 2) + (30 x 3) + (60 x 4) + (80 x 5)] = 780; 780
200 = 3.900
Expand storage area: [(10 x 1) + (40 x 2) + (70 x 3) + (50 x 4) + (30 x 5)] = 650;
650 200 = 3.250
Add security lock: [(30 x 1) + (60 x 2) + (50 x 3) + (40 x 4) + (20 x 5)] = 560; 560
200 = 2.800
New appearance for table top: [(10 x 1) + (20 x 2) + (50 x 3) + (60 x 4) + (60 x 5)]
= 740; 740 200 = 3.700
Extend warranty: [(40 x 1) + (70 x 2) + (30 x 3) + (35 x 4) + (25 x 5)] = 535; 535
200 = 2.675
3. (a) DF currently earns a $16 profit on each table sold ($80 - $64), which
translates
into a 20% markup on sales ($16 $80). The current competitive market
price is $95, which means that if DF maintains the 20% markup, it will earn
$19 ($95 x 20%) per unit. The maximum allowable cost is therefore $76
($95 - $19).
(b) Customers feel most strongly about adding cabinet doors and giving the
table top a new appearance. Both of these features can be added, and DF
will be able to earn its 20% markup. The third and fifth most desirable
features (the expanded storage area and extended warranty) are too
costly. If it desires, DF could also add a lock to the storage area.
(Calculations follow.)
1Add cabinet $
doors. 6.00
2New appearance for table 4.2
top 5
Subtotal $10.2
5
4Add security 1.6
lock.. 5
Total $11.9
.. 0
4. An expanded storage area would be the most logical additional feature in view of
its no. 3 ranking. DF might use value engineering to study the design and
McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,
Inc.
Managerial Accounting, 5e 15- 27
production process of both the table as currently manufactured as well as the
proposed new features. The goal is to identify improvements and associated
reductions in cost that may allow the company to add previously rejected options.
1. The order will boost Graydons net income by $27,900, as the following
calculations show.
Sales revenue............................................. $165,000
Less: Sales commissions (10%)................... 16,500 $148,500
Less manufacturing costs:
Direct material........................................ $ 29,200
Direct labor............................................ 56,000
Variable manufacturing overhead *.................... 16,800
Total manufacturing costs 102,000
Income before taxes.................................... $ 46,500
Income taxes (40%).................................... 18,600
Net income .............................................. $ 27,900
2. Yes. Although this amount is below the $165,000 full-cost price, the order is still
profitable. Graydon can afford to pick up some additional business, because the
company is operating at 75 percent of practical capacity.
Sales revenue.................................................. $127,000
Less: Sales commissions (10%)........................ 12,700 $114,300
Less manufacturing costs:
Direct material $ 29,200
Note that the fixed manufacturing overhead and fixed corporate administration
costs are not relevant in this decision, because these amounts will remain the
same regardless of what Graydons management decides about the order.
P 0.1 P - $102,000 = 0
0.9 P = $102,000
P = $113,333
Income taxes can be ignored, because there is no tax at the break-even point.
4. Profits will probably decline. Graydon originally used a full-cost pricing formula to
derive a $165,000 bid price. A drop in the selling price to $127,000 signifies that
the firm is now pricing its orders at less than full cost, which would decrease
profitability.
Reduced prices could lead to an increase in income if the company is able to
generate additional volume. This situation will not occur here, because the
problem states that Graydon has operated and will continue to operate at 75
percent of practical capacity.
1. Target costing is the design of a product, and the processes used to produce it, so
that ultimately the product can be manufactured at a cost that will enable a firm to
make a profit when the product is sold at an estimated market-driven price. This
estimated price is called the target price, the desired profit margin is called the
target profit, and the cost at which the product must be manufactured is called the
target cost.
2. Value engineering (or value analysis) refers to a cost-reduction and process
improvement technique that utilizes information collected about a product's design
and production processes and then examines various attributes of the design and
processes to identify candidates for improvement efforts.
Increase/
Current (Decrease) Revised
Material:
Purchased components............................. $110 $110
All other................................................... 40 40
Labor:
Manufacturing, direct................................ 65 $ 15 80
Setups..................................................... 9 (9) 0
Material handling...................................... 18 (18) 0
Inspection................................................ 23 (23) 0
Machining:
All............................................................ 35 (5) 30
Other:
Finished-goods warehousing..................... 5 (5) 0
Warranty*................................................. 10 (4) 6
*40% reduction
$108,000
= $16 + 12,000
+ $4
2. PRICE QUOTATION
1. Gargantuan Industries should price the standard compound at $22 per case and
the commercial compound at $30 per case. The contribution margin is the highest
at these prices as shown in the following calculations:
Standard Compound
$ 18 $ 20 $ 21
Selling price per case .................................................................... $ 22 $ 23
16 16 16
Variable cost per case ................................................................... 16 16
$ 2 $ 4 $ 5
Contribution margin per case ......................................................... $ 6 $ 7
120 100 90
Volume in cases (in thousands) ..................................................... 80 50
Total contribution margin (in thousands) .........................................
$240 $400 $450 $480 $350
Commercial Compound
$ 25 $ 27 $ 30
Selling price per case .................................................................... $ 32 $ 35
21 21 21
Variable cost per case ................................................................... 21 21
$ 4 $ 6 $ 9
Contribution margin per case ......................................................... $ 11 $ 14
175 140 100
Volume in cases (in thousands) ..................................................... 55 35
Total contribution margin (in thousands) .........................................
$700 $840 $900 $605 $490
GARGANTUAN INDUSTRIES
BOISE PLANT
PROJECTED CONTRIBUTION MARGIN
FOR THE SIX-MONTH PERIOD ENDING DECEMBER 31
(IN THOUSANDS)
Standard Commercial Total
Sales ............................................................................................
$1,150 $1,225 $2,375
Variable costs:
Selling and administrative ..........................................................
$ 200 $ 245 $ 445
Manufacturing ...........................................................................
600 490 1,090
Total variable costs ................................................................
$ 800 $ 735 $1,535
$ 350
Contribution margin .......................................................................$ 490 $ 840
1. The minimum price per blanket that Omaha Synthetic Fibers, Inc. could bid
without reducing the companys net income is $24 calculated as follows:
2. Using the full cost criteria and the maximum allowable return specified, Omaha
Synthetic Fibers, Inc.s bid price per blanket would be $29.90 calculated as
follows:
3. Factors that management should consider before deciding whether to submit a bid
at the maximum acceptable price of $25 per blanket include the following:
The company should be sure there is sufficient excess capacity to fill the order
and that no additional investment is necessary in facilities or equipment that
would increase fixed costs.
If the order is accepted at $25 per blanket, there will be a $1 contribution per
blanket to fixed costs. However, the company should consider whether there
are other jobs that would make a greater contribution.
Acceptance of the order at a low price could cause problems with current
customers who might demand a similar pricing arrangement.
Department I Department II
Variable overhead
Department I: 37,500 $8 ........................................................
$300,000
Department II: 37,500 $4 ........................................................ $150,000
150,000
Fixed overhead ............................................................................. 150,000
Total overhead ..............................................................................
$450,000 $300,000
Total budgeted overhead for both
departments ($450,000 + $300,000) ............................................ $750,000
Total expected direct-labor hours for
both departments (37,500 + 37,500) ............................................ 75,000
budgeted overhead
Predetermined overhead rate = budgeted direct-labor hours
$750,000
= 75,000
2. Basic Advanced
Total cost ......................................................................................
$400 $500
Markup (15% of cost)
Basic: $400 .15 .....................................................................
60
Advanced: $500 .15 ............................................................... 75
Price ............................................................................................
$460 $575
3. Department I Department II
Budgeted overhead (from requirement 1)........................................
$450,000 $300,000
37,500
Budgeted direct-labor hours .......................................................... 37,500
Calculation of predetermined overhead rate ................................... 300,000
$ 450 ,000 $
37,500 37,500
$12
Predetermined overhead rate ........................................................ $8
4. Basic Advanced
Direct material ..............................................................................
$160 $260
140
Direct labor ................................................................................... 140
Manufacturing overhead:
Department I:
Basic: 2 $12 .......................................................................
24
Advanced: 8 $12 ................................................................ 96
Department II:
Basic: 8 $8 .........................................................................
64
Advanced: 2 $8 .................................................................. 16
Total cost ......................................................................................
$388 $512
5. Basic Advanced
Total cost (from requirement 4).......................................................
$388.00 $512.00
Markup (15% of cost)
Basic: $388 .15 ......................................................................
58.20
Advanced: $512 .15 ............................................................... 76 .80
Price ............................................................................................
$446 .20 $588 .80
6. The management of Sounds Fine, Inc. should use departmental overhead rates.
The overhead cost structures in the two production departments are quite different,
and departmental rates more accurately assign overhead costs to products. When
the company used a plantwide overhead rate, the Basic speakers were overcosted
and the Advanced speakers were undercosted. This in turn resulted in the Basic
model being overpriced and the Advanced model being underpriced. The cost and
price distortion resulted from the following facts: (1) the Basic speakers spend most
of their production time in Department II, which is the least costly of the two
departments; and (2) the Advanced speakers spend most of their production time in
Department I, which is more costly than Department II.
$972,000
= $1,620,000
= 60%
= ($9.00) (.6)
= $5.40
b
Selling price per unit of standard product....................................... $12,000
Variable costs per unit
Direct material .......................................................................
$2,500
Direct labor (250 DLH @ $15) ................................................ 3,750
Variable overhead (250 DLH @ $5.40) ................................... 1,350 7,600
Net contribution per unit ................................................................ $ 4,400
Standard product requirements (12,000 DLH 3) .......................... 36,000 DLH
Special order requirements ...........................................................
11,000 DLH
Total hours required ......................................................................
47,000 DLH
Plant capacity per quarter (15,000 DLH 3) ..................................
45,000 DLH
2,000 DLH
Shortage in hours .........................................................................
Lost unit sales (2,000 DLH 250 DLH) .......................................... 8
Lost contribution ........................................................................... $35,200
1. The lowest price Biloxi Corporation would bid for a one-time special order of
25,000 pounds (25 lots) would be $34,750, which is equal to the variable costs of
the order calculated as follows:
(60 DLH per lot) (25 lots) = 1,500 direct-labor hours (DLH)
Because only 800 hours can be scheduled during regular time this month,
overtime would have to be used for the remaining 700 hours; therefore,
overtime is a relevant cost of this order.
(1,500 DLH) ($7.00 per DLH) ................................................................... $10,500
(700 DLH) ($3.50 per DLH) ......................................................................2,450
Total direct-labor cost .................................................................................
$12,950
(c) Overhead:
This special order will not increase fixed overhead costs. Therefore, fixed
overhead is not relevant, and the relevant overhead charge is the variable
overhead rate:
2. Calculation of the price for recurring orders of 25,000 pounds (25 lots) is as
follows.
Because of the possibility of future orders, raw materials must all be charged
at their expected future cost represented by the current market price per
pound.
60% of the production of a batch (900 DLH) can be done on regular time; the
remaining 600 DLH cause overtime to be incurred and are a relevant cost of
this new product.
Regular time
(1,500 DLH) ($7.00 per DLH) ................................................................. $10,500
Overtime premium
(600 DLH) ($3.50 per DLH) .................................................................... 2,100
Total direct-labor cost .................................................................................
$12,600
(c) Overhead:
All new products should contribute to fixed overhead as well as cover all
variable costs and provide a markup. Therefore, the overhead charge would
be:
Let S = IC + T + NIAT
Where S = total price
IC = incremental cost
T = taxes
T = (S IC)t
t = tax rate
NIAT = net income after taxes
NIAT = S desired return on total price
Substituting for the known items, the formula is revised to read:
S = IC + (S IC) .4 + .10 S
The incremental costs for the three-year order are calculated as shown in the
following schedule.
Current Amount
Amounts Contract Inflation Details of (in
Cost Item (in thousands) Increase Rate Years Calculations thousands)
Direct material $200 10% 5% 3 (200 .10 1.05 3) $ 63.0
Direct labor 400 10% 10% 3 (400 .10 1.10 3) 132.0
Indirect labor 100
Supplies 40 10% 10% 3 (40 .10 1.10 3) 13.2
Additional supplies $4 10% 3 (4 1.10 3) 13.2
Power 120 10% 20% 3 (120 .10 1.20 3) 43.2
Additional power $10 20% 3 (10 1.20 3) 36.0
Factory administration 60 $15* 10% 3 (15 1.10 3) 49.5
Depreciation 70
Sales commission $10 10.0
Total incremental costs $360.1
*The current amount of factory administration, $60,000, will be unchanged, but an additional part-time factory
supervisor will be hired at an annual cost of $15,000.
The company has idle capacity that will be fully utilized by this order. The capacity costs (i.e., depreciation)
would be expensed whether management accepted the order or not. Therefore, the depreciation is a sunk cost and
is not considered an incremental cost of the order.
The total price needed by Polaski for the three-year order is $432,120 as shown in
the calculations below:
S = IC + ( S IC ) .4 + .10 S
S = $360,100 + ( S $360,100).4 + .10 S
S = $360,100 + .4 S $144,040 + .10 S
.5 S = $216,060
S = $432,120
2. If the three-year order is to contribute nothing to net income after taxes, Polaski
would set the total price at $360,100, an amount equal to the incremental costs to
produce the order.
Estimated Contri-
Function Attendance Revenue Expense bution
Registration .................... 100% 2,000 = 2,000 $100,000 $ -0- $100,000
Reception ....................... 100% 2,000 = 2,000 -0- 50,000 (50,000)
Annual meeting* .............. 100% 2,000 = 2,000 -0- -0-* -0-
Keynote luncheon ............ 90% 2,000 = 1,800 72,000 45,000 27,000
Six concurrent sessions* . 70% 2,000 = 1,400 84,000 -0-* 84,000
Plenary session* ............. 70% 2,000 = 1,400 70,000 -0-* 70,000
Six workshops ................. 50% 2,000 = 1,000 100,000 -0-* 100,000
Banquet .......................... 90% 2,000 = 1,800 90,000 54,000 36,000
Hotel credit for free rooms
1,200
$125 .8 3
50
(7,200)
7,200
Total ............................... $516,000 $141,800 $374,200
*Meeting rooms and halls are free when 1,000 members are expected to register at the
hotel.
Reflects 20% discount.
*Meeting rooms and halls are free when 1,000 members are expected to
register at the hotel.
Reflects 20% discount.
HIGH FUEL PRICES MAY HURT STORES, NOT CONSUMERS," THE WALL STREET
JOURNAL , SEPTEMBER 28, 2000, DANIEL MACHALABA AND REBECCA QUICK.
1. Retailers will absorb increased shipping costs instead of passing them along to
customers for the holiday season discussed in this article. The highly competitive
nature of the season determines that the cost of retail goods will be determined by
market-based pricing.
2. Cost-based pricing is when sellers determine their costs and add a profit margin.
Market-based pricing is when a competitive price is determined at which the
product will sell. As mentioned above, market-based pricing is likely to prevail in
this scenario.
ISSUE 15-54
CAR MAKERS MAY TRY TO ALTER PRICING PRACTICES," THE WALL STREET
JOURNAL , JANUARY 24, 2000, JOSEPH B. WHITE AND FARA WARNER.
U. S. auto dealers are changing their pricing policies as a result of the surge in online
auto trading by adjusting their online prices on a daily basis. A growing number of
dealers already are abandoning the practice of negotiating down from an MSRP, as
more consumers come to showrooms armed with invoice price information downloaded
from the internet.
2. As all auto makers feel the decline in profits, cost-based pricing takes priority
across the industry. Without profits the auto industry cannot stay in business, and
therefore all makers have to raise prices. The auto makers do not have to compete
against each other on an unbalanced price-competitive field.
ISSUE 15-56
ISSUE 15-57
ISSUE 15-58
TARGET COSTING CAN BOOST YOUR BOTTOM LINE, " STRATEGIC FINANCE , JULY
1999, GERMAIN BOER AND JOHN ETTLIE.
Using the bottom-up approach engineers can add the estimated prices of purchased
components and estimated production costs for each part that goes into a new
product. Databases containing current component purchase prices, product routings,
and bills of material for existing parts enable design engineers to estimate the cost of
new parts. Another approach is to deduct the desired margin for a product from the
predicted selling price. This approach is consistent with the Japanese concept of
price-down, cost-down, which says production costs must decline as the price of a
product declines. In other words, the market determines the acceptable cost for a
product.
ISSUE 15-59
ISSUE 15-60
HOW SHOULD WE PRICE OUR PRODUCTS? " CONVERTING , AUGUST 2000, SKIP
HEINTZELMAN.
According to the article, marking up material costs to price products will tend to
encourage jobs using low-priced materials and penalize products requiring higher-
priced materials.