1.

Not necessarily, for one time special order the relevant costs that will change as a result of
accepting the order. In this case full product costs will be rarely relevant.It is more likely that full
product costs will be relevant on long run pricing decisions. In addition to that relevant costs are
those costs that differ between two alternatives considered they can also be called differential
costs.
12-3.Examples of pricing decisions within short run include
(a) Price for one timespecial order with no long term implications
(b) Adjusting product mix and volume in competitive markets
12-4.Activity based costing helps managers in the following ways
(a)It gives managers more accurate product cost information for making price decisions.
This is by identifying all the cost associated with production of the product or service and in the
end to maximize profits.
(b)It helps managers to manage costs during value engineering by identifying the cost
impact of eliminating ,reducing or changing various activities.
12-8.Examples of value added cost and nonvalue added costs
This are cost that customers perceive as adding value, utility to a product or service.
Examples include costs of materials ,direct labour, tools, and machinery.
Non value added costs this are costs that customers do not perceive as adding value, or utility to
a product or service and examples include; costs of rework ,scrap, expediting, and breakdown
miaintanance.
12-8.No it is important to distinguish between when costs are locked in and when costs are
incurred ,because its difficult to alter or reduce costs that have already been locked in.It is
important to distinguish them in order to accurately access costs and plan for future
expenditures.Understanding the difference between them can help manage its budgets and make
informed decisions about future investments
2.2 EXERCISE
12-18. 1. If Colorado Mountains can acquire all the Holstein milk that it needs, and has sufficient
production capacity hence the minimum price per kilogram it should charge should be equal to
the variable cost per kilogram of hard cheese.
Where
Milk =16(8litres ×2.0)
Variable manufacturing labour =5
Variable manufacturing overhead =4
Variable cost per kilogram=16+5+4=25
Therefore the minimum price =$25 per kilogram of hard cheese

2. If the Holstein milk is in short supply, then the dairy will have to give up some of the
production of soft cheese to produce the hard cheese. Assuming that the contribution margin per
kilogram of soft cheese is $10.If it is in short supply, then for hard cheese the minimum price
they should charge is the variable cost per kilogram of hard cheese plus the contribution margin
from 2 kilogram of soft cheese,
Thus to say
$25+(2×10per kilogram)=$45 per kilogram
Therefore Colorado Mountains should not agree to produce any hard cheese unless the buyer is
willing minimum $45 per kilogram.
12-20.
1. Based on the information given, the value-added costs for Calvert Associates would be the
77% of time spent making calculations and preparing drawings for clients, which generates
revenue for the company. The nonvalue-added costs would be the time spent checking
calculations and drawings, correcting errors found in drawings and correcting own errors
regarding building codes, as these activities do not generate revenue for the company. The gray
area would be the administrative and support costs, which may or may not be directly related to
generating revenue.

To reduce costs, Calvert could consider outsourcing some of the nonvalue-added activities or
investing in technology that would reduce the time and resources required for these tasks.

2. If Calvert could eliminate all errors and reduce professional-labor costs proportionately, the
new professional-labor costs would be $390,000 - (0.77 x $390,000) = $89,100. The total costs
would be $89,100 + $15,000 + (0.23 x $390,000) = $202,500. Therefore, the operating income
would be $498,750 ($701,250 - $202,500).

3. If Calvert could not add more professional staff but could increase revenues proportionately,
the new revenues would be 1.77 x $701,250 = $1,241,348. The new professional-labor costs
would be $390,000 - (0.77 x $390,000) = $89,100. The administrative and support costs would
be $171,600 x (89,100/390,000) = $39,367. The travel costs would remain at $15,000. Therefore,
the total costs would be $89,100 + $39,367 + $15,000 + (0.23 x $390,000) = $179,997. The
operating income would be $1,061,351 ($1,241,348 - $179,997).
12-23. 1.To calculate the full cost per room-night, we need to add the variable and fixed costs:
Full cost per room-night = Variable operating costs + Fixed costs/Number of room-nights

Full cost per room-night = $5 + $375,000/15,000

Full cost per room-night = $30

The target return on investment is 25%, which means that the motel must earn a profit of 25% on
the capital invested:

Target return on investment = 25% x $900,000

Target return on investment = $225,000

To earn the target return on investment, the total revenue from room-nights must be:
Total revenue = Capital invested x Target return on investment + Fixed costs
Total revenue = $900,000 x 25% + $375,000
Total revenue = $375,000 + $225,000
Total revenue = $600,000

To calculate the price Blodgett should charge for a room-night, we add the mark-up to the cost.
Full cost of a room= VC per room + FC per room
$5+($375,000÷$15,000)= $5+$25=$30
Mark up per room=Rent price per room-Full cost per room
$45-$30= $15
Mark percentage as a fraction of full cost
$15÷$30=50%

2.If Blodgett reduces the price of a room-night by 10%, the new price would be:
New price per room-night = 90% of $45= $40.50
New price per room-night = $40.50
The expected number of room-nights Blodgett can rent would increase by 10%, which means he
can rent:

New number of room-nights = 15,000 x 1.1

New number of room-nights = 16,500

The new total revenue would be:

New total revenue = New price per room-night x New number of room-nights
New total revenue = $35.5x 16,500
New total revenue =$585,750

Since the return on investment is 585,750 at price of $40.50 which is less than that of $600,000
at price of $45 then Blodgett should not reduce the price.

AmountAmount
Revenues (1,000 crates at $117 per crate)117,000

Variable costs:

Manufacturing35,000

Marketing 17,000

Total variable costs 52,000

Contribution 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;

noadditional 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
operatingincome. Therefore, based on financial considerations, Stardom should accept
the 200-crate specialorder at $55 per crate that will generate revenues of $11,000 ($55
 200) and relevant(incremental) costs of $10,000.
The reasoning based on a comparison of $55 per crate price with the $65 per
crateabsorption cost ignores monthly cost-volume-profit relationships. The $65 per
crate absorptioncost includes a $30 per crate cost component that is irrelevant to the
special order. The relevantrange for the fixed manufacturing costs is from 500 to 2,000
crates per month; the special orderwill increase production from 1,000 to 1,200 crates
per month. Furthermore, the special orderrequires no incremental marketing costs.

3. If the new customer is likely to remain in business, Burst should consider whether a
strictlyshort-run focus is appropriate. For example, what is the likelihood of demand
from othercustomers increasing over time? If Burst accepts the 200-crate special offer
for more than onemonth, it may preclude accepting other customers at prices
exceeding $55 per crate. Moreover, theexisting customers may learn about Burst’s
willingness to set a price based on variable cost plus asmall

12-27.1.
Guest nights on weeknights:
18 weeknights × 100 rooms × 90% = 1,620
Guest nights on weekend nights:
12 weekend nights × 100 rooms × 20% = 240
Total guest nights in April = 1,620 + 240 = 1,860
Breakfasts served:
1,620 weeknight guest nights ×1.0 = 1,620
240 weekend guest nights × 2.5 = 600
Total breakfasts served in April = 1,620 + 600 = 2,220
Total cost for April
$(20,000+35,000+12,000+46,500+5,000+11,100=129,600)
Where variable breakfast cost =2,220 ×$5=$11,100
Cost per guest night (129,600÷1,860=$69.68)
Revenue for April =$(68×1,860=126,480)
Operating income or loss=revenue – cost
$(126,480- 129,600=3,120)
Loss =$3,120

2.New weeknight guest nights

18 weeknights × 100 rooms × 85% = 1,530
New 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 × 2.5 = 1,500
Total breakfasts served in April = 1,530 + 1,500 = 3,030
Total cost for April =$(20,000+35,000+12,000+53,250+5,000+15,150=140,400)
Where
Variable house keeping and supplies ($2,130× 25=$53,250)
Variable breakfast cost=3,030×5=$15,150
Operating income = revenue – total cost
$152,400- 140,400=$12,000
Operating income=$12,000
Therefore, yes the pricing agreement will increase operating income by $15,120 from an
operating loss lf $3,120

3.Most of the clients during weeknights are business clients, they do not take into consideration
how long the stay rather than the hotel’s park view hence their demand is inelastic. The changes
can be tolerated.

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 × 2 breakfasts = $35. Any price above $35 would increase Executive Suites operating
income.

12-32. 1. California temps’ full cost per hour of supplying contract labour is :
Variable cost + fixed cost
$13 +($168,000 ÷ 84,000)=$15
Full cost per hour =$15
Price per hour at full cost plus 20%=$15 ×1.20=$18 per hour

2. Contribution margin for different prices and demand are as follows:

Price Variable CM Demand Total
per cost per per in hours contribution
hour hour hour
.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 do not vary(remain constant). Hence California Temps' can maximisecontribution
margin ($444,000) and operation income by charging a price of $19 per hour.

3.The two different approaches lead to two different prices in requirement 1 and 2 , the
requirement 2 is more balanced as it considers both market and demand ,while requirement 1
cost plus price bases more on market consideration anticipated customer’s reaction to different
price levels and prices of the similar products .

12-36. 1.The $500 spent on basketball tickets is irrelevant since it is a sunk cost(past). This
means either Apex wins or losses will still incur the $500 cost.

2. Working:
Original cost of framing matrials per unit
$540,000÷500units=$80
Target full cost
$145,000÷1.25=$116,000
Target price
$145,000 + (25% × 116,000) =$121,000
The difference =$121,000 - $116,000=$5,000
Therefore the target cost of framing material is given by $40,000-$5,000=$35,000
Targeting cost of framing materials per unit =$35,000÷500units=$70

3. It is unethical for Grant to use the basketball tickets to get the tip out of the purchasing agent.
Grants should have considered ethical conducts such as integrity and credibility. Grants and
Gomes should leave the bid as it was produced without using the unethical obtained information.