管理会计示范性双语课件习题06

CHAPTER 6

COST INFORMATION for PRICING and PRODUCT PLANNING

TRUE/FALSE

1. Price-taker firms usually enjoy a significant market share. a. True b. False

2. Costs that are committed in the short term may be considered flexible in the long term. a. True b. False

3. For price-taker firms, the relevant costs for the product mix decisions are the short-run

flexible costs plus any opportunity costs of forgone alternatives. a. True b. False

4. For one-time special orders, flexible costs may be relevant but fixed costs are never

relevant. a. True b. False

5. Giving up the production of some profitable product results in an opportunity cost. a. True b. False

6. Opportunity costs are always relevant. a. True b. False

7. A price-taker firm should simply produce and sell as much product as it can of all products

that are profitable. a. True b. False

8. With price determined, the only short-term decision faced by the manufacturer is how much

of each possible product it should produce. a. True b. False

9. The selling price quoted for a one-time special order may be less than the selling price for a

long-term customer. a. True b. False

1

10. 11.

A small firm will always be a price-taker. a. True b. False

When capacity is limited, companies should rank-order products by contribution margin per unit, not by contribution per constrained resource. a. True

b. False

12. By using overtime, a company can increase capacity in the short run. a. True b. False

13. Managers have more flexibility in the short-term to adjust the capacities of activity

resources. a. True b. False

14. When a firm has limited capacity, incremental costs will be lower than the incremental

costs of a firm with surplus capacity. a. True b. False

15. In practice, a special order will be priced above incremental costs. a. True b. False

16. When excess capacity exists, the minimum acceptable price must at least cover the

incremental costs of production and delivery. a. True b. False

17. Bid prices and costs that are relevant for regular orders are also relevant for special orders. a. True b. False

18. Full costs are relevant for short-term pricing decisions. a. True b. False

19. Full manufacturing costs include flexible support costs, but not fixed support costs. a. True b. False

20. Markups tend to be greater when demand is more elastic. a. True b. False

2

21. 22. 23. 24. 25. 26. 27. 28. 29.

Markups increase with the strength of demand. a. True b. False

When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions. a. True b. False

Product cost analysis is important even if market forces set prices. a. True b. False

Because demand conditions fluctuate over time, prices also fluctuate. a. True b. False

When demand is relatively inelastic, profits will usually increase when prices increase. a. True b. False

Most firms use full cost-based prices when making long-term pricing decisions. a. True b. False

If a small manufacturing firm lowers the price of a standardized product, it risks being put out of business by a larger competitor. a. True b. False

Dropping unprofitable products will automatically increase profitability. a. True b. False

Capacity constraints are of less concern for long-term than for short-term product mix decisions. a. True b. False

30. For short-term pricing decisions, many more costs are relevant than for long-term pricing

decisions. a. True b. False

3

MULTIPLE CHOICE

31. Incremental costs include all of the following EXCEPT: a. direct materials b. direct labor c. flexible support costs d. fixed support costs

32. Direct materials $40, Direct labor $10, Flexible support costs $30, and Fixed support costs

$20. In the short term, the incremental cost of one unit is: a. $30 b. $50 c. $80 d. $100

33. A product mix strategy is MOST influenced by: a. the products’ contribution margins and their use of capacity resources b. whether a product is a price-taker or a price-setter c. the products’ price elasticity d. full product costs

34. A product cost analysis provides important information for decisions regarding: a. marketing and promotion resources b. discounts for large orders c. a product-mix strategy d. All of the above are correct.

35. Product cost analysis is important when deciding: a. the amount of sales commissions b. pricing discounts c. special-order pricing d. All of the above are correct.

36. Product mix decisions: a. have a long-run focus b. help determine how to maximize operating profits c. focus on selling price per unit d. All of the above are correct.

37. A company with a large share of the market: a. is a price-taker b. can influence price c. can determine price d. can be any of the above because it varies by industry

4

38. 39. 40. 41. 42. 43. 44.

For short-run product mix decisions, depreciation is a cost that is: a. not relevant b. differential c. incremental d. flexible

Opportunity costs:

a. result in a cash outlay

b. only are considered when selecting among alternatives c. are recorded in the accounting records d. should be maximized for the best decision

When a firm has constrained capacity as opposed to surplus capacity, opportunity costs will be:

a. lower b. the same c. greater d. it varies

The opportunity cost of holding significant inventory includes: a. the interest forgone on an alternative investment b. additional insurance costs c. additional storage costs d. All of the above are correct.

A supplier offers to make Part A for $70. Jansen Company has relevant costs of $80 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier: a. is zero b. is $10,000 c. is $70,000

d. cannot be determined using the above information Fixed manufacturing support costs include the cost of: a. plant administration

b. employee wages for assembly c. advertising

d. product delivery

Flexible manufacturing support costs include the cost of: a. wages for the finishing department b. indirect materials

c. depreciation of equipment d. parts for the product

5

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 70 THROUGH 72.

Rosa’s Rockers manufactures two models: Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 70 units of the Premium Model. Only 496 machine hours are available per week. The following per unit data apply:

70.

Contribution margin per unit

Number of machine hours required Standard $18 3 Premium $20 4

The contribution per machine hour is:

a. $18 for Standard and $20 for Premium b. $54 for Standard and $80 for Premium c. $15for Standard and $16 for Premium d. $6 for Standard and $5 for Premium

To maximize production profits, how many units would you recommend of each model? a. 100 units of Standard and 49 units of Premium b. 72 units of Standard and 70 units of Premium c. 100 units of Standard and 70 units of Premium d. 85 units of Standard and 60 units of Premium

71.

72. If there are 600 machine hours available per week (instead of only 496 machine hours per

week), how many rockers of each model should Rosa’s produce to maximize profits? a. 100 units of Standard and 49 units of Premium b. 72 units of Standard and 70 units of Premium c. 100 units of Standard and 70 units of Premium d. 85 units of Standard and 60 units of Premium

73. The amount of markup is usually higher if: a. the firm is using a skimming strategy b. demand is weak c. competition is intense d. demand is elastic

74. Price-setters include: a. large companies in the commodity industry b. companies with a small share of the market c. small firms that manufacture a specialty product d. one of many firms within a particular industry

75. When demand for a product is inelastic and prices are increased, demand will usually

__________ and operating profits will __________. a. increase, increase b. remain the same, increase c. decrease, decrease d. remain the same, decrease

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76. When demand for a product is very elastic and prices are increased, demand will

__________ and operating profits __________. a. remain the same, will increase b. remain the same, may either increase or decrease c. decrease, will decrease d. decrease, may either increase or decrease

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 77 AND 78.

Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $90 per table, consisting of 80% flexible costs and 20% fixed costs. The company has surplus capacity available. It is Northwoods’ policy to add a 50% markup to full costs.

77. Northwoods is invited to bid on an order to supply 100 rustic tables. What is the lowest

price Northwoods should bid on this one-time special order? a. $6,300 b. $7,200 c. $9,000 d. $13,500

78. A large hotel chain is currently expanding and has decided to decorate all new hotels using

the rustic style. Northwoods is invited to submit a bid to the hotel chain. What is the lowest price per unit Northwoods should bid on this long-term order? a. $63 b. $72 c. $90 d. $135

12

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 79 AND 80.

Berryman Products manufactures coffee tables. Berryman Products has a policy of adding a 20% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

Output units Machine-hours

Direct manufacturing labor-hours Direct materials per unit

Direct manufacturing labor per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs

30,000 tables 8,000 hours 10,000 hours $50 $6 $161,250 $600,000 $450,000 $562,500

79. Berryman Products is approached by an overseas customer to fill a one-time-only special

order for 2,000 units. All cost relationships remain the same except for a one-time setup charge of $20,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order? a. $67.38 b. $77.38 c. $111.13 d. $80.85

80. For long-run pricing of the coffee tables, what price will MOST likely be used by Berryman? a. $67.38 b. $80.85 c. $111.13 d. $133.35

13

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 81 THROUGH 83.

Northern Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 3,000 units. Currently Projected Demand 20,000 units 17,000 units Selling price $4.50 $5.00 Incremental cost per unit $3.00 $3.00

81. If the price increase is implemented, operating profit is projected to: a. increase by $4,000 b. decrease by $4,000 c. increase by $6,000 d. decrease by $4,500

82. 83. 84. 85. 86.

Would you recommend the 50-cent price increase? a. No, because demand decreases.

b. No, because the selling price increases. c Yes, because contribution per unit increases. d. Yes, because operating profits increase. The demand for this product is: a. greatly inelastic b. slightly inelastic c. elastic

d. indeterminable

Firms with small market shares:

a. can lower prices and industry target prices will follow b. have little influence on the price and demand of products c. can demand a higher price and increase company profits d. All of the above are correct.

A company that competes as a producer in the grain industry is a: a. price-taker firm b. price-setter firm c. full-cost pricing firm

d. None of the above is correct.

In an industry with a standardized product, prices will be most influenced by: a. incremental production costs b. the top ten firms in the industry c. the price-taker firms

d. None of the above is correct.

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87. When an industry such as the hotel industry has peak and slower times, __________ also

fluctuate(s). a. prices b. opportunity costs c. demand d. All of the above are correct.

88. If customer demand for a product is strong, then a company is able to command a higher: a. markup b. market share c. full cost d. All of the above are correct.

89. Firms lower markups: a. to increase market share b. to adjust for lower demand conditions c. for one-time special orders d. All of the above are correct.

90. A small firm can become a price-setter if the firm: a. manufactures a standardized product b. differentiates its products from others in the market c. competes in a regulated industry d. The firm can never become a price setter.

91. Which statement is correct? a. Prices are adjusted upward when competition is intense. b. Prices are adjusted downward when capacity is fully utilized. c. Markups are increased when demand is strong. d. Markups are decreased for the skimming price strategy.

92. The penetration pricing strategy includes: a. winning additional market share b. initially charging a higher selling price c. maintaining a full product line d. charging for the privilege of possessing the latest technological innovations

93. When a company is evaluating an order and there is available capacity, one of the

company’s primary concerns should be: a. whether the incremental costs are fixed or flexible b. the demand for the product c. how long the firm is committing its production capacity d. the variety of colors and other complexities of the order

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94. If a small manufacturing firm RAISES the price of its generic aspirin product, it will

probably: a. become more profitable b. lose customers to competing firms c. increase its market share d. lose its price-setting status

95. If a small manufacturing firm LOWERS the price of its generic aspirin product, its

GREATEST long-term risk is: a. a lower contribution margin per unit b. decreased profits c. reduced market share d. being put out of business by a large competitor

96. If a product is unprofitable, a firm: a. may choose to continue the product to maintain a full product line b. should drop the product immediately c. may choose to add costly features to the product to increase the value d. may choose to better duplicate similar products

97. When the greatest portion of a firm’s costs are fixed rather than flexible: a. the firm enjoys lower financial risk b. offering discounts during non-peak times will generally increase profits c. incremental costs will also be proportionately higher d. the firm should always use full-cost pricing to maximize profits

98. Dropping unprofitable products will increase profitability: a. if the activity resources no longer required are eliminated b. if capacity constraints are adjusted c. automatically d. when they are part of a full product line

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99. Camera Corner is considering eliminating Model AE2 from its camera line because of

losses over the past quarter. The past three months of information for Model AE2 are summarized below.

Sales (1,000 units) Manufacturing costs: Direct materials

Direct labor ($15 per hour) Support Operating loss

$300,000 150,000 60,000

($10,000) 100,000 Support costs are 70% flexible and the remaining 30% is depreciation of special equipment for model AE2 that has no resale value.

If Model AE2 is dropped from the product line, operating income will: a. increase by $10,000 b. decrease by $20,000 c. increase by $30,000 d. decrease by $10,000

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 100 AND 101.

Denly Company has three products, A, B, and C. The following information is available: Product A Product B Product C Sales $60,000 $90,000 $24,000 Variable costs 36,000 48,000 15,000 Contribution margin 24,000 42,000 9,000 Fixed costs: Avoidable 9,000 18,000 6,000 Unavoidable 6,000 9,000 5,400 Operating income $ 9,000 $15,000 $ (2,400)

100. Denly Company is thinking of dropping Product C because it is reporting a loss.

Assuming Denly drops Product C and does not replace it, operating income will: a. increase by $2,400 b. increase by $3,000 c. decrease by $3,000 d. decrease by $5,400

101. Assuming Product C is discontinued and the space formerly used to produce Product C is

rented for $12,000 per year, operating income will: a. increase by $6,600 b. increase by $9,000 c. increase by $12,000 d. increase by $14,400

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EXERCISE/PROBLEM

102. Axle and Wheel Manufacturing is approached by a European customer to fill a special, one-time special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers:

Direct materials Direct labor

Flexible manufacturing support Fixed manufacturing support Total manufacturing costs Markup (50%)

Targeted selling price $33 15 24 52 124 62 $186

Axle and Wheel Manufacturing has excess capacity. a. b. c. d. e.

What is the full manufacturing cost per unit? What is the contribution margin per unit?

Which costs are relevant for making the decision regarding this special order? Why? For Axle and Wheel Manufacturing, what is the minimum acceptable price of this special order?

For this special order, should Axle and Wheel Manufacturing consider a price of $100 per unit? Why or why not?

103. Silver Lake has excess capacity. Silver Lake Cabinets is approached by Ms. Jenny Zhang, a

new customer, to fill a large one-time order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

Direct materials Direct labor

Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (60%)

Targeted selling price a. b. c. d.

$100 125 60 75 360 216 $576 For Silver Lake, what is the minimum acceptable price of this special order?

Other than price, what other items should Silver Lake consider before accepting this special order?

How would the analysis differ if there was limited capacity?

How would this analysis differ if Ms. Jenny Zhang wanted a long-term commitment for supplying this product?

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104. Maggie’s Mufflers manufactures three different product lines: Model X, Model Y, and

Model Z. Considerable market demand exists for all models. The following per unit data apply: Model X Model Y Model Z Selling price $80 $90 $100 Direct materials 30 30 30 Direct labor ($10 per hour) 15 15 20 Variable support costs ($5 per machine hour) 5 10 10 Fixed support costs 20 20 20 a. For each model, compute the contribution per unit. b. For each model, compute the contribution per machine hour. c. If there is excess capacity, which model is the most profitable to produce? Why? d. If there is a machine breakdown, which model is the most profitable to produce?

Why?

e. How can Maggie encourage her sales people to promote the more profitable model?

105. Charlie’s Chairs manufactures two models: Standard and Premium. Weekly demand is

estimated to be 120 units of the Standard Model and 70 units of the Premium Model. Only 420 machine hours are available per week. The following per unit data apply: Standard Premium Contribution margin per unit $12 $15 Number of machine hours required 2 3 a. For each model, compute the contribution per machine hour. b. To maximize weekly production profits, how many machine hours would you

recommend of each model? How many units of each model?

c. If there are 500 machine hours available per week (instead of only 420 machine hours

per week), how many chairs of each model should Charlie’s produce to maximize profits?

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106. Novelene’s Novelties manufactures Green Bay Packer cheese heads (small, medium, and

large) that are sold to area retailers. Production takes 0.20, 0.25, and 0.30 machine hours to manufacture one unit of the small, medium, and large cheese heads, respectively. The company has monthly capacity of 2,500 machine hours. The following per unit data apply for the month of August: Small Medium Large Projected maximum sales 2,500 4,000 3,000 Machine hours required 0.20 0.25 0.30 Selling price $30 $36 $42 Direct materials 8 10 12 Direct labor 3 3 4 Variable support costs 4 5 5 Fixed support costs 2 2 2 a. For each size, compute the contribution per unit. b. For each size, compute the contribution per machine hour. c. How many units of each size should Novelene’s produce this month to maximize

profits?

d. Suppose a foreign firm places a special order for the purchase of an additional 1,000

medium cheese heads at $50 each.

1. Determine the opportunity cost for this order.

2. What other issues might Novelene want to consider before accepting this special

order?

e. Suppose available machine hour capacity is reduced to 2000 machine hours due to

machine breakdown. How many units of each size should Novelene’s produce to maximize profits?

107. Backwoods Incorporated manufactures rustic furniture. The cost accounting system

estimates manufacturing costs to be $80 per table, consisting of 70% flexible costs and 30% fixed costs. The company has surplus capacity available. It is Backwoods’ policy to add a 50% markup to full costs. a. Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables.

What is the lowest price Backwoods should bid on this one-time special order?

b. A large hotel chain is currently expanding and has decided to decorate all new hotels

using the rustic style. Backwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Backwoods should bid on this long-term order?

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LO2,3

118. Under what conditions will a firm become a price-setter? A price-taker? Solution: A firm will be a price-setter when it is in an industry with relatively little

competition, it holds a large share of the market, and it can exercise leadership. A firm will be a price-taker when it is one of a large number of firms in an industry, it holds a small market share in an industry with a price-setter firm, or it competes in an industry where there is little to distinguish products from each other. LO3

119. Vlasic has a large market share of the pickle industry. What influences how Vlasic

determines its prices? Solution: Since Vlasic holds a large share of the market, it can set the prices for the pickle

industry based on customer price acceptance. LO3 120. Clark Manufacturing offers two product lines IN2 and EL5. The demand of the IN2

product line is inelastic, while the demand of the EL5 product line is very elastic. If Clark initiates a price increase for both product lines, how will customer demand change? How will the price increase affect operating profits? Solution: For the inelastic product line, when prices are increased demand will stay

approximately the same and profits would be expected to increase. For the elastic product line, the increased price will result in decreased demand (i.e., lower

sales volume). Whether a profit or a loss results from this change will depend on the amount of decreased demand and the amount of the increased contribution margin due to the increase in price. LO3

121. What factors may influence the level of markups? Solution: Factors affecting the level of markups include the strength of demand, the

elasticity of demand, and the intensity of competition. In addition, strategic reasons also may influence the level of markups. For instance, a firm may either choose a low markup to penetrate the market and win market share from established products of its competitors, or employ a high markup if it employs a skimming strategy for a market segment in which some customers are willing to pay higher prices for the privilege of owning the product. LO3

122. When is full-cost information useful for pricing decisions? Solution: Full costs are used for pricing decisions under the following circumstances: 1) Contracts for the development and production of new customized products, including

contracts with governmental agencies, specify prices as full costs plus a markup; 2) Prices set in regulated industries like electric utilities also are based on full costs; 3) When a firm enters into a long-term contractual relationship with a customer to supply

a product, it will price the product based on its full costs, because with the flexibility it has in adjusting the level of commitment for all activity resources, most costs become variable in the long run; and 4) Prices based on full costs are used as benchmark prices to guide short-run price

adjustments in response to fluctuations in short-run demand conditions.

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LO3

123. Explain how price markups relate to the strength of demand, the elasticity of demand, and

the intensity of competition. Solution: The stronger the demand, the higher the markup will be. When demand is more

elastic, markup will be lower because customers are sensitive to higher prices. Finally, when competition is more intense, a firm cannot sustain a high markup. LO4

124. Vlasic has a large market share of the pickle industry. Dean Foods holds a much smaller

share of the pickle market. What influences how Dean Foods determines its prices? Solution: Firms with smaller market share like Dean Foods will set prices similar to Vlasic,

the price setter for the pickle market. LO4

125. Vlasic has a large market share of the pickle industry. Dean Foods holds a much smaller

share of the pickle market. What are the possible consequences if Dean Foods raises the price of their pickles? Lowers the price of their pickles? Solution: If Dean Foods raise their pickle prices they would lose market share because

customers will simply purchase a competitor’s pickles at the lower price. If Dean Foods lowers their pickle prices, Vlasic would probably respond by also lowering

prices. This could lead to a price war and decreased profits for everyone in the industry. In this situation, smaller firms are usually the losers because they cannot sustain losses over an extended period of time and as a result may be forced out of business. LO4

126. Is a company that competes in commodities such as corn and wheat a price-taker or a price-setter? Why? Solution: A price-taker. In industries where it is difficult to differentiate one firm’s products

from another firm’s products, prices are influenced by the supply and demand of the market, and all firms are price-takers. LO4

127. A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices

be adjusted during peak periods? During slow times? Solution: During peak periods the hotel can justify increased prices because of full capacity

conditions, whereas in slower periods when there is excess capacity, the hotel may want to lower prices to fill the excess capacity. LO4

128. What options may be considered when long-run market prices are below full costs? Solution: If long-run market prices are lower than full costs, managers may consider re-engineering the product to lower costs, raising prices by further differentiating the product,

or dropping these unprofitable products.

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108. Molar Camera is considering eliminating Model AE1 from its camera line because of losses

over the past quarter. The past three months of information for model AE1 is summarized below.

Sales (1,000 units) Manufacturing costs: Direct materials

Direct labor ($15 per hour) Support Operating loss

$250,000 140,000 30,000 100,000 ($20,000) Support costs are 70% flexible and the remaining 30% is depreciation of special equipment for model AE1 that has no resale value.

Should Molar Camera eliminate Model AE1 from its product line? Why or why not?

109. Central Plains Lighting manufactures small flashlights and is considering raising the price

by 20 cents a unit for the coming year. With a 20-cent price increase, demand is expected to fall by 3,000 units. Currently Projected Demand 20,000 units 17,000 units Selling price $4.80 $5.00 Incremental cost per unit $3.00 $3.00 a. If the price increase is implemented, how will this change operating profit? b. Would you recommend the 20-cent price increase? Why or why not? c. Is the demand for this product elastic or inelastic? How can you tell?

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110. The management accountant for the Chocolate S’more Company has prepared the

following income statement for the most current year.

Chocolate Sales $40,000 Cost of goods sold 26,000 Contribution margin 14,000 Delivery and ordering costs 2,000 Rent (per sq. foot used) 3,000 Allocated corporate costs 5,000 Corporate profit $4,000 a. b.

Other Candy $25,000 15,000 10,000 3,000 3,000 5,000 $(1,000) Fudge $35,000 19,000 16,000 2,000 2,000 5,000 $7,000 Total $100,000 60,000 40,000 7,000 8,000 15,000 $10,000

Do you recommend discontinuing the Other Candy product line? Why or why not? If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount?

111. Freeman Company has a demand function given by Q = 600 – (2 x P) and a cost function given by C = $8,000 + ($30 x Q) where P is the price, and Q is the quantity produced and sold. Determine the optimal price, the corresponding demand quantity, and unit product cost.

22

CRITICAL THINKING/ESSAY

112. What considerations other than cost need to be evaluated for one-time special orders?

113. An activity-based costing system allocates fixed manufacturing costs to various product

lines. When should these allocated costs be used to evaluate short-term pricing decisions?

114. For short-term pricing decisions, what costs are relevant when there is available surplus

capacity? When there is no available surplus capacity?

115. When there is inadequate capacity, under what conditions may a firm consider accepting a

one-time special order?

116. Under what conditions might a manufacturing firm sell a product for less than its long-term

price? Why?

117. Why is the evaluation of short-term pricing decisions different from the evaluation of long-term pricing decisions?

118. Under what conditions will a firm become a price-setter? A price-taker?

119. Vlasic has a large market share of the pickle industry. What influences how Vlasic

determines its prices?

120. Clark Manufacturing offers two product lines IN2 and EL5. The demand of the IN2 product

line is inelastic, while the demand of the EL5 product line is very elastic. If Clark initiates a price increase for both product lines, how will customer demand change? How will the price increase affect operating profits?

121. What factors may influence the level of markups?

122. When is full-cost information useful for pricing decisions?

123. Explain how price markups relate to the strength of demand, the elasticity of demand, and

the intensity of competition.

124. Vlasic has a large market share of the pickle industry. Dean Foods holds a much smaller

share of the pickle market. What influences how Dean Foods determines its prices?

125. Vlasic has a large market share of the pickle industry. Dean Foods holds a much smaller

share of the pickle market. What are the possible consequences if Dean Foods raises the price of their pickles? Lowers the price of their pickles?

126. Is a company that competes in commodities such as corn and wheat a price-taker or a price-setter? Why?

127. A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices

be adjusted during peak periods? During slow times?

128. What options may be considered when long-run market prices are below full costs?

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CHAPTER 6 SOLUTIONS

COST INFORMATION for PRICING and PRODUCT PLANNING

TRUE/FALSE LO1 1. b LO1 2. a LO1 3. a LO1 4. a

MULTIPLE CHOICE LO1 31. d LO1 32. c LO1 33. a LO1 34. d

LO2 LO2 LO2 LO2 66. 67 68. 69. a b a c LO1 5.

LO1 6. LO1 7. LO1 8. LO1,3 9. LO1,4

10.

LO2 11. LO2 12. LO2 13. LO2 14. LO2

15.

LO2 16. LO2,3 17. LO2,3 18. LO3 19. LO3

20.

LO3 21. LO3 22. LO3 23. LO3 24. LO3

25.

LO3 26. LO4 27. LO4 28. LO4 29. LO4 30.

a

a a a a b b a b b a a b b b b a b a a a a a b a b

LO1

LO1 LO1 LO1 LO1 LO1

LO1 LO1 LO1 LO1 LO1

LO1 LO1 LO1 LO1 LO1

LO1 LO1 LO1 LO1,2,3 LO1,2,3

LO1,2,3 LO1,2,3 LO1,2 LO2 LO2

LO2 LO2 LO2 LO2 LO2 35. d

36. b 37. d 38. a 39. b 40. c 41. a 42. a 43. a 44. b 45. a 46. d 47. b 48. c 49. b 50. c 51. b 52. a 53. d 54. a 55. b 56. c 57. a 58. c 59. a 60. d 61. d 62. b 63. a 64. c 65

b

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LO2

70.

LO2 71. LO2 72. LO3 73. LO3 74. LO3

75.

LO3 76. LO1,3 77. LO1,3 78. LO1,3 79. LO1,3

80.

LO3 81. LO3 82. LO3 83. LO3,4 84. LO4

85.

LO4 86. LO4 87. LO4 88. LO4 89. LO4

90.

LO4 91. LO4 92. LO4 93. LO4 94. LO4

95.

LO4 96. LO4 97. LO4 98. LO4 99. LO4

100.

LO4 101.

d a c a c b d b d a d a d c b a d d a d b c a c b d a b a b c

b

MULTIPLE CHOICE

49. $40 + $20 + $50 + $60 = $170 50. $255 - $40 - $20 - $50 = $145 52. $40 + $20 + $50 = $110

53. Any price equal to or greater than $110 54. $455 + $300 + $45 = $800

65. CM per unit of Y = $60 - $6 - $12- $8 = $34

66. CM per mh of X = $50 - $6 - $12- $4 = $28/1 machine hour = $28 per machine hour 67. Model Y, because it has the greatest CM per unit

68. Model X, because it has the greatest CM per machine hour

70. Standard CM $18/3 mh = $6 CM per mh; Premium CM $20/4 mh = $5 CM per mh 71. To maximize CM per mh, the constrained resource, manufacture the demand of 100

standard rockers and use the remaining machine hours to manufacture the Premium Model with the lower CM per machine hour. 100 Standard Rockers x 3 mh per rocker = 300 mh. 496 mh – 300 mh = 196 remaining mh / 4 mh per Premium Model = 49 Premium Rockers

72. Manufacture units demanded of each rocker, which will leave excess capacity of 20

machine hours. (100 x 3 mh = 300 mh) + (70 x 4 mh = 280 mh) + (Excess capacity 0f 20 mh) = 600mh

77. $90 x .80 = $72 x 100 = $7,200 78. $90 x 1.50% = $135

79. Direct materials $50.000 Direct manufacturing labor ($6 x 10,000) / 30,000 2.000 Variable manufacturing ($161,250 / 30,000) 5.375 Setup ($20,000 / 2,000) 10.000 Minimum acceptable bid $67.375

80. 81.

Direct materials

Direct manufacturing labor ($6 x 10,000)/30,000 Variable manufacturing ($161,250/30,000) Fixed manufacturing ($600,000/30,000)

Product and process design costs ($450,000/30,000) Marketing and distribution ($562,500/30,000) Full cost per unit Markup (20%)

Estimated selling price $ 50.000 2.000 5.375 20.000 15.000 18.750 $111.125 22.225 $133.350 With the price increase, operating profits are expected to increase by $4,000 = [17,000 units x ($5.00 - $3.00)] - [20,000 units x ($4.50 - $3.00)]

99. $300,000 - $150,000 - $60,000 - $70,000 = $20,000 loss in operating income

100. $24,000 - $15,000 - $6,000 = $3,000. Product C contributes $3,000 toward corporate

profits. Without Product C, operating income would be $3,000 less than currently reported.

101. $(3,000) + $12,000 = $9,000

25

EXERCISE/PROBLEM LO1

102. a. b. c. d. e.

LO1,2,3103. a. b. c. d.

LO1,2

104. a. b. c. d. e.

$124 $114 = Selling price $186 – Variable costs ($33 + $15 + $24). Relevant costs for decision making are those costs that differ between alternatives

which, in this situation, are the incremental costs. The incremental costs total $72 = Variable costs ($33 + $15 + $24).

The minimum acceptable price is $72 = Variable costs ($33 + $15 + $24), the

incremental costs in the short term.

Yes, because this price is greater than the minimum acceptable price of this special

order determined in (d).

$285 = flexible costs $100 + $125 + $60 Silver Lake Cabinets should also consider the impact on current customers when

these customers hear that another customer was offered a discounted price, and the impact on the competition and if they might choose to meet the discounted price.

Currently, the incremental costs total $285. If additional capacity is needed to process

this order, these incremental costs will increase by the cost of adding capacity.

In the long term, Silver Lake Cabinets needs to cover all costs plus profits and, on

average, needs to achieve the targeted selling price of $576.

The contribution per unit is $30 for Model X ($80 - $30 - $15 - $5), $35 for Model Y ($90 - $30 - $15 - $10), and $40 for Model Z ($100 - $30 - $20 - $10). The contribution per machine hour is $30 for Model X ($30 contribution margin / 1.0 machine hours per unit), $17.50 for Model Y ($35 / 2.0), and $20 for Model Z ($40 / 2.0). When there is excess capacity, Model Y is the most profitable because it has the

greatest contribution per unit.

When there are machine hour capacity constraints, Model X is the most profitable

because it has the greatest contribution per constrained resource.

To encourage salespersons to promote specific products, Maggie may want to provide

marketing incentives such as higher sales commissions for products contributing the most to profits. Maggie may also want to educate salespeople about the effects of constrained resources.

26

LO1,2 105. a. b.

c.

LO1,2 106. a.

b.

c.

d.

Contribution per machine hour is $6 for the Standard chair and $5 for the Premium chair.

To maximize profits, 240 machine hours should be used to manufacture 120 units of the Standard chair and 180 machine hours should be used to manufacture 60 units of the Premium chair. (240 mh + 180 mh = 420 mh available per week.)

If there are 500 machine hours available per week there is excess capacity of 50 machine hours. Demand for both types of chairs can be met and Charlie’s Chairs should manufacture 120 Standard chairs and 70 Premium chairs per week. (240 mh + 210 mh = 450 mh used per week.)

The contribution per unit is

$15 for Small ($30 - $8 - $3 - $4),

$18 for Medium ($36 - $10 - $3 - $5), and $21 for Large ($42 - $12 - $4 - $5).

The contribution per machine hour is

$75 for Small ($15 contribution margin / 0.20 machine hours per unit), $72 for Medium ($18 / 0.25) and $70 for Large ($21 / 0.30). Machine hours required: Small (2,500 x 0.20) =

500 mh Medium (4,000 x 0.25) = 1,000 mh Large (3,000 x 0.30) =

900 mh

Total machine hours required

2,400 mh Since total machine hours required are less than the capacity of 2,500 machine hours, to maximize profits Novelene’s should produce enough to meet projected sales for each size. That is, Novelene’s should produce 2,500 small, 4,000 medium, and 3,000 large cheese heads. 1. Contribution margin for the special order: Unit selling price $ 50 Unit variable costs ($10 + $3 + $5) 18 Contribution margin per unit $ 32 Machine hours available: 2,500 Machine hours required: Special order (1,000 units x 0.25) 250 Current demand 2,400

(2,650)

Machine hour shortage

(150) 27

Since the large size has the lowest contribution margin per machine hour, 500 (500 units x .3 mh/unit = 150 mh) units of the large size would not be produced if the special order was accepted. Therefore, the opportunity cost for the special order would be $10,500 ($21 contribution per unit x 500 units), the contribution margin that would be sacrificed when the production and sale of 500 units of large size cheese heads would be given up.

Novelene will want to consider the impact of this special order on her regular customers now and in the future. For example, will manufacturing fewer large cheese heads result in shortages and, therefore, angry customers?

2,000 500 1,000 500

2.

e. Available machine hours Machine hours required: Small (2500 x 0.20) = Medium (4000 x 0.25) = Machine hours remaining

Number of the large size that can be

produced is 1,666 units = (500 mh / 0.30 per unit)

LO1,3 107. a.

b.

The optimal production plan is as follows: Small size 2500 units, Medium size 4000 units, Large size 1,666 units.

The lowest price Backwoods should bid on the 100 table one-time special order is $5,600 = Variable costs ($80 x .70 x 100 tables), the short-term incremental costs. The lowest price Backwoods should bid on the long-term hotel chain order is $120 per table = Full costs $80 + 50% markup, the long-term targeted price.

LO1,3

108. No, Molar Camera should not eliminate Model AE1 from its product line because it

contributes $10,000 toward fixed costs and profits, as shown: Sales (1,000 units) $250,000 Manufacturing costs: Direct materials 140,000 Direct labor 30,000 Variable support ($100,000 x 70%) 70,000 Contribution margin $10,000

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LO3,4 109. a.

b. c.

With the price increase operating profits are expected to decrease by $2,000 = [17,000 units x ($5.00 - $3.00)] - [20,000 units x ($4.80 - $3.00)].

No, I would not recommend the price increase because operating profits are expected to decline by $2,000.

The demand is elastic because the demand in units decreased with an increase in price.

LO4 110. a.

b.

No, I would not recommend discontinuing the Other Candy product line because this product line contributes $4,000 toward corporate costs and profits. $25,000 - $15,000 - $3,000 - $3,000 = $4,000

Without the Other Candy product line, corporate profits would be $4,000 less than currently reported.

If the Chocolate product line were discontinued, corporate profits would immediately decrease by $9,000.

$40,000 - $26,000 - $2,000 - $3,000 = $9,000

APPENDIX

111. Total revenue = R = P x Q = P x (600 - 2P) = 600P - 2P2 Total cost = C = $8,000 + $30Q = $8,000 + $30 * (600 - 2P) = $8,000 + 18,000 - 60P = 26,000 - 60P Total profit = R - C = 660P - 2P2 – 26,000 OPTIMAL PRICE Differentiating total profit with respect to P and setting it equal to zero, we obtain the

optimal price. P = (660/4) = $165. CORRESPONDING DEMAND QUANTITY Substituting P into the demand function, we obtain Q = 600 – (2 x 165) = 270 units. UNIT PRODUCTION COST The corresponding cost is C = $ 8,000 + ($30 x 270) = $16,100. The unit cost is C/Q = $16,100/270 = $59.63.

29

CRITICAL THINKING/ESSAY LO1

112. What considerations other than cost need to be evaluated for one-time special orders? Solution: Firms also need to consider the strategic implications such as the impact on

current customers when these customers hear that another customer was offered a

discounted price, and the impact on the competition and if they might choose to meet the discounted price. LO1

113. An activity-based costing system allocates fixed manufacturing costs to various product

lines. When should these allocated costs be used to evaluate short-term pricing decisions? Solution: Allocated costs should only be used to evaluate short-term pricing decisions if they are variable in the short run and differ among the alternatives being considered.

LO1,2

114. For short-term pricing decisions, what costs are relevant when there is available surplus

capacity? When there is no available surplus capacity? Solution: For both situations the relevant costs are the incremental costs. However, when

there is limited capacity the incremental costs will be greater because they will include the costs of adding capacity or the opportunity costs of alternative manufacturing choices. LO2

115. When there is inadequate capacity, under what conditions may a firm consider accepting a

one-time special order? Solution: When the incremental revenues exceed the incremental costs, a special order

should be considered.

LO1,3

116. Under what conditions might a manufacturing firm sell a product for less than its long-term

price? Why? Solution: The price for a short-term order may be less than the price offered to a long-term

customer. If a firm has excess capacity, it is more profitable for the firm to accept a special order for a price below the long-run price than it is to let the capacity sit idle. In addition, the firm may use this strategy for market penetration and to obtain greater market share.

LO1,3

117. Why is the evaluation of short-term pricing decisions different from the evaluation of long-term pricing decisions? Solution: Since capacities made available for many production and support activities cannot

be altered easily in the short run, managers need to pay attention to whether surplus capacity is available for additional production or whether the available capacity limits production alternatives. By contrast, in the long run, managers have considerably more flexibility in adjusting the capacities of activity resources to match the demand that is placed on these resources by the actual production of different products.

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