Exam 13: Pricing Decisions and Cost Management

Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Golden Generator Supply has excess capacity. The following per unit data apply for sales to regular customers: If Mr. Stephen wanted a long-term commitment, and not a one-time-only special order, for supplying this product, calculate the most likely price to be quoted assuming the markup remains the same?

Which of the following is an advantage of using full cost of the product as the cost base?

Which of the following statements is true regarding cost-plus pricing?

Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Golden Generator Supply has excess capacity. The following per unit data apply for sales to regular customers: If Golden Generator Supply accepts the order at $2640, what is the amount contributed towards fixed costs and profit on a sales order of 1600 units?

Ski Valet provides materials that let people teach themselves how to snow ski. It has six different skill-level programs. Each one includes visual and audio learning aids along with a workbook that can be submitted to the company for grading and evaluation purposes, if the person so desires. The accounting system of Ski Valet is very traditional in its reporting functions with the calendar year being the company's fiscal year. It includes an abundance of information that can be used for various reporting purposes. The company has found that any new idea soon runs its course with an effective life of about three years. Therefore, the company is always in the development stage of some new program. Program development requires experts in the area to provide the know-how of the item being developed and a development team that puts together the video, audio, and workbook materials. The actual costs of reproducing the packages are relatively inexpensive when compared to the development costs. Required: How might product life-cycle budgeting aid the company in improving its overall operations?

Whether the firm uses the market-based approach or the cost-based approach for pricing decisions, the market forces must be considered.

Block Island TV currently sells large televisions for $380. It has costs of $320. A competitor is bringing a new large television to market that will sell for $360. Management believes it must lower the price to $360 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 150,000 televisions per year. What is the change in operating income if marketing is correct and only the sales price is changed?

In cost-plus pricing, the markup definitively determines the actual selling price.

Selling prices computed under cost-plus pricing are prospective prices that may or may not actually be charged to customers.

Troy City Inc., manufactures a product and is considering raising the price by $20 a unit for the coming year. With a $20 price increase, demand is expected to fall by 2500 units. Would you recommend the $20 price increase?

Target cost per unit is arrived at by adding the target operating income to the target price of the product.

Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division. -Server Planning, a new service, incurred $280,000 in development costs. -The direct costs of providing the service, which is all labor, averages $70 per hour. -Other costs for this service are estimated at $350,000 per year. -The current program for server planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non viable. -Customer service expenses average $350 per client, with each job lasting an average of 20 hours. The current staff expects to bill 7900 hours for each of the two years the program is in effect. Billing averages $100 per hour. What is the estimated life-cycle operating income for the first year?

Jamal, Kareem, Rashid and Associates are in the process of evaluating its new client services for the business consulting division. -Estate Planning, a new service, incurred $150,000 in development costs and employee training. -The direct costs of providing this service, which is all labor, averages $31 per hour. -Other costs for this service are estimated at $440,000 per year. -The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting. -Customer service expenses average $99 per client, with each job lasting an average of 450 hours. The current staff expects to bill 54,000 hours for each of the two years the program is in effect. Billing averages $46 per hour. What are estimated life-cycle revenues?

The difference in rices between countries can vary beyond the cost of delivering the product to each country, solely because of changes in exchange rates.

Markups tend to be higher in more competitive markets.

Value engineering can have undesirable effects if the product remains in development for a long time as the reengineering team repeatedly evaluates alternative designs.

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?

Which of the following can be used to determine markup percentage in the case of cost-plus pricing?

Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $500 as opposed to the current market price charged of $600 per unit. Granite City Products Inc. has decided to revise its sales price to $500. The annual sales target volume of the product after price revision is 200 units. Granite City Products Inc. wants to earn 40% on its sales amount. What is the total target cost?

There are alternative ways of measuring the cost base when applying a cost-plus method to pricing but research shows that many managers prefer to use full cost as the cost base.