Exam 13: Pricing Decisions and Cost Management

Answer the following questions using the information below: Weather Inc., manufactures single room sized air conditioners. The cost accounting system estimates manufacturing costs to be $190 per air conditioner, consisting of 75% variable costs and 25% fixed costs. The company has surplus capacity available. It is Weather Inc.'s policy to add a 30% markup to full costs. -Weather Inc.,is invited to bid on a one-time-only special order to supply 100 air conditioners.What is the lowest price Weather Inc.should bid on this special order?

Answer the following questions using the information below: Purple Purpose Inc., is in the process of evaluating a new product using the following information: • A new transformer has two production runs each year, each with $10,000 in setup costs. • The new transformer incurred $30,000 in development costs and is expected to be produced over the next three years. • Direct costs of producing the transformers are $40,000 per run of 4,500 transformers each. • Indirect manufacturing costs charged to each run are $45,000. • Destination charges for each transformer average $1.00. • Customer service expenses average $0.20 per transformer. • The transformers are selling for $25 the first year and will increase by $3 each year thereafter. • Sales units equal production units each year. -What is the estimated life-cycle operating income for the first three years?

Answer the following questions using the information below: Sales of Blair Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Blair Inc. can be sold only for $400 as opposed to the current market price charged of $500 per unit. Blair Inc. has decided to revise its sales price to $400. The annual sales target volume of the product after price revision is 200 units. Blair Inc. wants to earn 18% on its sales amount. -What is the target cost per unit?

In a noncompetitive environment,the key factor affecting pricing decisions is the ________.

Answer the following questions using the information below: 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 $100,000 in development costs and employee training. • The direct costs of providing this service, which is all labor, averages $27 per hour. • Other costs for this service are estimated at $400,000 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 $95 per client, with each job lasting an average of 400 hours. The current staff expects to bill 40,000 hours for each of the two years the program is in effect. Billing averages $42 per hour. -What are estimated life-cycle revenues?

Which of the following is true of target pricing?

Greentree Incorporated manufactures rustic furniture.The cost accounting system estimates manufacturing costs to be $120 per table,consisting of 60% variable costs and 40% fixed costs.The company has surplus capacity available.It is Greentree's policy to add a 30% markup to full costs. a.Greentree Incorporated is invited to bid on an order to supply 100 rustic tables.What is the lowest price Greentree should bid on this one-time-only special order? b.A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style.Greentree Incorporated is invited to submit a bid to the hotel chain.What is the lowest price per unit Greentree should bid on this long-term order?

________ identifies an estimated price customers are willing to pay and then computes the cost to be achieved to earn the desired profit.

Answer the following questions using the information below: Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year: Direct materials \ 1,125,000 Direct labor 775,000 Manufacturing overhead Variable 840,000 Fixed 645,000 Selling and administrative Variable 360,000 Fixed 480,000 Total costs \ 4,225,000 Wilde has an annual target operating income of $900,000. -The markup percentage for setting prices as a percentage of variable manufacturing costs is ________.

Which one of the following activities would most likely be considered a long-run pricing decision?

A company is said to be involved in predatory pricing even when it is compelled to sell its products are a price below the average variable cost because of pricing of the competitor.

Timothy Company has budgeted sales of $780,000 with the following budgeted costs: Direct materials \ 168,000 Direct manufacturing labor 132,000 Factory overhead Variable 96,000 Fixed 108,000 Selling and ad ministrative expenses Variable 72,000 Fixed 100,000 Compute the average markup percentage for setting prices as a percentage of: a.Total manufacturing costs b.The variable cost of the product c.The full cost of the product d.Variable manufacturing costs

Companies operating in competitive markets should ideally use cost-plus approach to pricing.

Julian Pharma manufactures hospital beds.Its most popular model,Deluxe,sells for $5,000.It has variable costs totaling $2,650 and fixed costs of $1,200 per unit,based on an average production run of 5,000 units.It normally has four production runs a year,with $400,000 in setup costs each time.Plant capacity can handle up to six runs a year for a total of 30,000 beds. A competitor is introducing a new hospital bed similar to Deluxe that will sell for $3,800.Management believes it must lower the price to compete.The marketing department believes that the new price will increase sales by 25% a year.The plant manager thinks that production can increase by 25% with the same level of fixed costs.The company currently sells all the Deluxe beds it can produce. Required: a.What is the annual operating income from Deluxe at the current price of $5,000? b.What is the annual operating income from Deluxe if the price is reduced to $3,800 and sales in units increase by 25%? c.What is the target cost per unit for the new price if target operating income is 30% of sales?

Quick Connect manufactures high-tech cell phones.Quick Connect 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 1,250 phones Machine-hours 750 hours Direct manufacturing labor-hours 700 hours Direct materials per unit \ 20 Direct manufacturing labor per hour \ 8 Variable manufacturing overhead costs \ 175,000.00 Fixed manufacturing overhead costs \ 126,300 Product and process design costs \ 143,000 Marketing and distribution costs \ 153,645 For long-run pricing of the cell phones,what price will most likely be used by Quick Connect?

Peak-load pricing is the practice of charging a lower price for the same product or service when the demand for it approaches the physical limit of the capacity to produce that product or service.

Developing a product that satisfies the need of the potential customers is the first step in implementing target pricing and target costing.

In some industries,such as legal and consulting,most costs are locked in ________.

Which of the following is regarded as a purpose of cost allocation?

Which of the following is a disadvantage of using target costing?