Deck 12: Pricing Decisions and Cost Management

Question 1

Answer the following questions using the information below:
Jinan's Generator Supply is approached by Mr. Khalid, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Jinan's Generator Supply has excess capacity. The following per unit data apply for sales to regular customers:


-For Jinan's Generators, what is the minimum acceptable price of this one-time-only special order?

A) $2,000
B) $2,150
C) $2,580
D) $1,800

Answer 1

$2,000

Question 2

Answer the following questions using the information below:
Farouk Products manufactures coffee tables. Farouk 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:


-For long-run pricing of the coffee tables, what price will most likely be used by Farouk?

A) $134.76
B) $266.70
C) $161.70
D) $222.25

Answer 2

$266.70

Question 3

Navid Company manufactures basketball backboards. The following information pertains to the company's normal operations per month:

Required:
a. For long-run pricing, what is the full-cost base per unit?
b. Navid Company is approached by an overseas city to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for an additional one-time setup charge of $40,000. 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?

Answer 3

a. Direct materials $100.00
Direct manufacturing labor ($12 × 5,000)/15,000 4.00
Variable manufacturing ($150,000/15,000) 10.00
Fixed manufacturing ($300,000/15,000) 20.00
Marketing and distribution ($250,000/15,000) 16.67
Research and development ($200,000/15,000) 13.33
Total $164.00
b. Direct materials $100.00
Direct manufacturing labor 4.00
Variable manufacturing 10.00
Setup ($40,000 / 1,000) 40.00
Total $154.00

Question 4

Answer the following questions using the information below:
After conducting a market research study, El Ain Doors decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. El Ain Doors has target operating income of 20% of sales.

-What is the target operating income?

A) $360,000
B) $384,000
C) $600,000
D) $480,000

Question 5

Answer the following questions using the information below:
After conducting a market research study, El Ain Doors decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. El Ain Doors has target operating income of 20% of sales.

-What is the target cost?

A) $2,016,000
B) $2,520,000
C) $1,920,000
D) $1,800,000

Question 6

Answer the following questions using the information below:
After conducting a market research study, Hamid Products decided to produce an electric coffee pot to complement its line of kitchen products. It is estimated that the new coffee pot can be sold at a target price of $23. The annual target sales volume for the coffee pot is 300,000. Hamid has target operating income of 18% of sales.

-What are the target sales revenues?

A) $690,000
B) $6,000,000
C) $6,900,000
D) $600,000

Question 7

Answer the following questions using the information below:
After conducting a market research study, El Ain Doors decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. El Ain Doors has target operating income of 20% of sales.

-What is the target operating income?

A) $600,000
B) $621,000
C) $1,242,000
D) $1,200,000

Question 8

Answer the following questions using the information below:
After conducting a market research study, El Ain Doors decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. El Ain Doors has target operating income of 20% of sales.

-What is the total target cost?

A) $5,658,000
B) $6,900,000
C) $500,000
D) $1,242,000

Question 9

Answer the following questions using the information below:
Fahim's Computer Monitors, Inc., currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Fahim's sales are currently 10,000 monitors per year.

-What is the target cost if operating income is 25% of sales?

A) $168.75
B) $202.50
C) $56.25
D) $67.50

Question 10

Answer the following questions using the information below:
TTB Company has invested $1,000,000 in a plant to make vending machines. The target operating income desired from the plant is $150,000 annually. The company plans annual sales of 1,500 vending machines at a selling price of $1,000 each.

-What is the target rate of return on investment for TTB Company?

A) 15.0%
B) 17.6%
C) 11.1%
D) 10.0%

Question 11

Answer the following questions using the information below:
TTB Company has invested $1,000,000 in a plant to make vending machines. The target operating income desired from the plant is $150,000 annually. The company plans annual sales of 1,500 vending machines at a selling price of $1,000 each.

-What is the markup percentage as a percentage of cost for TTB Company?

A) 17.6%
B) 11.1%
C) 10.0%
D) 15.0%

Question 12

Answer the following questions using the information below:
LM Juice Company has invested $2,000,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $360,000 annually. The company plans annual sales of 7,000 juicer machines at a selling price of $400 each.

-What is the target rate of return on investment for LM Juice Company?

A) 22.0%
B) 12.9%
C) 18.0%
D) 14.8%

Question 13

Answer the following questions using the information below:
LM Juice Company has invested $2,000,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $360,000 annually. The company plans annual sales of 7,000 juicer machines at a selling price of $400 each.

-What is the markup percentage as a percentage of cost for LM Juice Company?

A) 12.9%
B) 14.8%
C) 18.0%
D) 22.0%

Question 14

Nadra Company has budgeted sales of $300,000 with the following budgeted costs:

Compute the average markup percentage for setting prices as a percentage of:
a. The full cost of the product
b. The variable cost of the product
c. Variable manufacturing costs
d. Total manufacturing costs

Question 15

TTB Company has budgeted sales of $780,000 with the following budgeted costs:

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

Question 16

Answer the following questions using the information below:

Ibrahim & Associates are in the process of evaluating its new client services for the business consulting division.
? Estate Planning, a new service, incurred $300,000 in development costs and employee training.
? The direct costs of providing this service, which is all labor, averages $50 per hour.
? Other costs for this service are estimated at $1,000,000 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 $200 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 $70 per hour.



-What are estimated life-cycle revenues?

A) $5,600,000
B) $11,200,000
C) $4,000,000
D) $3,200,000

Question 17

Answer the following questions using the information below:

Ibrahim & Associates are in the process of evaluating its new client services for the business consulting division.
? Estate Planning, a new service, incurred $300,000 in development costs and employee training.
? The direct costs of providing this service, which is all labor, averages $50 per hour.
? Other costs for this service are estimated at $1,000,000 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 $200 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 $70 per hour.



-What is estimated life-cycle operating income for the first year?

A) $3,320,000
B) $(700,000)
C) $2,800,000
D) $(520,000)