Rahima T Imam
073567
ACC 420 -065
Shaveta Bedi
18TH April 2021.
WEEK 6 CHAPTER 12 WEEKLY EXERCISE
Total Marks = 60 Marks
1) The three major influences on pricing decisions are (2 MARKS)
a) competition, costs, and customers.
b) competition, demand, and production efficiency.
c) continuous improvement, customer satisfaction, and a dual internal/external focus.
d) variable costs, fixed costs, and mixed costs.
e) economic, qualitative, and costs.
2) Target pricing is based on (2 MARKS)
a) engineered cost.
b) variable manufacturing and nonmanufacturing costs.
c) full product cost.
d) what customers are willing to pay.
e) full manufacturing cost.
3) Your company produces 700,000 widgets per year but has the capacity to produce 950,000
units. Company records show the following: full product costs = $85 per unit, which includes
fixed manufacturing overhead of $11, and variable overhead of $4 per unit, and direct variable
costs of $22, all based on the current 700,000 production run. If the company wanted to bid on
a special one-time order, based on the above information only, what would be its minimum
bid? (2 MARKS)
a) $59
b) $81
c) $63
d) $74
e) $85
Solution
$85
-
$11
$74
Minimum bid cost is $74
Use the information below to answer the following question(s).
Action Mopeds manufactures mopeds. The following information pertains to the company's
normal operations per month:
Output units
15,000 mopeds
Machine-hours
4,000 hours
Direct manufacturing labour hours
5,000 hours
Direct manufacturing labour per hour
$24
Direct materials per unit
$200
Variable manufacturing overhead costs $322,500
Fixed costs:
Fixed manufacturing overhead costs
$1,200,000
Marketing and distribution costs
$1,125,000
Research and development costs
$900,000
4) What is the unit cost for establishing a minimum bid on a one-time-only special order of
1,000 mopeds from an overseas city if all cost relationships remain the same except for a onetime setup charge of $40,000? (2 MARKS)
Solutions
(24 * 500) / 15,000 = 8
Therefore,
200
+
40
+
8
+
21.50
$269.50
5) What is the unit cost when establishing a long-run price for mopeds? (2 MARKS)
$444.50
Answer the following question(s) using the information below.
Rogers' Heaters is approached by Ms. Yukki, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. Rogers' Heaters has
excess capacity. The following per unit data apply for sales to regular customers:
Direct materials
$200
Direct manufacturing labour
60
Variable manufacturing support 30
Fixed manufacturing support
Total manufacturing costs
100
390
Markup (30%)
117
Estimated selling price
$507
6) For Rogers' Heaters, what is the minimum acceptable price of this one-time-only special
order? (2 MARKS)
Solution
$200
+
$60
+
$30
$290
7) If Ms. Yukki wanted a long-term commitment for supplying this product, what price would
most likely be quoted to her? (2 MARKS)
Solution
Total manufacturing costs
Markup (30%)
Estimated selling price
$390
+
$117
$507
If Ms. Yukki wanted a long-term commitment for supplying this product, she would likely be
quoted the estimated selling price of $507.
8) Delgreco Products manufactures high-tech cell phones. Delgreco Products has a policy of
adding a 30% markup to full costs and currently has excess capacity. The following information
pertains to the company's normal operations per month:
Output units
10,000 phones
Machine-hours
8,000 hours
Direct manufacturing labour-hours
5,000 hours
Direct materials per unit
$25
Direct manufacturing labour per hour
$15
Variable manufacturing overhead costs
$175,000
Fixed manufacturing overhead costs
$425,000
Product and process design costs
$400,000
Marketing and distribution costs
$475,000
Delgreco Products is approached by an overseas customer to fulfill a one-time-only special
order for 1,000 units. All cost relationships remain the same except for a one-time setup charge
of $15,000. No additional design, marketing, or distribution costs will be incurred.
Required:
What is the minimum acceptable bid per unit on this one-time-only special order? (2 MARKS)
Solution
Direct materials
Direct manufacturing labor ($15 x 5,000) / 10,000
$25.00
$7.50
Variable manufacturing ($175,000 / 10,000)
$17.50
Setup ($15,000 / 1,000)
$15.00
Minimum acceptable bid
$72.50
What is the full product cost? (2 MARKS)
Solution
Direct materials
Direct manufacturing labor ($15 x 5,000) / 10,000
$25.00
$7.50
Variable manufacturing ($175,000 / 10,000)
$17.50
Fixed manufacturing overhead costs ($425,000 / 10,000)
$42.50
Product and process design costs ($400,000 / 10,000)
$40.00
Marketing and distribution costs ($475,000 / 10,000)
$47.50
Product Cost per unit
$180.00
9) For setting long-term prices a company should use full product costs. Full product costs for
pricing purposes (2 MARKS)
a) include direct costs only.
b) include all manufacturing costs only.
c) does not include fixed overhead.
d) equals manufacturing and selling costs.
e) include all direct costs plus an appropriate allocation of the indirect costs of all
business functions.
10) A company uses a long-run time horizon to price its product, an electronic component used
in aircraft. To produce a normal production run for a year of 100,000 units direct materials are
$90,000; direct labour is $180,000; and, rent on leased equipment is $106,000 per year.
Currently re-work is running at 4% of production, after testing. The company has the capacity
to test 10 units per hour. Manufacturing Overhead has two cost drivers: testing (cost driver is
testing hours at $2.50 per hour); and rework (cost driver is units reworked at $80 per unit reworked).
Calculate current total manufacturing costs for 100,000 units. (2 MARKS)
Solutions
Manufacturing cost with testing
$90,000
+
$180,000
+
$106,000
+
100,000/(10 * $2.50)
$401,000
Total manufacturing costs for 100,000 units = $401,000
Answer the following question(s) using the information below.
After conducting a market research study, Schultz Manufacturing 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 $60. The annual target sales volume for interior doors is 20,000.
Schultz has target operating income of 20% of sales.
11) What are target sales revenues? (2 MARKS)
Solution
20,000 * $60 = $1,200,000
12) What is the target operating income? (2 MARKS)
Solution
$1,200,000 * 20% = $240,000
13) What is the target cost? (2 MARKS)
Solution
$1,200,000
-
$ 240,000
$ 960,000
14) What is the target cost for each interior door? (2 MARKS)
Solution
$960,000 / 20,000 = $48
15) Survey evidence suggest that most companies use which type of cost when making pricing
decisions? (2 MARKS)
a) cost-plus
b) absorption product costing
c) variable product costs
d) variable manufacturing costs
e) manufacturing function costs
Use the information below to answer the following question(s).
Pershing Company budgeted the following costs for the production of its one and only product,
blades, for the next fiscal year:
Direct materials
$187,500
Direct labour
130,000
Factory overhead:
Variable
140,000
Fixed
107,500
Selling and administrative:
Variable
60,000
Fixed
80,000
Total costs
$705,000
Pershing has a target profit of $150,000.
16) What is the target profit percentage as a percentage of total manufacturing costs? (2
MARKS)
Solution
$187,500
+
$130,000
+
$140,000
+
$107,500
$565,000
Therefore, $565,000/$150,000 = 26.5%
17) If total invested capital is $1,000,000, what is the company's target rate of return on
investment? (2 MARKS)
Solution
$150,000/1,000,000 = 15%
18) The target profit percentage for setting prices as a percentage of total variable costs would
be (2 MARKS)
Solution
$150,000/($187,500+$140,000+$130,000+$60,000) = 29%
19) The target profit percentage for setting prices as a percentage of total costs would be (2
MARKS)
Solution
$150,000/$705,000 = 21.3%
Use the information below to answer the following question(s).
Patton Company budgeted the following costs for the production of its one and only product,
bells, for the next fiscal year:
Direct materials
$205,000
Direct labour
125,000
Factory overhead:
Variable
70,000
Fixed
290,000
Selling and administrative:
Variable
75,000
Fixed
80,000
Total costs
$845,000
Patton has a target profit of $750,000.
20) What is the target profit percentage as a percentage of total manufacturing costs? (2
MARKS)
Solution
$205,000
+
$290,000
+
$175,000
+
$70,000
$690,000
Therefore, $750,000/$690,000 = 1.1%
21) If total invested capital is $3,000,000, what is the company's target rate of return on
investment? (2 MARKS)
Solution
$750,000/3,000,000 = 25%
22) The target profit percentage for setting prices as a percentage of total variable costs would
be (2 MARKS)
Solution
$750,000/($205,000+$125,000+$70,000+$75,000) = 1.6%
23) The target profit percentage for setting prices as a percentage of total costs would be (2
MARKS)
Solution
750,000/$845,000 = 88.76%
24) Which of the following best describes the cost-plus pricing approach? (2 MARKS)
a) Cost base + Markup component = Prospective selling price
b) Prospective selling price + Cost base = Markup component
c) Cost base + Gross margin = Prospective selling price
d) Variable cost + Fixed cost + Contribution margin = Prospective selling price
e) Cost base plus markup ÷ 100% = selling profit percentage
25) Predatory pricing is a type of price discrimination that (2 MARKS)
a) allows prices to be cut to the level of variable costs.
b) is required when a company declares bankruptcy so that it can sell its remaining goods
quickly.
c) is used in the food industry for perishable goods.
d) deliberately sets prices very low, sometimes even below costs, so as to minimize
competition.
e) actually, ensures more supply access as high prices reduce demand.
26) To minimize the chances of violating pricing laws, a company should (2 MARKS)
a) maintain records that permit easy compilation of variable costs.
b) use a variable cost-plus markup method of pricing.
c) keep a record of the upstream costs associated with low-cost products.
d) use dumping only when a product is at the end of its life cycle.
e) ensure that prices do not exceed variable costs plus fixed costs.
27) Collusive pricing occurs when (2 MARKS)
a) a company wants two products to sell for the same, or almost the same, amount.
b) a company wants a product to sell for the same as a competitor's product.
c) two or more companies agree to sell a product at a price higher than should be
expected.
d) competitors are part of the same large parent organization.
e) one large company dominates an industry.
28) Price discrimination to customers is the practice of (2 MARKS)
a) setting different prices for different products.
b) charging different prices for quantity amounts.
c) using variable costing for some products and full costing for other products when
setting prices.
d) charging different prices to different customers or clients for the same products
or services.
e) changing prices frequently.
29) An airline charges business and pleasure travellers different amounts. This is an example
of (2 MARKS)
a) customer-preference pricing.
b) high-load pricing.
c) peak-load pricing.
d) price discrimination.
e) off-load pricing.