19) Life-cycle budgeting estimates the costs and revenues attributed to a product from its initial R&D
through production of a prototype product.
20) Environmental costs that are incurred over several years of the product’s life cycle are often locked in
at the product- and process-design stage.
21) Henderson Company is in the process of evaluating a new part using the following information.
• Part SLC2002 has one production run each month, each with $16,000 in setup costs.
• Part SLC2002 incurred $40,000 in development costs and is expected to be produced over the next
three years.
• Direct costs of producing Part SLC2002 are $56,000 per run of 24,000 parts each.
• Indirect manufacturing costs charged to each run are $88,000.
• Destination charges for each run average $18,000.
• Part SLC2002 is selling for $12.50 in the United States and $25 in all other countries. Sales are one-
third domestic and two-thirds exported.
• Sales units equal production units each year.
Required:
a. What are the estimated life-cycle revenues?
b. What is the estimated life-cycle operating income for the first year?
22) Saul and Solomon are starting a new business venture and are in the process of evaluating their
product lines. Information for one new product, hand-made lamps, is as follows:
• Every six months a new lamp pattern will be put into production. Each new pattern will require
$11,200 in setup costs.
• The lamp product line incurred $40,000 in development costs and is expected to be produced over the
next six years.
• Direct costs of producing the lamps average $144 each. Each lamp requires 12 labor-hours and 2
machine-hours.
• Indirect manufacturing costs are estimated at $168,000 per year.
• Customer service expenses average $16 per lamp.
• Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for $250.
• Sales units equal production units each year.
Required:
a. What are the estimated life-cycle revenues?
b. What is the estimated life-cycle operating income for the first year?
23) Grace Greeting Cards Incorporated is starting a new business venture and are in the process of
evaluating its product lines. Information for one new product, traditional parchment grade cards, is as
follows:
• Sixteen times each year, a new card design will be put into production. Each new
design will require $600 in setup costs.
• The parchment grade card product line incurred $75,000 in development costs and
is expected to be produced over the next four years.
• Direct costs of producing the designs average $0.50 each.
• Indirect manufacturing costs are estimated at $50,000 per year.
• Customer service expenses average $0.10 per card.
• Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50.
• Sales units equal production units each year.
Required:
a. What are the estimated life-cycle revenues?
b. What is the estimated life-cycle operating income for the first year?
c. What is the estimated life-cycle operating income per year for the years after the first year?
d. What is the total estimated life-cycle operating income?
24) 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?
Objective 13.7
1) 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 $250,000 in development costs.
• The direct costs of providing the service, which is all labor, averages $50 per hour.
• Other costs for this service are estimated at $300,000 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 $250 per client, with each job lasting an average of 40 hours. The
current staff expects to bill 15,000 hours for each of the two years the program is in effect. Billing averages
$90 per hour.
What is the estimated life-cycle operating income for both years combined?
A) $206,250
B) $162,500
C) $(43,750)
D) $(87,500)
2) Price discrimination is the practice of ________.
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
3) Roberto Inc., operates a chain of luxury hotels in the Asia-Pacific region. It charges $150 for one night
stay. However when 90% of the rooms are occupied, Roberto charges a premium of 20% on room tariff
for the remaining rooms. What pricing method has Roberto Inc. adopted?
A) customer-preference pricing
B) seasonal-load pricing
C) peak-load pricing
D) capacity pricing
4) ________ is the practice of charging a higher price for the same product or service when demand
approaches the physical limit of the capacity to produce that product or service.
A) Price discrimination
B) Peak-load pricing
C) Demand-based pricing
D) Customer preference pricing
5) When demand for a product is very elastic and prices are increased, demand will ________.
A) remain the same, and operating profits will increase
B) remain the same, and operating profits may either increase or decrease
C) decrease, and operating profits will decrease
D) decrease, and operating profits may either increase or decrease
6) Which of the following is an example of price discrimination?
A) Larry’s offers a 30% discount to buyers making repeat purchases within 30 days.
B) Enrique Corp sells different kind of goods at different prices.
C) Chang sells his wares at different prices based on the market conditions.
D) Nathan sells his ice-creams for a discount during winter season.
Answer the following questions using the information below:
Bright Inc., manufactures table lamps and is considering raising the price by $30 a unit for the coming
year. With a $30 price increase, demand is expected to fall by 2,000 units.
Currently Projected
Demand 20,000 units 18,000 units
Selling price $150 $180
Variable costs per unit $100 $100
7) Would you recommend the $30 price increase?
A) No, because demand decreased.
B) No, because the contribution margin decreases.
C) Yes, because inventory turnover increases.
D) Yes, because operating income increases.
8) Bright Inc., has a capacity to produce 25,000 units. Due to an increase in the electricity costs, there is a
sudden spike in demand by 2,000 units. If the company adopts peak-load pricing policy and charges a
premium of 30% over the current sales price, what is the total contribution on the sale of additional units?
A) $190,000
B) $200,000
C) $390,000
D) $290,000
Answer the following questions using the information below:
Velim Electronics manufactures electric shavers and is considering decreasing the price by $2 a unit for
the coming year. With a $2 price decrease, the unit demand is expected to increase by 25%, and a high
volume materials discount is expected to decrease the variable costs per unit by $1 per unit.
Currently Projected
Demand 10,000 units 12,500 units
Selling price $51 $49
Variable costs per unit $45 $44
9) Would you recommend the $2 price decrease?
A) Yes, because demand decreases.
B) No, because the selling price decreases.
C) Yes, because operating income increases.
D) No, because contribution margin per unit increases.
10) Einstein Motors, has a capacity to produce 25,000 electric cars. Due to a temporary subsidy
announced, there is a sudden increase in demand. Einstein decides to adopt peak-load pricing and charge
a premium of 25% over its normal selling price of $2,000. It has already accepted orders for 20,000 units at
normal selling price. What is the total contribution to the company on sale of additional 5,000 units if the
variable cost per unit is $900?
A) $10,000,000
B) $8,000,000
C) $4,500,000
D) $4,000,000
11) The Maize Eagles are evaluating ticket prices for its basketball games. Studies show that Friday and
Saturday night games average more than twice the number of fans compared to other days. The
following information pertains to the stadium’s normal operations per season:
Average fans per game (all games) 2,500 fans
Average fans per Friday and Saturday night games 3,500 fans
Number of home games per season 30 games
Stadium capacity 3,500 seats
Variable operating costs per operating hour $2,000
Marketing costs per season for basketball $138,750
Customer-service costs per season for basketball $25,000
The stadium is open for 5 operating hours on each day a game is played. All employees work by the hour
except for the administrators. A maximum of one game is played per day and each fan has only one ticket
per game.
The stadium authority wants to charge more for games on Friday and Saturday. What is the minimum
price that should be charged for peak attendance nights?
A) $4.40
B) $8.60
C) $6.19
D) $171.45
12) Hitz Video Rental is evaluating rental prices. Historical data show that Friday and Saturday have
twice the rentals of other days of the week. The following information pertains to the store’s normal
operations per week:
Average rentals per day on Friday and Saturday 1,150
Average rentals per day on Sunday through Thursday 500
Store hours per day 12
Total units available for rent 10,000
Variable operating costs per hour $ 40
Marketing costs per week $1,500
Customer service costs per week $ 250
The store manager wants to charge more for rentals on Friday and Saturday. What is the minimum price
that should be charged during peak rental days?
A) $0.60
B) $0.83
C) $0.90
D) $1.07
13) Insensitivity of demand to price changes is called demand inelasticity.
14) Price discrimination is the practice of charging a higher price for the same product or service when
demand approaches the physical limit of the capacity to produce that product or service.
15) 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.
16) -Prices between countries vary beyond the cost of delivering the product to each country only because
of changes in exchange rates.
17) What factors may influence the level of markups?
18) A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices be
adjusted during peak periods? During slow times? Why?
19) 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?
20) What advice would you give a company to avoid the appearance of predatory pricing?
1) Which of the following scenarios is an example of predatory pricing?
A) Ceramic Corp sells its products below average total costs during off-peak seasons.
B) Almeda flowers has arrived at an informal agreement with other sellers in the area to charge a very
high selling price.
C) Anton Inc., sells its products for $25 in the U.S, however it can sell the same product for double the
price in its home country.
D) Duyen Inc., is launching a new product and has decided to sell its product below its average variable
costs until it drives competitors out of market.
2) Predatory pricing is a type of price discrimination that ________.
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, to minimize competition
3) To minimize the chances of violating pricing laws, a company should ________.
A) keep detailed records of variable costs for all value-chain business functions
B) use a variable cost-plus markup method of pricing
C) underprice products on a consistent basis, rather than sporadically
D) use dumping only when a product is at the end of its life cycle
4) Crimpson Corp., a California-based company is selling its products for $23. Its average variable costs is
$21 and the average selling price of its competitors is $26. This is an example of ________.
A) dumping
B) collusive pricing
C) predatory pricing
D) suicidal pricing
5) To prove predatory pricing, one of conditions established by the U.S. Supreme Court is that the
company should be charging a price below 60% of its total costs.
6) Price discrimination is permissible if the intent is only to lessen or prevent competition.
7) Predatory pricing occurs when companies in an industry conspire in their pricing and production
decisions to achieve a price above the competitive price and so restrain trade.
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8) Price dumping occurs when a domestic company is trying to get rid of out-of-style products at a
substantially reduced price.
9) 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.
10) An Indian company selling a product in the United States at a price below the market value of the
product in India is an example of collusive pricing.
11) To comply with antitrust laws, a company must not engage in predatory pricing, dumping, or
collusive pricing which lessen competition, put another company at a competitive disadvantage, or harm
consumers.
12) When is a company said to be engaged in predatory pricing? What are the primary conditions to be
satisfied to prove predatory pricing?