Chapter 8 Pricing Decisions 8-33
134. Budget Enterprises is considering a special order from an overseas customer for
10,000 units at a price of $40.00 per unit. The company’s product normally sells for
$52.00 per unit and has variable manufacturing costs of $21.00 per unit and variable
selling costs of $4.00 per unit. Fixed manufacturing costs are $500,000 and fixed
selling and administrative costs are $200,000. Budget Enterprises has the capacity
to produce 100,000 units and is currently producing 80,000. If Budget accepts the
order, it will incur legal and accounting fees of $7,000 in connection with the order,
though variable selling costs will not be incurred on the special order and it will not
affect any of its other operations.
a. How much are the incremental revenues associated with the special order?
b. How much are the incremental costs associated with the special order?
c. How much additional profit or loss will result if the order is accepted?
135. Canon Equipment produces a machete that it sells for $45 each. The cost of
producing 20,000 machetes in the prior year was:
Direct material $220,000
Direct labor 100,000
Variable overhead 140,000
Fixed overhead 120,000
Total cost $580,000
At the start of the current year, the company received an order for 2,000 machetes
from a company in South America. Management of Canon has mixed feelings about
the order. On the one hand, they welcome the order because they currently have
excess capacity. This is also the company’s first international order. On the other
hand, the company in South America is only willing to pay $37 for each machete.
What will be the effect on profit of accepting the order?
Answer
8-34 Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
136. Janus Decor produces and sells stainless steel patio chairs. Janus uses cost-plus
pricing. The chairs have a variable cost per unit of $40.00. Janus has annual fixed
costs of $500,000.
a. If Janus can sell 50,000 chairs and has a markup of 40% of total cost, what
price will Janus charge?
b. If Janus can sell 100,000 chairs and has a markup of 30% of total cost, what
price will Janus charge?
Answer:
137. Mayfair Furniture is considering the production of an automatic reclining office chair
that the company would price at a markup of 30% above full cost. Management
estimates that the variable cost of each chair will be $80 and total fixed costs per
year will be $34,000.
a. Assuming sales of 800 chairs, what is the full cost of a chair?
b. Assume that the quantity demanded at the price calculated in part a. is only
680 chairs. What is the full cost of each chair and what is the anticipated
selling price?
Answer
138. A company believes it can sell 40,000 of its proposed new combo cell phone/garage
door openers at a price of $250 each. There will be annual fixed costs associated
with developing, marketing, and manufacturing the gadget of $5,000,000. If the
company desires to make a profit of 20% of selling price on the phone/opener, what
is the target variable cost per unit?
Chapter 8 Pricing Decisions 8-35
139. The product design team of Steed Motors is in the process of designing a new 20”
dirt bike. The company estimates that variable costs will be $80 per unit and fixed
costs will be $120,000 per year.
a. Suppose the company wants to set its price equal to full cost plus 25% and it
estimates that it can sell 4,000 units. What price will the company set?
b. Suppose the company sets a price as in Part a, but the number of units
demanded at that price turns out to be 3,000. Revise the price in light of the
change in demand.
c. Compare the two prices you calculated. Why are the prices different? What is
likely to happen to the quantity demanded if the company is forced to raise its
price to the price calculated in part b?
Answer
140. Sanders Oven Company is developing a “professional” model oven aimed at the
home market. The company estimates that variable costs will be $980 per oven and
total fixed costs will be $840,000 per year.
a. Suppose the company wants to set its price equal to full cost plus 40 percent.
The company estimates that it can sell 4,000 units. What price will the
company set?
b. What is the risk involved with setting the price based on an estimate of how
many units will be sold?
Answer
8-36 Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
141. A cross-functional team at Enrich, Inc. is developing a new product using the target
costing method. Product features in comparison to competing products suggest a
price of $1,500 per unit. The company requires a profit of 30% of selling price. How
much is the target cost per unit?
Answer
142. Savor Enterprises has determined the following costs for customers:
Order processing (per order) $ 8.00
Additional handling costs if order marked rush (per order) 10.00
Customer service calls (per call) 14.00
Relationship management costs (per customer per year) 3,500
In addition to these costs, product costs amount to 85 percent of sales. In the prior
year, the company had the following experience with Hanson Electronics, one of its
customers:
Sales $54,000
Number of orders 250
Percent of orders marked rush 70%
Calls to customer service 160
Calculate the profitability of the Hanson Electronics account.
Answer
143. Randall Equipment uses activity-based pricing. The pricing structure is to charge
customers the direct cost of the products they order with a markup of 40% on direct
costs plus the cost of the services that are provided. The service costs are $8.00 per
order, $2.00 for each product that is ordered, and $1.50 per pound for shipping.
Wilson, Inc. made 10 orders for goods with a total direct cost of $4,000.
Wilson ordered 50 different products that weighed a total of 560 lbs. What is the total
price paid by Wilson?
Answer
Chapter 8 Pricing Decisions 8-37
144. Moscovitz Produce developed the following information on indirect costs for
assessing customer profitability.
Cost Pool
Annual
Cost
Cost Driver
Annual
Driver
Quantity
Acme Deli
Boson
Cafe
Processing
electronic orders
$1,000,000
Number of orders
500,000
500
0
Processing non-
electronic orders
$2,000,000
Number of orders
400,000
0
1000
Picking orders
$3,000,000
Number of different
products ordered
1,000,000
800
1800
Packaging
orders
$1,500,000
Number of items
ordered
50,000,000
1,000,000
1,000,000
Returns
$3,000,000
Number of returns
50,000
2
200
Acme Deli and Boson Cafe each generated revenues in the last year of $600,000
and had direct costs associated with their orders of $450,000. How much is the cost
per unit of the cost driver in each of the cost pools?
Answer
$1,000,000
$2,000,000
$3,000,000
$1,500,000
$3,000,000
50,000
8-38 Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
145. Project Depot has determined the following costs for its customers using an activity–
based costing system:
Order processing (per order) $ 6
Additional handling costs if order marked rush (per order) 9
Customer service calls (per call) 14
Relationship management costs (per customer per year) 3,500
In addition to these costs, product costs amount to 85 percent of sales. In the prior
year, the company had the following experience with one of its customers, Shannon
Tools:
Sales $54,000
Number of orders 250
Percent of orders marked rush 70%
Calls to customer service 160
For the coming year, Project Depot has told Shannon Tools that it will be switched to
an activity-based pricing system. In addition to regular prices, Shannon Tools will be
required to pay:
Order processing (per order) $ 8
Additional handling costs if order marked rush (per order) 10
Customer service calls (per call) 18
Calculate the expected profitability of the Shannon Tools account for the coming year
if activity is the same as in the prior year.
Answer
Chapter 8 Pricing Decisions 8-39
146. APL Internet Services has analyzed its customer and order handling data for the past
year and has determined the following costs:
Order processing cost per order $ 4
Customer tech support calls (per call) 7
Additional costs if tech support is after hours 12
Relationship management costs (per customer per year) $950
In addition to these costs, product costs amount to 80% of sales. In the prior year,
APL had the following experience with Tapper Recreation, one of its customers:
Sales $9,400
Number of orders 42
Calls to tech support 62
Percent of tech support calls after hours 40%
For the coming year, APL has told Tapper Recreation that it will be switched to an
activity-based pricing system. In addition to regular prices, Tapper will be required to
pay:
Order processing (per order) $ 7
Customer tech support calls (per call) 15
Additional costs if a tech support call is after hours 28
Calculate the total revenue to be billed to Tapper Recreation if activity is the same as
in the prior year.
Answer
8-40 Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
CHALLENGE EXERCISES
147. Smythe Moving Company has estimated monthly sales of $255,000. It estimates
$166,000 of total manufacturing costs with 25% of these costs fixed. Its selling and
distribution costs are estimated at a total of $42,000 with 30% of these costs fixed.
a. How much is Smythe’s markup percentage on full cost to arrive at the target
selling price?
b. How much is Smythe’s markup percentage on variable costs to arrive at the
target selling price?
c. Which approach might a manager prefer and why?
Answer
Chapter 8 Pricing Decisions 8-41
148. Lawn Butler is a local operation that provides mowing services for 300 customers
each month. The company has analyzed the indirect costs associated with servicing
its various customers in order to assess customer profitability. Budgeted amounts for
2017 appear below:
Cost Pool
Cost
Cost Driver
Quantity
Repairs made due to mowing damage
$18,200
Number of repairs
350
Processing billings
4,180
Number of invoices sent
880
Travel costs to customer’s home
57,750
Number of miles driven
105,000
Return visits for inadequate services
24,000
Hours incurred for return visits
800
The direct cost of each mowing is $24. Two customers are of concern to
management, each of whom seem to be ‘high maintenance’. Data on these
customers follows:
S. Wallace
Quantity
H. Willis
Quantity
Number of mowings
52
Number of mowings
24
Number of repairs
7
Number of repairs
2
Number of invoices sent
26
Number of invoices sent
12
Number of miles driven
416
Number of miles driven
620
Hours incurred for return visits
6
Hours incurred for return visits
15
Customer revenue
$2,220
Customer revenue
$1,080
Discuss the profitability of each customer and recommend to management what
action should be taken.
Answer
Repairs made due to mowing damage
÷
Processing billings
÷
Travel costs to customer’s home
÷
105,000
Return visits for inadequate services
÷
8-42 Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
think they are entitled to ‘good’ service done right the first time. The company may
consider applying late fee charges for past due accounts, to cover the cost of
additional billings. In addition, a mileage fee may be charged for customers who live
outside a designated area to offset the additional costs of traveling. Lawn Butler
should also consider training its employees to avoid situations that require repairs to
be made, such as mowing sprinkler heads and damaging property with the mowers.
149. Southeast Pools uses cost-plus pricing with a 30% mark–up on total cost. The
company is currently building 320 pools per year with total variable cost of
$5,760,000. In addition, the company incurs $720,000 in fixed costs annually and
has a capacity to build 450 pools.
a. How much will the company price each pool on average?
b. If demand falls to 250 pools and the company wants to continue to earn the
same markup percentage on total cost as earned in part a., what price should the
company charge per pool?
c. Identify two problems with cost-plus pricing.
Answer
Chapter 8 Pricing Decisions 8-43
SHORT-ANSWER ESSAYS
150. Explain why cost-plus pricing is “circular”?
Answer
151. Explain the steps involved in target costing and contrast it to cost-plus pricing.
Answer
152. What is activity-based pricing and why is it used?
Answer
153. What is CPM? For what purpose might managers use it?
Answer