12-11
1. Target operating income = target return on investment invested capital
Target operating income (25% of $900,000) $225,000
Total fixed costs 375,000
Target contribution margin $600,000
2. If price is reduced by 10%, the number of rooms Beck could rent would increase by 10%.
The new price per room would be 90% of $45 $ 40.50
The number of rooms Beck expects to rent is 110% of 15,000 16,500
12-12
1. Investment $8,400,000
Return on investment 18%
Operating income (18% $8,400,000) $1,512,000
2. Contribution margin per unit = $12,208 – $8,450 = $3,758
Increase in sales = $10% 1,500 units = 150 units
3.
Revenues ($12,208 × 1,400 units)
$17,091,200
Target full cost at 9% markup ($17,091,200 ÷ 1.09)
$15,680,000
Less: Target total fixed costs ($4,125,000 – $125,000)
4,000,000
Target total variable costs
$11,680,000
Divided by number of units
÷ 1,400 units
Target variable cost per unit
$ 8,342.86
12-13
1.
Variable cost per unit = Production cost per unit + Mktg and distribn. cost per unit
= $20 + $5 = $25
Contribution margin per unit = Selling price – Variable cost per unit = $50 – $25 = $25
Total fixed
costs over life
of robot
=
Design
fixed costs
+
Production
fixed costs
+
Marketing and
distribution
fixed costs
= $650,000 + $3,560,000 + $2,225,000
= $6,435,000
BEP in units =
Fixed costs $6,435,000 257,400 units
Contribution margin per unit $25
==
2a. Option A:
Revenues ($50
500,000 units)
$25,000,000
Variable costs ($25
500,000 units)
12,500,000
Fixed costs
6,435,000
Operating income
$ 6,065,000
2b. Option B:
Revenues
Year 2 ($70
100,000 units)
$ 7,000,000
Years 3 & 4 ($40
600,000 units)
24,000,000
Total revenues
31,000,000
Variable costs ($25
700,000 units)
17,500,000
Fixed costs
6,435,000
Operating income
$ 7,065,000
Over the product’s life-cycle, Option B results in an overall higher operating income of
$1,000,000 ($7,065,000 – $6,065,000).
12-14
1.
Revenues (1,000 crates at $117 per crate)
$117,000
Variable costs:
Manufacturing
$35,000
Marketing
17,000
Total variable costs
52,000
Contribution margin
65,000
Fixed costs:
Manufacturing
$30,000
Marketing
13,000
Total fixed costs
43,000
Operating income
$ 22,000
2. Only the manufacturing-cost category is relevant to considering this special order; no
additional marketing costs will be incurred. Variable manufacturing cost per crate = $35,000 ÷
1,000 crates = $35 per crate. The relevant manufacturing costs for the 200-crate special order are:
Variable manufacturing cost per unit
3. If the new customer is likely to remain in business, Burst should consider whether a strictly
short-run focus is appropriate. For example, what is the likelihood of demand from other
customers increasing over time? If Burst accepts the 200-crate special offer for more than one
12-15
1.
Guest nights on weeknights:
18 weeknights × 100 rooms × 90% = 1,620
Guest nights on weekend nights:
12 weekend nights × 100 rooms × 20% = 240
Total guest nights in April = 1,620 + 240 = 1,860
Breakfasts served:
1,620 weeknight guest nights ×1.0 = 1,620
240 weekend guest nights × 2.5 = 600
Total breakfasts served in April = 1,620 + 600 = 2,220
Total costs for April:
Depreciation
$ 20,000
Administrative costs
35,000
Fixed housekeeping and supplies
12,000
Variable housekeeping and supplies (1,860 × $25)
46,500
Fixed breakfast costs
5,000
Variable breakfast costs (2,220 × $5)
11,100
Total costs for April
$129,600
Cost per guest night ($129,600 ÷ 1,860)
$69.68
Revenue for April ($68 × 1,860)
$126,480
Total costs for April
129,600
Operating income/(loss)
$ (3,120)
2.
New weeknight guest nights
18 weeknights × 100 rooms × 85% = 1,530
New weekend guest nights
12 weeknights × 100 rooms × 50% = 600
Total guest nights in April = 1,530 + 600 = 2,130
Breakfasts served:
1,530 weeknight guest nights × 1.0 = 1,530
600 weekend guest nights × 2.5 = 1,500
Total breakfasts served in April = 1,530 + 1,500 = 3,030
Total costs for April:
Depreciation
$20,000
Administrative costs
35,000
Fixed housekeeping and supplies
12,000
Variable housekeeping and supplies (2,130 × $25)
53,250
Fixed breakfast costs
5,000
Variable breakfast costs (3,030 × $5)
15,150
Total costs
$140,400
Revenue [(1,530 × $80) + (600 × $50)]
$152,400
Total costs for April
140,400
Operating income
$ 12,000
12-16
Yes, this pricing arrangement would increase operating income by $15,120 from an
operating loss of $3,120 to an operating income of $12,000 ($12,000 + $3,120 = $15,120).
3. The weeknight guests are business travelers who have to stay at the hotel on weeknights to
conduct business for their organizations. They are probably not paying personally for their hotel
stays, and they are more interested in the hotel’s location in the business park than the price of the
4. Executive Suites would need to charge a minimum of $35 per night for the last-minute
12-17
12-28 (25 min.) Cost-plus, target pricing, working backward.
1. In the following table, work backwards from operating income to calculate the selling price
Selling price
$ 10.14 (plug)
Less: Variable cost per unit
3.75
Unit contribution margin
$ 6.39
Number of units produced and sold
× 500,000 units
Contribution margin
$3,195,000
Less: Fixed costs
3,000,000
Operating income
$ 195,000
a) Total sales revenue = $10.14
500,000 units = $5,070,000
b) Selling price = $10.14 (from above)
Alternatively,
Operating income
$ 195,000
Add fixed costs
3,000,000
Contribution margin
3,195,000
Add variable costs ($3.75 × 500,000 units)
1,875,000
Sales revenue
$5,070,000
Sales revenue $5,070,000
Selling price = $10.14
Units sold 500,000
==
c) Rate of return on investment =
Operating income $195,000 9.75%
Total investment in assets $2,000,000
==
d) Markup % on full cost
Total cost = ($3.75
500,000 units) + $3,000,000 = $4,875,000
Unit cost =
$4,875,000 $9.75
500,000 units =
Markup % =
$10.14 $9.75 4%
$9.75
−=
Or
$5,070,000 $4,875,000 4%
$4,875,000
−=
2.
New fixed costs
=$3,000,000 – $200,000 = $2,800,000
New variable costs
= $3.75 – $0.60 = $3.15
New total costs
= ($3.15 × 500,000 units) + $2,800,000 = $4,375,000
New total sales (5% markup)
= $4,375,000
1.04 = $4,550,000
New selling price
= $4,550,000 ÷ 500,000 units = $9.10
Alternatively,
New unit cost
= $4,375,000 ÷ 500,000 units = $8.75
New selling price
= $8.75
1.04 = $9.10
3.
New units sold = 500,000 units × 90% = $450,000 units
12-18
Budgeted Operating Income
for the Year Ending December 31, 20xx
Revenues ($9.10
450,000 units)
$4,095,000
Variable costs ($3.15
450,000 units)
1,417,500
Contribution margin
2,677,500
Fixed costs
2,800,000
Operating income (loss)
$ (122,500)
1.
Old
CE100
Cost Change
New
CE100
Direct materials costs
Direct manufacturing labor costs
Machining costs
Testing costs
Rework costs
Ordering costs
Engineering costs
Total manufacturing costs
$182,000
28,000
31,500
35,000
14,000
3,360
21,140
$315,000
$2.20
7,000 = $15,400 less
$0.50
7,000 = $3,500 less
Unchanged because capacity same
(20%
2.5
7,000) × $2 = $7,000
(See Note 1)
(See Note 2)
Unchanged because capacity same
$166,600
24,500
31,500
28,000
5,600
2,100
21,140
$279,440
Note 1:
10% of old CE100s are reworked. That is, 700 (10% of 7,000) CE100s made are reworked.
Rework costs = $20 per unit reworked 700 = $14,000. If rework falls to 4% of New CE100s
manufactured, 280 (4% of 7,000) New CE100s manufactured will require rework. Rework costs =
$20 per unit 280 = $5,600.
Note 2 :
Ordering costs for New CE100 = 2 orders/month 50 components $21/order
= $2,100
Unit manufacturing costs of New CE100 = $279,440 ÷ 7,000 = $39.92
2. Total manufacturing cost reductions based on new design = $315,000 – $279,440
= $35,560
3. Changes in design have a considerably larger impact on costs per unit relative to
improvements in manufacturing efficiency ($5.08 versus $1.50). One explanation is that many