978-0133058789 Chapter 5 Part 2

5-37 (20 min.)

1. Total Total

Variable Fixed Costs

Costs

$9 $150

2. There are correct ways and incorrect ways to analyze the data. A correct way

follows:

Total cost = Total FC + Total VC

3. (a) The CPA can compare either total annual costs or unit costs. Let X = the

total number of lunches in question.

Total Costs Unit Costs

Elsewhere At Club Elsewhere At Club

In general ……………………….$ 10X $150+$ 9X $10.00 ($150÷X)+$9

5-38 (15 min.)

1. Except for the advertising costs, the fixed costs are irrelevant in this situation.

The contribution margin per student is:

5-39 (10 min.)

Cost per Unit of Product

Variable manufacturing cost $12.00 $12.00 $12.00

Variable selling and admin. cost 7.00 7.00

5-40 (20 min.)

This solution may be obvious to most students. However, the use of this

problem in executive programs and regular classes has shown that some students need

this exercise before they become convinced that the “unitization” of fixed costs can be

misleading. Moreover, in decision-making in general, the use of total rather than unit

Fixed costs 1.00 300,000

Net income ($ .60) ($180,000)

The new business would alter the picture as follows, assuming fixed costs are

“spread” on a 50/50 basis:

Regular Special Total

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No matter how the fixed costs are spread, the total fixed costs will be $300,000

and the total net loss will be $210,000. This is true despite the fact that fixed costs per

unit have fallen from $1.00 to $.50. The moral is: beware of unit fixed costs.

Some instructors may want to emphasize how the unitization of fixed costs

differs. That is, the unit cost depends on the production volume chosen as the

denominator.

Fixed costs per unit = Total fixed costs ÷ Production vol. = $300,000 ÷ 300,000 units = $1

or

5-41 (10-15 min.)

Pricing policies always seem to spark much student interest. This “break-even”

philosophy is similar to the “base or bulk volume” philosophy favored by many

executives. That is, the “normal” pricing applies to the bulk or base of the business, but

5-42 (15 min.)

1. Assuming that total fixed costs are the same at production levels of 6,000 and

10,000 units, the analysis can focus on contribution margins:

2. Subjective factors include image in the marketplace (higher price may give an

5-43 (10 min.)

5-44 (10-15 min.)

1. (150% × $30,000) + ($75 × 2,000 hours) = $45,000 + $150,000 = $195,000

2 & 3.

2. Minimum bid $133,000

5-45 (10 min.)

Unit Target Cost = Target Price – Target Profit

= $75 – .25 × $75

= $56.25

5-46 (15 – 20 min.)

1. Unit Target Cost = Target Price – Target Profit

= $230 – .2 × $230

2. Total Cost Savings = .4 × $5,000,000 – $1,100,000 = $900,000

5-47 (10 min.)

This problem raises issues for which there are no right answers. Determining the

types of product promotion activities that are ethically and legally appropriate is not an

easy question, and the role of price discrimination is especially difficult.

For a company to legally charge different prices to different customers, it usually

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students want to focus on, and it may be the one with the most ethical content, but it

should not be the sole issue discussed.

5-48 (25-35 min.) All amounts are in millions of Euros.

1. LAGRANDE CORPORATION

Contribution Income Statement

For 2012

2. (a) Sales: €900 × 90% × 130% €1,053

Variable expenses: €440 × 130% 572

Contribution margin 481 *

Fixed expenses 340

Operating income € 141

(c) Sales €900

Variable expenses:

Manufacturing: €300 × 85% €255

Selling and administrative 140 395

Contribution margin 505

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Selling and administrative:

€140 × 120% × 125% 210 570

Contribution margin 564 **

Fixed expenses:

Manufacturing €280

Selling and administrative: €60 × 2 120 400

Operating income € 164

**Alternate computation of contribution margin:

Sales after a 5% increase in prices:

€900 × 105% € 945

a planning procedure. An important point to make with students is that the

contribution form of income statement is much more appropriate for these

purposes than the absorption form.

The analysis is readily calculated by using data from the contribution income

statement. In contrast, the data in the absorption income statement must be

3. Alternative (c) is clearly undesirable because it produces less operating income

than the status quo. Alternatives (a), (b) or (d) would be better than the status

5-49 (10-15 min.)

Fully

1. Sales $39,000 $39,000

2. A decision not to accept the order means that short-run income would be $5,250

lower. In effect, by turning down the business, Transnational invests $5,250 to

possibly achieve some long-run benefits. Goldmark can find the contribution

5-50 (20-25 min.)

1. Net income would be increased by £470 if the order were taken:

Without Effect of With

the Order the Order the Order

labor.

2. A contribution approach to pricing might appear as follows:

Selling price £16,000

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The contribution approach essentially attempts to provide a measure of the

decrease in immediate net income that would result from rejecting an order. This

is the contribution margin forgone. Traditional approaches to pricing do not

supply such a number. In part (1), the £470 tells Smythe that she is investing

£470 now to uphold her pricing policies. She can then assess whether preserving

such policies and the long-run pricing structure is worth an investment of such

magnitude. She also may assess whether accepting marginal business will cause

this customer to seek such concessions regularly. Alternatively, Smythe may

want to make such concessions occasionally to attract new customers.

A possible contribution margin formula may be illustrated as follows:

Direct material £ 5,300

Direct labor 6,200

Variable overhead at 65% of direct labor 4,030

Total variable cost £15,530

Markup at 48.1%* of £15,530 7,470

Target selling price £23,000

*Normal markup percentage = (£23,000 – £15,530) ÷ £15,530 = 48.1%.

Note that the markup of 48.1% is much higher than the 10% used previously

because the markup must provide for the recovery of fixed overhead as well as

the making of net income. The key to the contribution approach is its intelligent

use with full recognition that total variable cost is not total cost.

5-51 (15-20 min.)

1. Final Course

Year to Enrollment Grand

Date 30 10 More Totals

2. The same general considerations influence pricing decisions in profit-seeking

and nonprofit organizations. The exception is price-setting by many

government-owned entities, which often is heavily affected by legislative bodies.

The familiar three Cs — customers, costs, and competition — do influence price

setting.

alumni.

5-52 (15 min.)

1. Contribution margin from direct sales = $12 – $2 = $10

Contribution margin from sales to distributor = $45 – $2 = $43

3. Total contribution from direct sales = 33 million × ($12.30 – $2) = $339.9 million.

Sales at CM of $43 to get contribution of $339.9 million:

$339,900,000  $43 = 7,904,651 DVDs