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Total breakfasts served in June = 2,340 + 4,320 = 6,660
Total costs for June:
Depreciation
$ 25,000
Administrative costs
38,000
Fixed housekeeping and supplies
16,000
Variable housekeeping and supplies (2,250 × $30)
67,500
Fixed breakfast costs
12,000
Variable breakfast costs (6,660 × $6)
39,960
Total costs for June
$198,460
Cost per guest night ($198,460 ÷ 2,250)
$88.20
Revenue for June ($85 × 2,250)
$191,250
Total costs for June
198,460
Operating income/(loss)
$ (7,210)
2.
New weeknight guest nights
18 weeknights × 100 rooms × 75% = 1,350
New weekend guest nights
12 weeknights × 100 rooms × 90% = 1,080
Total guest nights in June l = 1,350 + 1,080 = 2,430
Breakfasts served:
1,350 weeknight guest nights × 2 = 2,700
1,080 weekend guest nights × 4 = 4,320
Total breakfasts served in June = 2,700 + 4,320 = 7,020
Total costs for June:
Depreciation
$ 25,000
Administrative costs
38,000
Fixed housekeeping and supplies
16,000
Variable housekeeping and supplies (2,430 × $30)
72,900
Fixed breakfast costs
12,000
Variable breakfast costs (7,020 × $6)
42,120
Total costs
$206,020
Revenue [(1,350 × $75) + (1,080 × $105)]
$214,650
Total costs for June
206,020
Operating income
$ 8,630
Yes, this pricing arrangement would increase operating income by $15,840 from an
operating loss of $7,210 to an operating income of $8,630 ($8,630 + $7,210 = $15,840).
1. Guests typically do not come to the amusement park on weekdays because adults are busy
at work and children have to attend school. The weeknight guests are families who stay at
the hotel for convenience. They are willing to consider other hotel options or even not
travel at all if the price is high and unaffordable. Reducing the weeknight price is important
to entice families to try to come to the amusement park on weekdays. The demand of
weeknight guests is elastic.
3.
New units sold = 500,000 units × 95% = $475,000 units
Budgeted Operating Income
for the Year Ending December 31, 20xx
Revenues ($8.58
475,000 units)
$4,075,500
Variable costs ($3.70
475,000 units)
1,757,500
Contribution margin
2,318,000
Fixed costs
2,275,000
Operating income
$ 43,000
4. The CEO has not considered customers in these pricing decisions. Will customers continue
to want the product at these prices? What are competitors doing? The CEO should take a more
market-based approach to pricing.
The CEO should also think about the effect of cost cutting on employee participation and
morale and whether the cuts are falling disproportionately on any specific value-chain function.
13-26 (30 min.) Value engineering, target pricing, and target costs.
Tiffany Cosmetics manufactures, and sells a variety of makeup and beauty products. The company
has come up with its own patented formula for a new anti-aging cream The company president
wants to make sure the product is priced competitively because its purchase will also likely
increase sales of other products. The company anticipates that it will sell 400,000 units of the
product in the first year with the following estimated costs:
Required:
1. The company believes that it can successfully sell the product for $38 a bottle. The company’s
target operating income is 40% of revenue. Calculate the target full cost of producing the
400,000 units. Does the cost estimate meet the company’s requirements? Is value engineering
needed?
2. A component of the direct materials cost requires the nectar of a specific plant in South
America. If the company could eliminate this special ingredient, the materials cost would drop
Weekly costs:
Ticket sales
Online ticket sales: 55,000 15% $1
$ 8,250
On-site sales: 55,000 85% $2
93,500
Ticket verification: 55,000 $1.50
82,500
Operating attractions: 11,340a runs $90.00
1,020,600
Litter patrol: 1,750b 20
35,000
Total weekly costs
$1,239,850
Cost per patron: $1,239,850 ÷ 55,000
$22.54
Operating profit: ($1,925,000 – $1,239,850)
$ 685,150
a6 runs per hour 10 hours per day 7 days per week 27 attractions = 11,340 runs per week
b(25 acres ÷ 1 acre per hour) 10 hours per day 7 days per week = 1,750 litter patrol hours
Lagoon does achieve its target profit of 35% of revenues.
2.
Weekly Revenue:
55,000 patrons $33
$1,815,000
Weekly costs
Ticket sales:
Online ticket sales: 55,000 40% $0.75 + $1,000
17,500
On-site sales: 55,000 60% $2
66,000
Ticket verification: 55,000 1.50
82,500
Operating attractions: 10,332a runs $90
929,880
Litter patrol: 1,400b $20 + $250
28,250
Total weekly costs
1,124,130
Operating profit
$ 690,870
a6 runs per hour 10 hours per day 7 days per week 19 attractions +
6 runs per hour 7 hours per day 7 days per week 8 attractions = 10,332 runs per week
b(25 acres ÷ 1.25 acres per hour) 10 hours per day 7 days per week = 1,400 litter patrol hours
This profit is slightly greater than Lagoon’s current profitability.
Yes, the changes and improvements will allow Lagoon to maintain its desired profit margin of
35% ($690,870 ÷ $1,815,000 = 38%).
3. The challenges that Lagoon might encounter in achieving the target cost are mostly
employee related. If the employees resist the changes, or struggle with the implementation of the
improvements, the target cost will be in danger of not being met. Lagoon might counter these
struggles by training employees to implement these changes successfully and by adapting its
incentive program to reward the desired improvements.
