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Solutions Manual, Chapter 12 81
Exercise 12A-5 (30 minutes)
1. The profit at a price of $24.00 is computed as follows:
Profit = (P
–
V) × Q − Fixed expenses
2. Northport would need to sell 76,364 units computed as follows:
Profit = (P
–
V) × Q − Fixed expenses
$40,000 = ($24.00 − $13.00) × Q − $800,000
3. The percentage decrease is computed as follows:
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82 Managerial Accounting, 16th Edition
Exercise 12A-5 (continued)
4a and 4b.
The optimal selling price ($26.59) and the optimal profit ($134,178) are as
shown below:
4c. The additional profit is computed as follows:
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Solutions Manual, Chapter 12 83
Exercise 12A-5 (continued)
5a. The optimal selling price ($22.54) and optimal profit ($63,069) are as
shown below:
5b. The optimal price in requirement 5a is lower than the price in
requirement 4a because the customers are more sensitive to the price
5c. If unit sales decrease by 35% instead of 30%, the price increase is still
a good idea. The company is currently earning a profit of $40,000 at a
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84 Managerial Accounting, 16th Edition
Exercise 12A-6 (30 minutes)
1. The absorption cost-plus price of $15,540 is computed as follows:
2. The economic value to the customer (EVC) is computed as follows:
EVC = Reference value + Differentiation value
The differentiation value shown above ($18,400) includes three
components. First, customers who purchase an XP-200 rather than the
competing alternative would avoid the need to buy a second piece of
a 20,000-hour period, computed as follows:
Competin
g
Equipment XP-200
Preventive maintenance cost for 20,000 hours:
Third, customers who purchase an XP-200 rather than the competing
period, computed as follows:
Competin
g
Equipment XP-200
Electricity cost for 20,000 hours:
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Solutions Manual, Chapter 12 85
Exercise 12A-6 (continued)
3. The range of possible prices is as follows:
4. The absorption approach to cost-plus pricing ignores the value that XP-200
offers customers relative to the best available alternative. It is quite possible
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86 Managerial Accounting, 16th Edition
Exercise 12A-7 (30 minutes)
1. The postal service’s contribution margin (CM) at a price of $8.00 is
computed as follows:
2. The percentage decrease in the selling price and the percentage
increase in unit sales are computed as follows:
Pric
e
V
olum
e
3. The postal service’s contribution margin at a price of $7.00 is computed
as follows:
4. The increase in contribution margin is computed as follows:
5. The postal service would have to sell 92,904 sheets computed as
follows:
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Solutions Manual, Chapter 12 87
Exercise 12A-7 (continued)
6. The percentage increase is computed as follows:
7. The postal service should not allocate a portion of its common fixed
costs to these two pricing alternatives. Using sales dollars as the
allocation base would cause differing amounts of common fixed costs to
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88 Managerial Accounting, 16th Edition
Problem 12A-8 (45 minutes)
1. a. Number of pads manufactured each year:
38,400 labor-hours ÷ 2.4 labor-hours per pad = 16,000 pads.
Selling and administrative expenses:
(
)
Required ROI Selling and administrative
+
× Investment expenses
Markup percentage =
on absorption cost Unit sales × Unit product cost
b. Direct materials ………………………………. $ 10.80
Direct labor ……………………………………. 19.20
Manufacturin
g
overhead ……………………. 30.00
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Solutions Manual, Chapter 12 89
Problem 12A-8 (continued)
c. The income statement is:
Sales (16,000 pads × $135 per pad) …………. $2,160,000
Cost of
g
oods sold
The company’s ROI computation for the pads will be:
Net Operating Income
ROI =
A
verage Operating Assets
$324,000
=
$1,350,000
= 24%
2. Variable cost per unit:
Direct materials ………………………………………. $10.80
If the company has idle capacity and sales to the retail outlet would not
affect regular sales, any price above the variable cost of $45 per pad
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90 Managerial Accounting, 16th Edition
Problem 12A-9 (10 minutes)
1. The unit product cost is computed as follows:
Direct materials ………………………………………. $ 7.00
2. The markup percentage is computed as follows:
(
)
Required ROI Selling and administraive
+
× Investment expenses
Markup percentage =
on absorption cost Unit sales × Unit product cost
3. The selling price is computed as follows:
Unit product cost ………………… $21.25