Not For Sale. External and Internal Pricing Factors. Traditional Economic Pricing Theory. Price Determination. Chapter Assignments 1

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1 Chapter Assignments 1 LO 1 LO 2 Exercises: Set B External and Internal Pricing Factors E1B. Mobile Battery features more than a dozen brands of batteries in many sizes. Two of the brands are PowerPlus and SuperPower. Information about the two brands follows. PowerPlus SuperPower Selling price: Battery, installed $125 $110 Cost per battery As shown, selling prices include installation costs. Each battery costs $10 to install. 1. Compute each brand s net unit selling price after installation. 2. Accounting Connection Was cost the main consideration in setting those prices? 3. Accounting Connection What other factors could have influenced those prices? Traditional Economic Pricing Theory E2B. Texaza, a product design firm, has just completed a contract to develop a wireless phone keychain. The phone keychain needs to be recharged only once a week and can be used worldwide. Initial fixed costs for this product are $4,000. The designers estimate that the product will break even at the $5,000/100-unit mark. Total revenues will again equal total costs at the $25,000/900-unit point. Marginal cost is expected to equal marginal revenue when 550 units are sold. 1. Sketch total revenue and total cost curves for this product. Mark the vertical axis at each $5,000 increment and the horizontal axis at each 100-unit increment. 2. Based on your total revenue and total cost curves in 1, at what unit selling price will profits be maximized? (Round to two decimal places.) Price Determination E3B. Turley Industries has just patented a new toothpaste called Sparkle for lasting protection against tooth decay. The company s controller has developed the following annual information for use in price determination meetings: Variable production costs $ 900,000 Fixed overhead 500,000 Selling expenses 200,000 General and administrative expenses 125,000 Desired profit 375,000 Cost of assets employed 1,000,000 Annual demand for the product is expected to be 500,000 tubes. On average, the company now earns an 8 percent return on assets. 1. Compute the projected unit cost for one tube of Sparkle. 2. Using gross margin pricing, compute the markup percentage and selling price for one tube. 3. Using return on assets pricing, compute the unit price for one tube. CHE-NEEDLES_FINM WEB.indd 1

2 2 Chapter 25: Pricing Decisions, Including and Transfer Pricing Pricing a Service E4B. Texas has just passed a law making it mandatory to have every head of cattle inspected at least once a year for a variety of communicable diseases. Big Springs Enterprises is considering entering this inspection business. After extensive studies, Tex Autry, the owner of Big Springs Enterprises, has developed the following annual projections: Direct service labor $525,000 Variable service overhead costs 250,000 Fixed service overhead costs 225,000 Selling expenses 142,500 General and administrative expenses 157,500 Minimum desired profit 120,000 Cost of assets employed 750,000 Autry believes his company could inspect 250,000 head of cattle per year. On average, the company now earns a 16 percent return on assets. 1. Compute the projected cost of inspecting each head of cattle. 2. Determine the price to charge for inspecting each head of cattle. Use gross margin pricing. 3. Using return on assets pricing, compute the unit price to charge for this inspection service. Cost-Based Pricing E5B. Hometown Bank is determining the price for its newest mini debit card. The card can be used at any retail outlet with a swipe reader and is small enough to attach to a key chain no PIN number or signature is required. Sigrid Olmo has developed the following annual information for use in upcoming price determination meetings: Variable processing costs $50 million Fixed processing costs 36 million Selling expenses (fixed) 10 million General and administrative expenses (fixed) 4 million Desired profit 3 billion Cost of assets employed 10 billion Annual usage is expected to be 10 billion transactions. On average, the company now earns a 6 percent return on assets. 1. Compute the projected cost of one transaction. 2. Using gross margin pricing, compute the price to charge per transaction. (Round to the nearest whole percent.) 3. Using return on assets pricing, compute the price to charge per transaction. Pricing Services E6B. Gator Car Repair specializes in repairing hybrid cars. The company uses a 70 percent markup rate on parts to cover parts-related overhead costs and profit margin. It uses a 100 percent markup rate on labor to cover labor-related overhead costs and profit margin. Compute the bill for a recent job that used the following parts and labor: Material and repair parts used $550 Labor used 4 hours at $40 per hour Time and Materials Pricing E7B. Cruz s Home Remodeling Service specializes in refurbishing older homes. Last week Cruz was asked to bid on a remodeling job for the town s mayor. The list of materials and labor needed to complete the job follows. CHE-NEEDLES_FINM WEB.indd 2

3 Chapter Assignments 3 Materials Labor Lumber $ 6,500 Carpenter $2,000 Nails/bolts 160 Floor specialist 1,300 Paint 1,420 Painter 1,500 Glass 2,890 Supervisor 1,420 Doors 730 Helpers 1,680 Hardware 600 Total $7,900 Supplies 400 Total $12,700 The company uses an overhead markup percentage for materials (60 percent) and for labor (40 percent). Those markups cover all operating costs. In addition, Cruz expects to make at least a 25 percent profit on all jobs. Compute the price that Cruz should quote for the mayor s job. and Pricing E8B. Environ Company has determined that its new fireplace screen would gain widespread customer acceptance if the company could price it at or under $90. Anticipated labor hours and costs for each unit of the new product follow. Direct materials cost $15 Direct labor cost Manufacturing labor: Hours 1.2 Hourly labor rate $12 Assembly labor: Hours 1.5 Hourly labor rate $10 Machine hours 2 The company currently uses the following three activity-based cost rates: Materials handling Production Product delivery $1.30 per dollar of direct materials $3.00 per machine hour $5.50 per unit Accounting Connection The company s minimum desired profit is 25 percent over total production and delivery cost. Compute the target cost for the new fireplace screen, and determine if the company should market it. E9B. Accounting Connection Assume the same facts as in E8B except that the company s minimum desired profit has been revised to 10 percent over production and delivery costs as a result of a recent economic downturn. Compute the revised target cost for the new fireplace screen, and determine if the company should market it. (Round to two decimal places.) E10B. Suppose that Modern Manufacturing is developing a new chair targeted to sell for less than $100 and that it is considering the two production alternatives that follow. Rank the alternatives, assuming that the company s minimum desired profit is 30 percent over total production costs. (Round to two decimal places.) Alternative A Alternative B Direct material costs $35 $20 Direct labor cost 1 hour at $12 per hour 2 hours at $8 per hour Overhead costs 200 percent of direct labor costs $2 per dollar of direct materials CHE-NEEDLES_FINM WEB.indd 3

4 4 Chapter 25: Pricing Decisions, Including and Transfer Pricing LO 5 LO 5 E11B. Management at Fox Valley Machine Tool Co. is considering the development of a new automated drill press called the AutoDrill. After conferring with the design engineers, the controller s staff assembled the following data about this product: Target selling price $6,000 per unit Desired profit percentage 20% of total unit cost Projected unit demand 4,500 units Activity-based cost rates: Materials handling 5% of direct materials and purchased parts cost Engineering $300 per unit Production and assembly $50 per machine hour Delivery $570 per unit Marketing $400 per unit Per-unit data: Direct materials cost $1,620 Purchased parts cost $200 Manufacturing labor: Hours 6 Hourly labor rate $14 Assembly labor: Hours 10 Hourly labor rate $15 Machine hours Compute the product s target cost. 2. Compute the product s projected unit cost based on the design engineers estimates. 3. Accounting Connection Should management produce and market the AutoDrill? Defend your answer. Transfer Price Comparison E12B. Mary Janus is developing a transfer price for the housing section of an automatic pool-cleaning device. The housing for the device is made in Department A. It is then passed on to Department D, where final assembly occurs. Unit costs for the housing follow. Cost Categories Unit Costs Direct materials $5.20 Direct labor 2.30 Variable overhead 1.30 Fixed overhead 2.60 Profit markup, 20% of cost? An outside vendor can supply the housing for $13.00 per unit. 1. Develop a cost-plus transfer price for the housing. 2. Accounting Connection What should the transfer price be? Support your answer. Transfer Pricing E13B. Patch Watch Company s Seconds Store offers refurbished or factory seconds timekeeping products to the public at substantially reduced prices. The factory controller is CHE-NEEDLES_FINM WEB.indd 4

5 Chapter Assignments 5 developing transfer price alternatives to present to management to determine the best price to use when transferring products from the factory to the store, using the following data: Unit price if sold to outside retailers $25 Variable product cost per unit $10 Fixed product cost per unit $5 Seconds store profit markup 40% 1. What is the market-based transfer price alternative? 2. What is the minimum transfer price alternative? 3. Compute the cost-plus transfer price alternative assuming cost includes variable costs only. LO 6 Pricing Policy Objectives E14B. Business Application Old Denim, Ltd., is an international clothing company that retails medium-priced goods. Its retail outlets are located throughout the United States, France, Germany, and Great Britain. Management wants to maintain the company s image of providing the highest possible quality at the lowest possible prices. Selling prices are developed to draw customers away from competitors stores. First-ofthe-month sales are regularly held at all stores, and customers are accustomed to this practice. Company buyers are carefully trained to seek out quality goods at inexpensive prices. Sales are targeted to increase a minimum of 5 percent per year. All sales should yield a 15 percent return on assets. Sales personnel are expected to wear Old Denim clothing while working, and all personnel can purchase clothing at 10 percent above cost. All stores are required to be clean and well organized. Competitors prices are checked daily. Identify Old Denim s pricing policy objectives. CHE-NEEDLES_FINM WEB.indd 5