ch06_tb

CHAPTER 6COST INFORMATION for PRICING and PRODUCT PLANNING

TRUE/FALSE

1. Price-taker firms usually enjoy a significant market share.a. Trueb. False

2. Costs that are committed in the short term may be considered flexible in the long term.a. Trueb. False

3. For price-taker firms, the relevant costs for the product mix decisions are the short-run flexible costs plus any opportunity costs of forgone alternatives.a. Trueb. False

4. For one-time special orders, flexible costs may be relevant but fixed costs are never relevant.a. Trueb. False

5. Giving up the production of some profitable product results in an opportunity cost.a. Trueb. False

6. Opportunity costs are always relevant.a. Trueb. False

7. A price-taker firm should simply produce and sell as much product as it can of all products that are profitable.a. Trueb. False

8. With price determined, the only short-term decision faced by the manufacturer is how much of each possible product it should produce.a. Trueb. False

9. The selling price quoted for a one-time special order may be less than the selling price for a long-term customer.a. Trueb. False

AKY 4E Test Bank Chapter 6 Schoenebeck

10. A small firm will always be a price-taker.a. Trueb. False

11. When capacity is limited, companies should rank-order products by contribution margin per unit, not by contribution per constrained resource.a. Trueb. False

12. By using overtime, a company can increase capacity in the short run.a. Trueb. False

13. Managers have more flexibility in the short-term to adjust the capacities of activity resources.a. Trueb. False

14. When a firm has limited capacity, incremental costs will be lower than the incremental costs of a firm with surplus capacity.a. Trueb. False

15. In practice, a special order will be priced above incremental costs. a. Trueb. False

16. When excess capacity exists, the minimum acceptable price must at least cover the incremental costs of production and delivery.a. Trueb. False

17. Bid prices and costs that are relevant for regular orders are also relevant for special orders. a. Trueb. False

18. Full costs are relevant for short-term pricing decisions.a. Trueb. False

19. Full manufacturing costs include flexible support costs, but not fixed support costs.a. Trueb. False

20. Markups tend to be greater when demand is more elastic.a. Trueb. False


21. Markups increase with the strength of demand.a. Trueb. False

22. When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions.a. Trueb. False

23. Product cost analysis is important even if market forces set prices. a. Trueb. False

24. Because demand conditions fluctuate over time, prices also fluctuate.a. Trueb. False

25. When demand is relatively inelastic, profits will usually increase when prices increase.a. Trueb. False

26. Most firms use full cost-based prices when making long-term pricing decisions.a. Trueb. False

27. If a small manufacturing firm lowers the price of a standardized product, it risks being put out of business by a larger competitor. a. Trueb. False

28. Dropping unprofitable products will automatically increase profitability.a. Trueb. False

29. Capacity constraints are of less concern for long-term than for short-term product mix decisions.a. Trueb. False

30. For short-term pricing decisions, many more costs are relevant than for long-term pricing decisions.a. Trueb. False


MULTIPLE CHOICE

31. Incremental costs include all of the following EXCEPT:a. direct materialsb. direct laborc. flexible support costsd. fixed support costs

32. Direct materials $40, Direct labor $10, Flexible support costs $30, and Fixed support costs $20. In the short term, the incremental cost of one unit is:a. $30b. $50c. $80d. $100

33. A product mix strategy is MOST influenced by:a. the products’ contribution margins and their use of capacity resourcesb. whether a product is a price-taker or a price-setterc. the products’ price elasticityd. full product costs

34. A product cost analysis provides important information for decisions regarding:a. marketing and promotion resourcesb. discounts for large ordersc. a product-mix strategyd. All of the above are correct.

35. Product cost analysis is important when deciding:a. the amount of sales commissionsb. pricing discountsc. special-order pricingd. All of the above are correct.

36. Product mix decisions:a. have a long-run focusb. help determine how to maximize operating profitsc. focus on selling price per unitd. All of the above are correct.

37. A company with a large share of the market: a. is a price-takerb. can influence pricec. can determine priced. can be any of the above because it varies by industry


38. For short-run product mix decisions, depreciation is a cost that is:a. not relevantb. differentialc. incrementald. flexible

39. Opportunity costs:a. result in a cash outlayb. only are considered when selecting among alternativesc. are recorded in the accounting recordsd. should be maximized for the best decision

40. When a firm has constrained capacity as opposed to surplus capacity, opportunity costs will be:a. lowerb. the samec. greaterd. it varies

41. The opportunity cost of holding significant inventory includes:a. the interest forgone on an alternative investmentb. additional insurance costsc. additional storage costsd. All of the above are correct.

42. A supplier offers to make Part A for $70. Jansen Company has relevant costs of $80 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier: a. is zerob. is $10,000c. is $70,000d. cannot be determined using the above information

43. Fixed manufacturing support costs include the cost of:a. plant administrationb. employee wages for assemblyc. advertisingd. product delivery

44. Flexible manufacturing support costs include the cost of:a. wages for the finishing departmentb. indirect materialsc. depreciation of equipmentd. parts for the product


45. For determining the best mix of products, the one with the LEAST amount of influence is:a. the elasticity of the market pricesb. selling and distribution costsc. the use of capacity resourcesd. contribution margins

46. When deciding to accept a special order from a wholesaler, management must do all of the following EXCEPT:a. analyze product costsb. consider the special order’s impact on future prices of their productsc. determine whether excess capacity is availabled. verify the retail-selling price

47. For short-term product mix decisions, relevant costs include short-run _________ costs plus any _________ costs.a. direct material, direct laborb. flexible, opportunityc. fixed, differentiald. support, distribution

48. One firm has a large market share for a product in a particular industry. A company with a smaller market share for the same product within the same industry:a. uses variable-cost pricingb. uses full-cost pricingc. is a price-takerd. is a price-setter


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 49 THROUGH 53.Truck Parts Manufacturing is approached by a European customer to fulfill a special one-time order for a product similar to one offered to domestic customers. Truck Parts Manufacturing has excess capacity. The following per unit data apply for sales to regular customers:

Direct materials $40Direct labor 20Variable manufacturing support 50Fixed manufacturing support 60 Total manufacturing costs 170Markup (50%) 85Targeted selling price $255

49. What is the full manufacturing cost per unit?a. $110b. $170c. $255d. $85

50. What is the contribution per unit?a. $85b. $110c. $145d. $255

51. Which costs are relevant for making the decision regarding this special order?a. full costsb. incremental costsc. targeted selling priced. it varies

52. For Truck Parts Manufacturing, what is the minimum acceptable price of this special order?a. $110b. $145c. $170d. $255

53. For this special order, Truck Parts Manufacturing should consider:a. any price less than $110b. any price less than $170c. any price less than $255d. a price of $150 per unit


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 54 THROUGH 57.Kevin’s Kitchens has excess capacity. Kevin’s Kitchens is approached by Mr. Cathay, a new customer, to fill a large one-time order of cherry cabinets, a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

Direct materials $455Direct labor 300Variable manufacturing support 45Fixed manufacturing support 100 Total manufacturing costs 900Markup (60%) 540Targeted selling price $1,440

54. For Kevin’s Kitchens, what is the minimum acceptable price of this special order?a. $800b. $900c. $755d. $1,440

55. Other than price, what other items should Kevin’s Kitchens consider before accepting this special order?a. contribution margin sacrificedb. reaction of existing customers to the lower price offered to Mr. Cathayc. demand for cherry cabinetsd. price is the only consideration

56. If there was limited capacity, all would change EXCEPT:a. opportunity costsb. incremental costsc. flexible costsd. the minimum acceptable price

57. If Mr. Cathay wanted a long-term commitment for supplying this product, this analysis would:a. definitely be differentb. may be differentc. not be differentd. need more information to determine

58. Plant capacity:a. is fixed or committed in the long runb. costs are used to determine special-price orders when there is excess capacityc. constraints can be used to justify higher price markupsd. All of the above are correct.


59. When there is no excess capacity, it makes sense to accept a one-time special order when:a. incremental revenues exceed incremental costsb. there is no required increase in fixed costsc. the company placing the order is a price setterd. never, because it doesn’t makes sense

60. When there is no available plant capacity, considerations for a one-time special order include:a. expanding capacity with the use of subcontractorsb. temporarily dropping another productc. authorizing overtime at time-and-a-half of the current wage rated. All of the above are correct.

61. Contribution per machine hour is: a. full-cost per unit / number of machine hours per unitb. number of machine hours per unit / full-cost per unitc. price per unit less variable costs per unitd. contribution per unit / number of machine hours per unit

62. When there is limited capacity, the minimum acceptable price of a special order will earn at least as much __________ as that which is sacrificed.a. selling priceb. contribution marginc. flexible costd. full cost

63. Special orders should only be accepted if __________ revenues exceed ________ costs.a. incremental, incrementalb. total, totalc. incremental, fixedd. total, fixed

64. When a firm has constrained capacity as opposed to surplus capacity, incremental costs will be:a. lowerb. the samec. greaterd. it varies


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 65 THROUGH 69.Brenda’s Brakes manufactures three different product lines: Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model ZSelling price $50 $60 $70Direct materials 6 6 6Direct labor ($12 per hour) 12 12 24Flexible support costs ($4 per machine hour) 4 8 8Fixed support costs 10 10 10

65. Which model has the greatest contribution per unit?a. Model Xb. Model Yc. Model Zd. both Models X and Y

66. Which model has the greatest contribution per machine hour?a. Model Xb. Model Yc. Model Zd. both Models Y and Z

67. If there is excess capacity, which model is the most profitable to produce?a. Model Xb. Model Yc. Model Zd. both Models X and Y

68. If there is a machine breakdown, which model is the most profitable to produce?a. Model Xb. Model Yc. Model Zd. both Models Y and Z

69. How can Brenda encourage her salespeople to promote the more profitable model?a. Brenda can put all sales persons on salary.b. Brenda can provide higher sales commissions for higher priced items.c. Brenda can provide higher sales commissions for items with the greatest contribution

margin per constrained resource.d. Both (b) and (c) are correct.


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 70 THROUGH 72.Rosa’s Rockers manufactures two models: Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 70 units of the Premium Model. Only 496 machine hours are available per week. The following per unit data apply:

Standard PremiumContribution margin per unit $18 $20Number of machine hours required 3 4

70. The contribution per machine hour is:a. $18 for Standard and $20 for Premiumb. $54 for Standard and $80 for Premiumc. $15for Standard and $16 for Premiumd. $6 for Standard and $5 for Premium

71. To maximize production profits, how many units would you recommend of each model?a. 100 units of Standard and 49 units of Premiumb. 72 units of Standard and 70 units of Premiumc. 100 units of Standard and 70 units of Premiumd. 85 units of Standard and 60 units of Premium

72. If there are 600 machine hours available per week (instead of only 496 machine hours per week), how many rockers of each model should Rosa’s produce to maximize profits?a. 100 units of Standard and 49 units of Premiumb. 72 units of Standard and 70 units of Premiumc. 100 units of Standard and 70 units of Premiumd. 85 units of Standard and 60 units of Premium

73. The amount of markup is usually higher if:a. the firm is using a skimming strategyb. demand is weakc. competition is intensed. demand is elastic

74. Price-setters include:a. large companies in the commodity industryb. companies with a small share of the marketc. small firms that manufacture a specialty productd. one of many firms within a particular industry

75. When demand for a product is inelastic and prices are increased, demand will usually __________ and operating profits will __________.a. increase, increaseb. remain the same, increasec. decrease, decreased. remain the same, decrease


76. When demand for a product is very elastic and prices are increased, demand will __________ and operating profits __________.a. remain the same, will increaseb. remain the same, may either increase or decreasec. decrease, will decreased. decrease, may either increase or decrease

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 77 AND 78.Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $90 per table, consisting of 80% flexible costs and 20% fixed costs. The company has surplus capacity available. It is Northwoods’ policy to add a 50% markup to full costs.

77. Northwoods is invited to bid on an order to supply 100 rustic tables. What is the lowest price Northwoods should bid on this one-time special order? a. $6,300b. $7,200c. $9,000d. $13,500

78. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Northwoods is invited to submit a bid to the hotel chain. What is the lowest price per unit Northwoods should bid on this long-term order?a. $63b. $72c. $90d. $135


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 79 AND 80.Berryman Products manufactures coffee tables. Berryman Products has a policy of adding a 20% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

Output units 30,000 tablesMachine-hours 8,000 hoursDirect manufacturing labor-hours 10,000 hours

Direct materials per unit $50Direct manufacturing labor per hour $6Variable manufacturing overhead costs $161,250Fixed manufacturing overhead costs $600,000Product and process design costs $450,000Marketing and distribution costs $562,500

79. Berryman Products is approached by an overseas customer to fill a one-time-only special order for 2,000 units. All cost relationships remain the same except for a one-time setup charge of $20,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order?a. $67.38b. $77.38c. $111.13d. $80.85

80. For long-run pricing of the coffee tables, what price will MOST likely be used by Berryman?a. $67.38b. $80.85c. $111.13d. $133.35


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 81 THROUGH 83.Northern Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 3,000 units.

Currently ProjectedDemand 20,000 units 17,000 unitsSelling price $4.50 $5.00Incremental cost per unit $3.00 $3.00

81. If the price increase is implemented, operating profit is projected to:a. increase by $4,000b. decrease by $4,000c. increase by $6,000d. decrease by $4,500

82. Would you recommend the 50-cent price increase?a. No, because demand decreases.b. No, because the selling price increases.c Yes, because contribution per unit increases.d. Yes, because operating profits increase.

83. The demand for this product is:a. greatly inelasticb. slightly inelasticc. elasticd. indeterminable

84. Firms with small market shares:a. can lower prices and industry target prices will followb. have little influence on the price and demand of productsc. can demand a higher price and increase company profitsd. All of the above are correct.

85. A company that competes as a producer in the grain industry is a:a. price-taker firmb. price-setter firmc. full-cost pricing firmd. None of the above is correct.

86. In an industry with a standardized product, prices will be most influenced by:a. incremental production costsb. the top ten firms in the industryc. the price-taker firmsd. None of the above is correct.


87. When an industry such as the hotel industry has peak and slower times, __________ also fluctuate(s).a. pricesb. opportunity costsc. demandd. All of the above are correct.

88. If customer demand for a product is strong, then a company is able to command a higher:a. markupb. market sharec. full costd. All of the above are correct.

89. Firms lower markups:a. to increase market shareb. to adjust for lower demand conditionsc. for one-time special ordersd. All of the above are correct.

90. A small firm can become a price-setter if the firm:a. manufactures a standardized productb. differentiates its products from others in the marketc. competes in a regulated industryd. The firm can never become a price setter.

91. Which statement is correct?a. Prices are adjusted upward when competition is intense.b. Prices are adjusted downward when capacity is fully utilized.c. Markups are increased when demand is strong.d. Markups are decreased for the skimming price strategy.

92. The penetration pricing strategy includes:a. winning additional market shareb. initially charging a higher selling pricec. maintaining a full product lined. charging for the privilege of possessing the latest technological innovations

93. When a company is evaluating an order and there is available capacity, one of the company’s primary concerns should be:a. whether the incremental costs are fixed or flexibleb. the demand for the productc. how long the firm is committing its production capacityd. the variety of colors and other complexities of the order


94. If a small manufacturing firm RAISES the price of its generic aspirin product, it will probably:a. become more profitableb. lose customers to competing firmsc. increase its market shared. lose its price-setting status

95. If a small manufacturing firm LOWERS the price of its generic aspirin product, its GREATEST long-term risk is:a. a lower contribution margin per unitb. decreased profitsc. reduced market shared. being put out of business by a large competitor

96. If a product is unprofitable, a firm:a. may choose to continue the product to maintain a full product lineb. should drop the product immediatelyc. may choose to add costly features to the product to increase the valued. may choose to better duplicate similar products

97. When the greatest portion of a firm’s costs are fixed rather than flexible:a. the firm enjoys lower financial riskb. offering discounts during non-peak times will generally increase profitsc. incremental costs will also be proportionately higherd. the firm should always use full-cost pricing to maximize profits

98. Dropping unprofitable products will increase profitability:a. if the activity resources no longer required are eliminatedb. if capacity constraints are adjustedc. automaticallyd. when they are part of a full product line


99. Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the past quarter. The past three months of information for Model AE2 are summarized below.

Sales (1,000 units) $300,000Manufacturing costs: Direct materials 150,000 Direct labor ($15 per hour) 60,000 Support 100,000Operating loss ($10,000 )

Support costs are 70% flexible and the remaining 30% is depreciation of special equipment for model AE2 that has no resale value.

If Model AE2 is dropped from the product line, operating income will:a. increase by $10,000b. decrease by $20,000c. increase by $30,000d. decrease by $10,000

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 100 AND 101.Denly Company has three products, A, B, and C. The following information is available:

Product A Product B Product CSales $60,000 $90,000 $24,000Variable costs 36,000 48,000 15,000Contribution margin 24,000 42,000 9,000Fixed costs: Avoidable 9,000 18,000 6,000 Unavoidable 6,000 9,000 5,400Operating income $ 9,000 $15,000 $ (2,400 )

100. Denly Company is thinking of dropping Product C because it is reporting a loss. Assuming Denly drops Product C and does not replace it, operating income will:a. increase by $2,400b. increase by $3,000c. decrease by $3,000d. decrease by $5,400

101. Assuming Product C is discontinued and the space formerly used to produce Product C is rented for $12,000 per year, operating income will:a. increase by $6,600b. increase by $9,000c. increase by $12,000d. increase by $14,400


EXERCISE/PROBLEM

102. Axle and Wheel Manufacturing is approached by a European customer to fill a special, one-time special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers:

Direct materials $33Direct labor 15Flexible manufacturing support 24Fixed manufacturing support 52 Total manufacturing costs 124Markup (50%) 62Targeted selling price $186

Axle and Wheel Manufacturing has excess capacity.

a. What is the full manufacturing cost per unit?b. What is the contribution margin per unit?c. Which costs are relevant for making the decision regarding this special order? Why?d. For Axle and Wheel Manufacturing, what is the minimum acceptable price of this

special order?e. For this special order, should Axle and Wheel Manufacturing consider a price of

$100 per unit? Why or why not?

103. Silver Lake has excess capacity. Silver Lake Cabinets is approached by Ms. Jenny Zhang, a new customer, to fill a large one-time order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

Direct materials $100Direct labor 125Variable manufacturing support 60Fixed manufacturing support 75 Total manufacturing costs 360Markup (60%) 216Targeted selling price $576

a. For Silver Lake, what is the minimum acceptable price of this special order?b. Other than price, what other items should Silver Lake consider before accepting this

special order?c. How would the analysis differ if there was limited capacity?d. How would this analysis differ if Ms. Jenny Zhang wanted a long-term commitment

for supplying this product?


104. Maggie’s Mufflers manufactures three different product lines: Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model ZSelling price $80 $90 $100Direct materials 30 30 30Direct labor ($10 per hour) 15 15 20Variable support costs ($5 per machine hour) 5 10 10Fixed support costs 20 20 20

a. For each model, compute the contribution per unit.b. For each model, compute the contribution per machine hour.c. If there is excess capacity, which model is the most profitable to produce? Why?d. If there is a machine breakdown, which model is the most profitable to produce?

Why?e. How can Maggie encourage her sales people to promote the more profitable model?

105. Charlie’s Chairs manufactures two models: Standard and Premium. Weekly demand is estimated to be 120 units of the Standard Model and 70 units of the Premium Model. Only 420 machine hours are available per week. The following per unit data apply:

Standard PremiumContribution margin per unit $12 $15Number of machine hours required 2 3

a. For each model, compute the contribution per machine hour.b. To maximize weekly production profits, how many machine hours would you

recommend of each model? How many units of each model?c. If there are 500 machine hours available per week (instead of only 420 machine hours

per week), how many chairs of each model should Charlie’s produce to maximize profits?


106. Novelene’s Novelties manufactures Green Bay Packer cheese heads (small, medium, and large) that are sold to area retailers. Production takes 0.20, 0.25, and 0.30 machine hours to manufacture one unit of the small, medium, and large cheese heads, respectively. The company has monthly capacity of 2,500 machine hours. The following per unit data apply for the month of August:

Small Medium LargeProjected maximum sales 2,500 4,000 3,000Machine hours required 0.20 0.25 0.30

Selling price $30 $36 $42Direct materials 8 10 12Direct labor 3 3 4Variable support costs 4 5 5Fixed support costs 2 2 2

a. For each size, compute the contribution per unit.b. For each size, compute the contribution per machine hour.c. How many units of each size should Novelene’s produce this month to maximize

profits?d. Suppose a foreign firm places a special order for the purchase of an additional 1,000

medium cheese heads at $50 each.1. Determine the opportunity cost for this order.2. What other issues might Novelene want to consider before accepting this

special order?e. Suppose available machine hour capacity is reduced to 2000 machine hours due to

machine breakdown. How many units of each size should Novelene’s produce to maximize profits?

107. Backwoods Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $80 per table, consisting of 70% flexible costs and 30% fixed costs. The company has surplus capacity available. It is Backwoods’ policy to add a 50% markup to full costs.

a. Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Backwoods should bid on this one-time special order?

b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Backwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Backwoods should bid on this long-term order?


108. Molar Camera is considering eliminating Model AE1 from its camera line because of losses over the past quarter. The past three months of information for model AE1 is summarized below.

Sales (1,000 units) $250,000Manufacturing costs:

Direct materials 140,000Direct labor ($15 per hour) 30,000Support 100,000

Operating loss ($20,000 )

Support costs are 70% flexible and the remaining 30% is depreciation of special equipment for model AE1 that has no resale value.

Should Molar Camera eliminate Model AE1 from its product line? Why or why not?

109. Central Plains Lighting manufactures small flashlights and is considering raising the price by 20 cents a unit for the coming year. With a 20-cent price increase, demand is expected to fall by 3,000 units.

Currently ProjectedDemand 20,000 units 17,000 unitsSelling price $4.80 $5.00Incremental cost per unit $3.00 $3.00

a. If the price increase is implemented, how will this change operating profit?b. Would you recommend the 20-cent price increase? Why or why not? c. Is the demand for this product elastic or inelastic? How can you tell?


110. The management accountant for the Chocolate S’more Company has prepared the following income statement for the most current year.

Chocolate Other Candy Fudge TotalSales $40,000 $25,000 $35,000 $100,000Cost of goods sold 26,000 15,000 19,000 60,000Contribution margin 14,000 10,000 16,000 40,000Delivery and ordering costs 2,000 3,000 2,000 7,000Rent (per sq. foot used) 3,000 3,000 2,000 8,000Allocated corporate costs 5,000 5,000 5,000 15,000Corporate profit $4,000 $(1,000) $7,000 $10,000

a. Do you recommend discontinuing the Other Candy product line? Why or why not?b. If the Chocolate product line had been discontinued, corporate profits for the current

year would have decreased by what amount?

111. Freeman Company has a demand function given by Q = 600 – (2 x P)and a cost function given by C = $8,000 + ($30 x Q)where P is the price, and Q is the quantity produced and sold.

Determine the optimal price, the corresponding demand quantity, and unit product cost.


CRITICAL THINKING/ESSAY

112. What considerations other than cost need to be evaluated for one-time special orders?

113. An activity-based costing system allocates fixed manufacturing costs to various product lines. When should these allocated costs be used to evaluate short-term pricing decisions?

114. For short-term pricing decisions, what costs are relevant when there is available surplus capacity? When there is no available surplus capacity?

115. When there is inadequate capacity, under what conditions may a firm consider accepting a one-time special order?

116. Under what conditions might a manufacturing firm sell a product for less than its long-term price? Why?

117. Why is the evaluation of short-term pricing decisions different from the evaluation of long-term pricing decisions?

118. Under what conditions will a firm become a price-setter? A price-taker?

119. Vlasic has a large market share of the pickle industry. What influences how Vlasic determines its prices?

120. Clark Manufacturing offers two product lines IN2 and EL5. The demand of the IN2 product line is inelastic, while the demand of the EL5 product line is very elastic. If Clark initiates a price increase for both product lines, how will customer demand change? How will the price increase affect operating profits?

121. What factors may influence the level of markups?

122. When is full-cost information useful for pricing decisions?

123. Explain how price markups relate to the strength of demand, the elasticity of demand, and the intensity of competition.

124. Vlasic has a large market share of the pickle industry. Dean Foods holds a much smaller share of the pickle market. What influences how Dean Foods determines its prices?

125. Vlasic has a large market share of the pickle industry. Dean Foods holds a much smaller share of the pickle market. What are the possible consequences if Dean Foods raises the price of their pickles? Lowers the price of their pickles?

126. Is a company that competes in commodities such as corn and wheat a price-taker or a price-setter? Why?

127. A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices be adjusted during peak periods? During slow times?

128. What options may be considered when long-run market prices are below full costs?


CHAPTER 6 SOLUTIONSCOST INFORMATION for PRICING and PRODUCT PLANNING

TRUE/FALSE

LO1 1. bLO1 2. aLO1 3. aLO1 4. aLO1 5. a

LO1 6. aLO1 7. aLO1 8. aLO1,3 9. aLO1,4 10. b

LO2 11. bLO2 12. aLO2 13. bLO2 14. bLO2 15. a

LO2 16. aLO2,3 17. bLO2,3 18. bLO3 19. bLO3 20. b

LO3 21. aLO3 22. bLO3 23. aLO3 24. aLO3 25. a

LO3 26. aLO4 27. aLO4 28. bLO4 29. aLO4 30. b

MULTIPLE CHOICE

LO1 31. dLO1 32. cLO1 33. aLO1 34. dLO1 35. d

LO1 36. bLO1 37. dLO1 38. aLO1 39. bLO1 40. c

LO1 41. aLO1 42. aLO1 43. aLO1 44. bLO1 45. a

LO1 46. dLO1 47. bLO1 48. cLO1 49. bLO1 50. c

LO1 51. bLO1 52. aLO1 53. dLO1,2,3 54. aLO1,2,3 55. b

LO1,2,3 56. cLO1,2,3 57. aLO1,2 58. cLO2 59. aLO2 60. d

LO2 61. dLO2 62. bLO2 63. aLO2 64. cLO2 65 b

LO2 66. aLO2 67 bLO2 68. aLO2 69. cLO2 70. d

LO2 71. aLO2 72. cLO3 73. aLO3 74. cLO3 75. b

LO3 76. dLO1,3 77. bLO1,3 78. dLO1,3 79. aLO1,3 80. d

LO3 81. aLO3 82. dLO3 83. cLO3,4 84. bLO4 85. a

LO4 86. dLO4 87. dLO4 88. aLO4 89. dLO4 90. b

LO4 91. cLO4 92. aLO4 93. cLO4 94. bLO4 95. d

LO4 96. aLO4 97. bLO4 98. aLO4 99. bLO4 100. c

LO4 101. b


MULTIPLE CHOICE

49. $40 + $20 + $50 + $60 = $17050. $255 - $40 - $20 - $50 = $14552. $40 + $20 + $50 = $11053. Any price equal to or greater than $11054. $455 + $300 + $45 = $80065. CM per unit of Y = $60 - $6 - $12- $8 = $3466. CM per mh of X = $50 - $6 - $12- $4 = $28/1 machine hour = $28 per machine hour67. Model Y, because it has the greatest CM per unit68. Model X, because it has the greatest CM per machine hour

70. Standard CM $18/3 mh = $6 CM per mh; Premium CM $20/4 mh = $5 CM per mh71. To maximize CM per mh, the constrained resource, manufacture the demand of 100

standard rockers and use the remaining machine hours to manufacture the Premium Model with the lower CM per machine hour. 100 Standard Rockers x 3 mh per rocker = 300 mh. 496 mh – 300 mh = 196 remaining mh / 4 mh per Premium Model = 49 Premium Rockers

72. Manufacture units demanded of each rocker, which will leave excess capacity of 20 machine hours. (100 x 3 mh = 300 mh) + (70 x 4 mh = 280 mh) + (Excess capacity 0f 20 mh) = 600mh

77. $90 x .80 = $72 x 100 = $7,20078. $90 x 1.50% = $135

79. Direct materials $50.000Direct manufacturing labor ($6 x 10,000) / 30,000 2.000Variable manufacturing ($161,250 / 30,000) 5.375Setup ($20,000 / 2,000) 10.000

Minimum acceptable bid $67.375

80. Direct materials $ 50.000Direct manufacturing labor ($6 x 10,000)/30,000 2.000Variable manufacturing ($161,250/30,000) 5.375Fixed manufacturing ($600,000/30,000) 20.000Product and process design costs ($450,000/30,000) 15.000Marketing and distribution ($562,500/30,000) 18.750

Full cost per unit $111.125Markup (20%) 22.225Estimated selling price $133.350

81. With the price increase, operating profits are expected to increase by $4,000 = [17,000 units x ($5.00 - $3.00)] - [20,000 units x ($4.50 - $3.00)]

99. $300,000 - $150,000 - $60,000 - $70,000 = $20,000 loss in operating income100. $24,000 - $15,000 - $6,000 = $3,000. Product C contributes $3,000 toward corporate

profits. Without Product C, operating income would be $3,000 less than currently reported.

101. $(3,000) + $12,000 = $9,000


EXERCISE/PROBLEM

LO1102. a. $124

b. $114 = Selling price $186 – Variable costs ($33 + $15 + $24).c. Relevant costs for decision making are those costs that differ between alternatives

which, in this situation, are the incremental costs. The incremental costs total $72 = Variable costs ($33 + $15 + $24).

d. The minimum acceptable price is $72 = Variable costs ($33 + $15 + $24), the incremental costs in the short term.

e. Yes, because this price is greater than the minimum acceptable price of this special order determined in (d).

LO1,2,3103. a. $285 = flexible costs $100 + $125 + $60

b. Silver Lake Cabinets should also consider the impact on current customers when these customers hear that another customer was offered a discounted price, and the impact on the competition and if they might choose to meet the discounted price.

c. Currently, the incremental costs total $285. If additional capacity is needed to process this order, these incremental costs will increase by the cost of adding capacity.

d. In the long term, Silver Lake Cabinets needs to cover all costs plus profits and, on average, needs to achieve the targeted selling price of $576.

LO1,2104. a. The contribution per unit is $30 for Model X ($80 - $30 - $15 - $5),

$35 for Model Y ($90 - $30 - $15 - $10),and $40 for Model Z ($100 - $30 - $20 - $10).

b. The contribution per machine hour is$30 for Model X ($30 contribution margin / 1.0 machine hours per unit),$17.50 for Model Y ($35 / 2.0), and$20 for Model Z ($40 / 2.0).

c. When there is excess capacity, Model Y is the most profitable because it has the greatest contribution per unit.

d. When there are machine hour capacity constraints, Model X is the most profitable because it has the greatest contribution per constrained resource.

e. To encourage salespersons to promote specific products, Maggie may want to provide marketing incentives such as higher sales commissions for products contributing the most to profits. Maggie may also want to educate salespeople about the effects of constrained resources.


LO1,2105. a. Contribution per machine hour is $6 for the Standard chair and $5 for the Premium

chair.b. To maximize profits, 240 machine hours should be used to manufacture 120 units of

the Standard chair and 180 machine hours should be used to manufacture 60 units of the Premium chair. (240 mh + 180 mh = 420 mh available per week.)

c. If there are 500 machine hours available per week there is excess capacity of 50 machine hours. Demand for both types of chairs can be met and Charlie’s Chairs should manufacture 120 Standard chairs and 70 Premium chairs per week. (240 mh + 210 mh = 450 mh used per week.)

LO1,2106. a. The contribution per unit is

$15 for Small ($30 - $8 - $3 - $4),$18 for Medium ($36 - $10 - $3 - $5), and $21 for Large ($42 - $12 - $4 - $5).

b. The contribution per machine hour is$75 for Small ($15 contribution margin / 0.20 machine hours per unit),$72 for Medium ($18 / 0.25) and $70 for Large ($21 / 0.30).

c. Machine hours required: Small (2,500 x 0.20) = 500 mhMedium (4,000 x 0.25) = 1,000 mhLarge (3,000 x 0.30) = 900 mh Total machine hours required 2,400 mh

Since total machine hours required are less than the capacity of 2,500 machine hours, to maximize profits Novelene’s should produce enough to meet projected sales for each size. That is, Novelene’s should produce 2,500 small, 4,000 medium, and 3,000 large cheese heads.

d. 1. Contribution margin for the special order:Unit selling price $ 50Unit variable costs ($10 + $3 + $5) 18Contribution margin per unit $ 32

Machine hours available: 2,500Machine hours required:

Special order (1,000 units x 0.25) 250Current demand 2,400

(2,650 ) Machine hour shortage (150 )


Since the large size has the lowest contribution margin per machine hour, 500 (500 units x .3 mh/unit = 150 mh) units of the large size would not be produced if the special order was accepted. Therefore, the opportunity cost for the special order would be $10,500 ($21 contribution per unit x 500 units), the contribution margin that would be sacrificed when the production and sale of 500 units of large size cheese heads would be given up.

2. Novelene will want to consider the impact of this special order on her regular customers now and in the future. For example, will manufacturing fewer large cheese heads result in shortages and, therefore, angry customers?

e. Available machine hours 2,000Machine hours required:

Small (2500 x 0.20) = 500Medium (4000 x 0.25) = 1,000

Machine hours remaining 500Number of the large size that can be produced is 1,666 units = (500 mh / 0.30 per unit)

The optimal production plan is as follows:Small size 2500 units, Medium size 4000 units, Large size 1,666 units.

LO1,3107. a. The lowest price Backwoods should bid on the 100 table one-time special order is

$5,600 = Variable costs ($80 x .70 x 100 tables), the short-term incremental costs.

b. The lowest price Backwoods should bid on the long-term hotel chain order is $120 per table = Full costs $80 + 50% markup, the long-term targeted price.

LO1,3108. No, Molar Camera should not eliminate Model AE1 from its product line because it

contributes $10,000 toward fixed costs and profits, as shown:

Sales (1,000 units) $250,000Manufacturing costs: Direct materials 140,000 Direct labor 30,000 Variable support ($100,000 x 70%) 70,000Contribution margin $10,000


LO3,4109. a. With the price increase operating profits are expected to decrease by $2,000 =

[17,000 units x ($5.00 - $3.00)] - [20,000 units x ($4.80 - $3.00)].b. No, I would not recommend the price increase because operating profits are expected

to decline by $2,000.c. The demand is elastic because the demand in units decreased with an increase in

price.

LO4110. a. No, I would not recommend discontinuing the Other Candy product line because this

product line contributes $4,000 toward corporate costs and profits.$25,000 - $15,000 - $3,000 - $3,000 = $4,000Without the Other Candy product line, corporate profits would be $4,000 less than currently reported.

b. If the Chocolate product line were discontinued, corporate profits would immediately decrease by $9,000.$40,000 - $26,000 - $2,000 - $3,000 = $9,000

APPENDIX111. Total revenue = R = P x Q

= P x (600 - 2P)= 600P - 2P2

Total cost = C = $8,000 + $30Q= $8,000 + $30 * (600 - 2P)= $8,000 + 18,000 - 60P= 26,000 - 60P

Total profit = R - C = 660P - 2P2 – 26,000

OPTIMAL PRICEDifferentiating total profit with respect to P and setting it equal to zero, we obtain the optimal price. P = (660/4) = $165.

CORRESPONDING DEMAND QUANTITYSubstituting P into the demand function, we obtainQ = 600 – (2 x 165) = 270 units.

UNIT PRODUCTION COSTThe corresponding cost isC = $ 8,000 + ($30 x 270) = $16,100.The unit cost is C/Q = $16,100/270 = $59.63.


CRITICAL THINKING/ESSAY

LO1112. What considerations other than cost need to be evaluated for one-time special orders?

Solution: Firms also need to consider the strategic implications such as the impact on current customers when these customers hear that another customer was offered a discounted price, and the impact on the competition and if they might choose to meet the discounted price.

LO1113. An activity-based costing system allocates fixed manufacturing costs to various product

lines. When should these allocated costs be used to evaluate short-term pricing decisions? Solution: Allocated costs should only be used to evaluate short-term pricing decisions if they are variable in the short run and differ among the alternatives being considered.

LO1,2114. For short-term pricing decisions, what costs are relevant when there is available surplus

capacity? When there is no available surplus capacity?Solution: For both situations the relevant costs are the incremental costs. However, when there is limited capacity the incremental costs will be greater because they will include the costs of adding capacity or the opportunity costs of alternative manufacturing choices.

LO2115. When there is inadequate capacity, under what conditions may a firm consider accepting a

one-time special order?Solution: When the incremental revenues exceed the incremental costs, a special order should be considered.

LO1,3116. Under what conditions might a manufacturing firm sell a product for less than its long-

term price? Why?Solution: The price for a short-term order may be less than the price offered to a long-term customer. If a firm has excess capacity, it is more profitable for the firm to accept a special order for a price below the long-run price than it is to let the capacity sit idle. In addition, the firm may use this strategy for market penetration and to obtain greater market share.

LO1,3117. Why is the evaluation of short-term pricing decisions different from the evaluation of long-

term pricing decisions?Solution: Since capacities made available for many production and support activities cannot be altered easily in the short run, managers need to pay attention to whether surplus capacity is available for additional production or whether the available capacity limits production alternatives. By contrast, in the long run, managers have considerably more flexibility in adjusting the capacities of activity resources to match the demand that is placed on these resources by the actual production of different products.


LO2,3118. Under what conditions will a firm become a price-setter? A price-taker?

Solution: A firm will be a price-setter when it is in an industry with relatively little competition, it holds a large share of the market, and it can exercise leadership. A firm will be a price-taker when it is one of a large number of firms in an industry, it holds a small market share in an industry with a price-setter firm, or it competes in an industry where there is little to distinguish products from each other.

LO3119. Vlasic has a large market share of the pickle industry. What influences how Vlasic

determines its prices?Solution: Since Vlasic holds a large share of the market, it can set the prices for the pickle industry based on customer price acceptance.

LO3120. Clark Manufacturing offers two product lines IN2 and EL5. The demand of the IN2

product line is inelastic, while the demand of the EL5 product line is very elastic. If Clark initiates a price increase for both product lines, how will customer demand change? How will the price increase affect operating profits?Solution: For the inelastic product line, when prices are increased demand will stay approximately the same and profits would be expected to increase.For the elastic product line, the increased price will result in decreased demand (i.e., lower sales volume). Whether a profit or a loss results from this change will depend on the amount of decreased demand and the amount of the increased contribution margin due to the increase in price.

LO3121. What factors may influence the level of markups?

Solution: Factors affecting the level of markups include the strength of demand, the elasticity of demand, and the intensity of competition. In addition, strategic reasons also may influence the level of markups. For instance, a firm may either choose a low markup to penetrate the market and win market share from established products of its competitors, or employ a high markup if it employs a skimming strategy for a market segment in which some customers are willing to pay higher prices for the privilege of owning the product.

LO3122. When is full-cost information useful for pricing decisions?

Solution: Full costs are used for pricing decisions under the following circumstances:1) Contracts for the development and production of new customized products, including contracts with governmental agencies, specify prices as full costs plus a markup;2) Prices set in regulated industries like electric utilities also are based on full costs;3) When a firm enters into a long-term contractual relationship with a customer to supply a product, it will price the product based on its full costs, because with the flexibility it has in adjusting the level of commitment for all activity resources, most costs become variable in the long run; and4) Prices based on full costs are used as benchmark prices to guide short-run price adjustments in response to fluctuations in short-run demand conditions.


LO3123. Explain how price markups relate to the strength of demand, the elasticity of demand, and

the intensity of competition.Solution: The stronger the demand, the higher the markup will be. When demand is more elastic, markup will be lower because customers are sensitive to higher prices. Finally, when competition is more intense, a firm cannot sustain a high markup.

LO4124. Vlasic has a large market share of the pickle industry. Dean Foods holds a much smaller

share of the pickle market. What influences how Dean Foods determines its prices?Solution: Firms with smaller market share like Dean Foods will set prices similar to Vlasic, the price setter for the pickle market.

LO4125. Vlasic has a large market share of the pickle industry. Dean Foods holds a much smaller

share of the pickle market. What are the possible consequences if Dean Foods raises the price of their pickles? Lowers the price of their pickles?Solution: If Dean Foods raise their pickle prices they would lose market share because customers will simply purchase a competitor’s pickles at the lower price.If Dean Foods lowers their pickle prices, Vlasic would probably respond by also lowering prices. This could lead to a price war and decreased profits for everyone in the industry. In this situation, smaller firms are usually the losers because they cannot sustain losses over an extended period of time and as a result may be forced out of business.

LO4126. Is a company that competes in commodities such as corn and wheat a price-taker or a

price-setter? Why?Solution: A price-taker. In industries where it is difficult to differentiate one firm’s products from another firm’s products, prices are influenced by the supply and demand of the market, and all firms are price-takers.

LO4127. A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices

be adjusted during peak periods? During slow times?Solution: During peak periods the hotel can justify increased prices because of full capacity conditions, whereas in slower periods when there is excess capacity, the hotel may want to lower prices to fill the excess capacity.

LO4128. What options may be considered when long-run market prices are below full costs?

Solution: If long-run market prices are lower than full costs, managers may consider re-engineering the product to lower costs, raising prices by further differentiating the product, or dropping these unprofitable products.


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