Chapter 25: Q25-12RQ (page 1406)
What is cost-plus pricing? Who uses it?
Answer
Cost-plus pricing is an approach of setting the target selling prices of products and services, and price-setter business concerns use the same.
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Brik, located in San Antonio, Texas, produces two lines of electric toothbrushes: deluxe and standard. Because Brik can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:
Per Unit
Deluxe Toothbrush Standard Toothbrush
Sales price \(88 \)54
Variable expense 22 18
Contribution margin \(66 \)36
Contribution margin ratio 75.0% 66.7%
After expansion, the factory will have a production capacity of 4,900 machine hours per month. The plant can manufacture 65 standard electric toothbrushes or 27 deluxe electric toothbrushes per machine hour.
Requirements
1. Identify the constraining factor for Brik.
2. Prepare an analysis to show which product line the company should emphasize.
What are sunk costs? Give an example.
Elm Petroleum has spent \(204,000 to refine 61,000 gallons of petroleum distillate, which can be sold for \)6.30 per gallon. Alternatively, Elm can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost \(1.80 per gallon of distillate. The cleaner fluid can be sold for \)9.10 per gallon. To sell the cleaner fluid, Elm must pay a sales commission of \(0.10 per gallon and a transportation charge of \)0.16 per gallon.
Requirements
1. Diagram Elmโs decision alternatives, using Exhibit 25-18 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Elmโs decision?
3. Should Elm sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
Members of the board of directors of Security Team have received the following operating income data for the year ended March 31, 2018:
SECURITY CHECK Income Statement For the Year Ended May 31, 2018 |
Product Line |
Industrial Systems | Household Systems | Total |
Net Sales Revenue | \( 300,000 | \) 330,000 | \( 630,000 |
Cost of Goods Sold: | |||
Variable | 35,000 | 42,000 | 77,000 |
Fixed | 210,000 | 63,000 | 273,000 |
Total Cost of Goods Sold | 245,000 | 105,000 | 350,000 |
Gross Pro๏ฌt | 55,000 | 225,000 | 280,000 |
Selling and Administrative Expenses: | |||
Variable | 66,000 | 77,000 | 143,000 |
Fixed | 39,000 | 28,000 | 67,000 |
Total Selling and Administrative Expenses | 105,000 | 105,000 | 210,000 |
Operating Income (Loss) | \) (50,000) | \( 120,000 | \) 70,000 |
Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by \(81,000 and decrease fixed selling and administrative expenses by \)15,000.
Requirements
1. Prepare a differential analysis to show whether Security Team should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Security Teamโs total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternativesโ income numbers to your answer to Requirement 1.
3. What have you learned from this comparison in Requirement 2?
StoreAll produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the products is so high that StoreAll can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,300 hours per period. StoreAll can produce 10 large bins every hour, whereas it can produce 17 regular bins in the same amount of time. Fixed costs amount to \(115,000 per period. Sales prices and variable costs are as follows:
Regular Large
Sales price per unit \)8.00 $10.40
Variable cost per unit 3.50 4.40
Requirements
1. Which product should StoreAll emphasize? Why?
2. To maximize profits, how many of each size bin should StoreAll produce?
3. Given this product mix, what will the companyโs operating income be?
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