Chapter 25: Q25-15RQ (page 1406)
When should special pricing orders be accepted?
Answer
Special pricing orders should be accepted when theunit sales price is higher than thevariable costper unit of the related product.
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Refer to Exercise E25-13. Assume that Video Avenue can avoid $39,000 of direct fixed costs by dropping the DVD product line. Prepare a differential analysis to show whether Video Avenue should stop selling DVDs.
Mary Tan is the controller for Duck Associates, a property management company in Portland, Oregon. Each year, Tan and payroll clerk Toby Stock meet with the external auditors about payroll accounting. This year, the auditors suggest that Tan consider outsourcing Duck Associates’s payroll accounting to a company specializing in payroll processing services. This would allow Tan and her staff to focus on their primary responsibility: accounting for the properties under management. At present, payroll requires 1.5 employee positions—payroll clerk Toby Stock and a bookkeeper who spends half her time entering payroll data in the system.
Tan considers this suggestion, and she lists the following items relating to outsourcing payroll accounting:
The current payroll software that was purchased for \(4,000 three years ago would not be needed if payroll processing were outsourced.
Duck Associates’ bookkeeper would spend half her time preparing the weekly payroll input form that is given to the payroll processing service. She is paid \)450 per week.
Duck Associates would no longer need payroll clerk Toby Stock, whose annual salary is \(42,000.
The payroll processing service would charge \)2,000 per month.
Requirements
1. Would outsourcing the payroll function increase or decrease Duck Associates’ operating income?
2. Tan believes that outsourcing payroll would simplify her job, but she does not like the prospect of having to lay off Stock, who has become a close personal friend. She does not believe there is another position available for Stock at his current salary. Can you think of other factors that might support keeping Stock, rather than outsourcing payroll processing? How should each of the factors affect Tan’s decision if she wants to do what is best for Duck Associates and act ethically?
Johnson Builders builds 1,500-square-foot starter tract homes in the fast-growing suburbs of Atlanta. Land and labor are cheap, and competition among developers is fierce. The homes are a standard model, with any upgrades added by the buyer after the sale. Johnson Builders’s costs per developed sublot are as follows:
Land \(50,000
Construction 123,000
Landscaping 9,000
Variable selling costs 8,000
Johnson Builders would like to earn a profit of 14% of the variable cost of each home sold. Similar homes offered by competing builders sell for \)207,000 each. Assume the company has no fixed costs.
Requirements
1. Which approach to pricing should Johnson Builders emphasize? Why?
2. Will Johnson Builders be able to achieve its target profit levels?
3. Bathrooms and kitchens are typically the most important selling features of a home. Johnson Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost \(16,000 per home but would enable Johnson Builders to increase the sales prices by \)28,000 per home.
(Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Johnson Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?
Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector-Cardz with a special order. The Hall of Fame wishes to purchase 56,000 baseball card packs for a special promotional campaign and offers \(0.38 per pack, a total of \)21,280. Collector-Cardz’s total production cost is \(0.58 per pack, as follows:
Variable costs:
Direct materials \)0.11
Direct labor 0.09
Variable overhead 0.08
Fixed overhead 0.30
Total cost \(0.58
Collector-Cardz has enough excess capacity to handle the special order.
Requirements
1. Prepare a differential analysis to determine whether Collector-Cardz should accept the special sales order.
2. Now assume that the Hall of Fame wants special hologram baseball cards. Collector-Cardz will spend \)5,700 to develop this hologram, which will be useless after the special order is completed. Should Collector-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.38 per pack?
What is the decision rule for selling a product as is or processing it further?
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