costacctg13_sm_ch12 - CHAPTER 12 PRICING DECISIONS AND COST...

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Unformatted text preview: CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT 12-1 12-16 (2030 min.) Relevant-cost approach to pricing decisions, special order. 1. Relevant revenues, $4.00 1,000 $4,000 Relevant costs Direct materials, $1.60 1,000 $1,600 Direct manufacturing labor, $0.90 1,000 900 Variable manufacturing overhead, $0.70 1,000 700 Variable selling costs, 0.05 $4,000 200 Total relevant costs 3,400 Increase in operating income $ 600 This calculation assumes that: a.The monthly fixed manufacturing overhead of $150,000 and $65,000 of monthly fixed marketing costs will be unchanged by acceptance of the 1,000 unit order. b. The price charged and the volumes sold to other customers are not affected by the special order. Chapter 12 uses the phrase one-time-only special order to describe this special case. 2. The presidents reasoning is defective on at least two counts: a.The inclusion of irrelevant costsassuming the monthly fixed manufacturing overhead of $150,000 will be unchanged; it is irrelevant to the decision. b. The exclusion of relevant costsvariable selling costs (5% of the selling price) are excluded. 3. Key issues are: a.Will the existing customer base demand price reductions? If this 1,000-tape order is not independent of other sales, cutting the price from $5.00 to $4.00 can have a large negative effect on total revenues. b. Is the 1,000-tape order a one-time-only order, or is there the possibility of sales in subsequent months? The fact that the customer is not in Dill Companys normal marketing channels does not necessarily mean it is a one-time-only order. Indeed, the sale could well open a new marketing channel. Dill Company should be reluctant to consider only short-run variable costs for pricing long-run business. 12-2 12-17 (2030 min.) Relevant-cost approach to short-run pricing decisions. 1. Analysis of special order: Sales, 3,000 units $75 $225,000 Variable costs: Direct materials, 3,000 units $35 $105,000 Direct manufacturing labor, 3,000 units $10 30,000 Variable manufacturing overhead, 3,000 units $6 18,000 Other variable costs, 3,000 units $5 15,000 Sales commission 8,000 Total variable costs 176,000 Contribution margin $ 49,000 Note that the variable costs, except for commissions, are affected by production volume, not sales dollars. If the special order is accepted, operating income would be $1,000,000 + $49,000 = $1,049,000. 2. Whether McMahons decision to quote full price is correct depends on many factors. He is incorrect if the capacity would otherwise be idle and if his objective is to increase operating income in the short run. If the offer is rejected, San Carlos, in effect, is willing to invest $49,000 in immediate gains forgone (an opportunity cost) to preserve the long-run selling-price structure....
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costacctg13_sm_ch12 - CHAPTER 12 PRICING DECISIONS AND COST...

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