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Chapter 8
Pricing Decisions, Analyzing Customer Profitability,
and ActivityBased Pricing
QUESTIONS
1.
The manager would estimate the quantity that could be sold at various prices. The
quantities would then be multiplied by the contribution margin per unit and fixed costs
would be subtracted from the total contribution margin, yielding an estimate of profit at
each price. The price that yields the highest profit is the profit maximizing price.
2.
The costplus price is based on full cost per unit. However, to determine full cost per unit,
one must first estimate the quantity that can be sold. But the quantity that can be sold
depends on the price!
3.
The target cost depends on price, and marketing staff is needed to determine product
features and price. Engineers are needed to determine efficient production methods given
the product features. And cost accountants are needed to estimate costs given the
production process. A cross functional team helps ensure good communication among
these various parties, increasing the likelihood that a product will be put into production
that can be produced for the target cost.
4.
In customer profitability analysis, indirect costs are grouped into cost pools (e.g., the cost
pool related to processing fax orders, the cost pool related to processing Internet orders, the
cost pool related to shipping, etc.). The costs are then allocated to customers using various
cost drivers (allocation bases) to determine customer profitability.
5.
With activitybased pricing, customers are charged for various services. For example, there
might be separate charges for delivery, for rush orders, and for returns. This way,
customers that impose high costs on a supplier will pay for the services they demand.
6.
The target costing process starts with specifying the desired features and price for a
product. The next step is to determine the desired profit. The desired profit is subtracted
from the anticipated price to arrive at the target cost. Finally, the product is designed to
meet the target cost. If excess capacity exists, the lowest specialorder price should be the
variable cost.
7.
The quantity of products demanded at various prices should be estimated at each price
level. The variable costs should be subtracted from the price to obtain the contribution
margin. The contribution margin should then be multiplied by the quantity demanded.
The
fixed costs are then subtracted from the total contribution margin; profit can then be
estimated.
The profitmaximizing price is difficult in real life because the demand for a product at
various price levels is not usually known.
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Managerial Accounting
8.
A special order is an order that is sold for less than full price. If a company is operating at
full capacity, the opportunity cost from the lost sales if the special order is undertaken must
be considered. If excess capacity exists, no existing sales will be lost and do not, therefore,
need to be considered.
9.
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 Spring '10
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 Managerial Accounting, Pricing

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