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Week 5 ex 3 - 12-17(2030 min Relevant-cost approach to...

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12-17 (20–30 min.) Relevant-cost approach to short-run pricing decisions. 1. Analysis of special order: Sales, 3,000 units × $80 $240,000 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 × $5 15,000 Other variable costs, 3,000 units × $5 15,000 Sales commission 6,000 Total variable costs 171,000 Contribution margin $ 69,000 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 + $69,000 = $1,069,000. 2. Whether McMahon’s 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 $69,000 in immediate gains forgone (an opportunity cost) to preserve the long-run selling- price structure. McMahon is correct if he thinks future competition or future price concessions to customers will hurt San Carlos’s operating income by more than $69,000. There is also the possibility that Abrams could become a long-term customer. In this case, is a price that covers only short-run variable costs adequate? Would Holtz be willing to accept a $6,000 sales commission (as distinguished from her regular $36,000 = 15% × $240,000) for every Abrams order of this size if Abrams becomes a long-term customer? 12-25 (25 min.) Life-cycle product costing, activity-based costing. 1. The budgeted life-cycle operating income for the new watch MX3 is $2,420,000, as shown below. Life-Cycle Revenues And Costs Revenues, $40 × 400,000 $16,000,000 R&D and design costs 1,000,000 Manufacturing costs: Variable, $15 × 400,000 6,000,000 Batch, $600 × 800 1 batches 480,000 Fixed 1,800,000 Marketing costs: Variable, $3.20 × 400,000 1,280,000 Fixed 1,000,000 Distribution costs:
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Batch, $280 × 2,500 2 batches 700,000 Fixed 720,000 Customer-service costs: Variable, $1.50 × 400,000 600,000 Total costs 13,580,000 Operating income $ 2,420,000 1 400,000 watches ÷
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