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Unformatted text preview: 12-17(2030 min.)Relevant-cost approach to short-run pricing decisions.1.Analysis of special order:Sales, 3,000 units $80$240,000Variable costs:Direct materials, 3,000 units $35$105,000Direct manufacturing labor, 3,000 units $1030,000Variable manufacturing overhead, 3,000 units $515,000Other variable costs, 3,000 units $515,000Sales commission6,000Total variable costs171,000Contribution margin$ 69,000Note 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 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 $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 Carloss 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 RevenuesAnd CostsRevenues, $40 400,000$16,000,000R&D and design costs1,000,000Manufacturing costs:Variable, $15 400,0006,000,000Batch, $600 8001batches480,000Fixed1,800,000Marketing costs:Variable, $3.20 400,0001,280,000Fixed1,000,000Distribution costs:Batch, $280 2,5002batches700,000Fixed720,000Customer-service costs:Variable, $1.50 400,000600,000Total costs13,580,000Operating income$ 2,420,0001400,000 watches 500 watches per batch = 800 batches...
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