sol12 - CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT...

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CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT 12-16 (20–30 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 president’s reasoning is defective on at least two counts: a.The inclusion of irrelevant costs––assuming the monthly fixed manufacturing overhead of $150,000 will be unchanged; it is irrelevant to the decision. b. The exclusion of relevant costs––variable 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 Company’s “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. 12-1
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12-21 (25–30 min.) Target prices, target costs, activity-based costing. 1.
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sol12 - CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT...

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