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We note that the first five items are volume-driven (i.e., unit level) costs, items 6-8 are batch-level costs, and the final two items are product-level costs.b. Carolyn must consider the following costs in her pricing decision.Cost of paper$0.02 per sheet × 120 sheets per packet × 10 packets$24.00Copy machine supplies 240 copies × $0.01 per copy × 10 packets$24.00Copyright fees$2 per article × 7 articles × 10 packets$140.00Machine cost240 copies × 10 packets × $0.01 per copy$24.00Student’s time – printing40 minutes × $8 per hour*$5.33Student’s time – delivery½ hour × $8 per hour $4.00Set up machine½ hour × $13.75 per hour**$6.875Total cost$228.205Cost per packet$22.82The cost per packet has not changed much in spite of the batch level cost associated with delivery and assembling the master. However, the product level cost (obtain Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY10-32
copyrights) no longer applies to this incremental order. In addition, note that we did not include the time required to assemble the master. Anticipating such extra runs, most print shops will retain the master copy for some time (typically a semester for college copy centers) after the initial order, making this cost also a product-level cost. However, Carolyn might wish to charge a premium price to reflect the rush nature of the business. c.The head of the Management & Organizations Department (a department that has many classes with large course packs) believes that the pricing scheme should only include the cost of papers and other consumables. He argues that the cost of the machine, Carolyn’s salary and other such expenses are fixed costs and therefore not relevant for the pricing decision. He further argues that this is a short-term decision because each course-pack is valid only for one semester. Evaluate the merits of this argument.The Chairman’s argument is flawed. Every course pack consumes the capacity available in the copy center. The allocations serve to approximate the opportunity costs of these capacity resources. While it is true that capacity costs are fixed in the short run, the decision is not a short-run decision. The number and variety of copies made will determine the staffing in the copy center as well as the frequency of machine replacement. Thus, Carolyn must consider these costs when developing prices.10. 71a.First, let us calculate the total number of visits. We have:500 individuals × 1 person / membership × 8 visits per person = 4,000 visits200 families × 2 persons/membership × 2 visits per person = 800 visits.Thus, we have 4,800 visits in total.We therefore allocate:(4,000/4,800) × $69,112 = $57,593.33 to individual members (800/4,800) × $69,112 = $11,518.67 to family memberships.With this, we have:IndividualsFamilyTotalRevenue$50,000 $32,000$82,000Costs (from above)$57,593 $11,519$69,112Profit($7,593)$20,481$12,888Profit per membership($15.19)$102.41Profit per person($15.19)$51.20 Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY10-33
The above analysis indicates that clearly, Tom is on the right track – they are actually losing money on their individual memberships.