CHAPTER 13 PRICING DECISIONS AND COST MANAGEMENT 13 16 Which of the following statements regarding price elasticity is incorrect? a A product with a perfectly inelastic demand would have the same dema[.]
CHAPTER 13 PRICING DECISIONS AND COST MANAGEMENT 13-16 Which of the following statements regarding price elasticity is incorrect? a A product with a perfectly inelastic demand would have the same demand even as prices change b A product with a perfectly inelastic demand would see demand change as prices change c When demand is price elastic, lower prices stimulate demand d When demand is price elastic, higher prices reduce demand 13-17 Value-added, non-value-added costs The Magill Repair Shop repairs and services machine tools A summary of its costs (by activity) for 2017 is as follows: a Materials and labor for servicing machine tools $1,100,000 b Rework costs 90,000 c Expediting costs caused by work delays 65,000 d Materials-handling costs 80,000 e Materials-procurement and inspection costs 45,000 f Preventive maintenance of equipment 55,000 g Breakdown maintenance of equipment 75,000 Required: Classify each cost as value-added, non-value-added, or in the gray area between For any cost classified in the gray area, assume 60% is value-added and 40% is non-value-added How much of the total of all seven costs is value-added and how much is non-value-added? Magill is considering the following changes: (a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by 40% and materials and labor costs for servicing machine tools by 5%; (b) working with suppliers to reduce materials-procurement and inspection costs by 20% and materials-handling costs by 30%; and (c) increasing preventive-maintenance costs by 70% to reduce breakdown-maintenance costs by 50% Calculate the effect of programs (a), (b), and (c) on value-added costs, non-value-added costs, and total costs Comment briefly 13-18 Target operating income, value-added costs, service company Calvert Associates prepares architectural drawings to conform to local structural-safety codes Its income statement for 2017 is as follows: The percentage of time spent by professional staff on various activities follows: Assume administrative and support costs vary with professional-labor costs Consider each requirement independently Required: How much of the total costs in 2017 are value-added, non-value-added, or in the gray area between? Explain your answers briefly What actions can Calvert take to reduce its costs? What are the consequences of misclassifying a non-value-added cost as a value-added cost? When in doubt, would you classify a cost as a value-added or non-value-added cost? Explain briefly Suppose Calvert could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional-labor costs Calculate Calvert’s operating income for 2017 Now suppose Calvert could take on as much business as it could complete, but it could not add more professional staff Assume Calvert could eliminate all errors so that it does not need to spend any time correcting errors Assume Calvert could use the time saved to increase revenues proportionately Assume travel costs will remain at $15,000 Calculate Calvert’s operating income for 2017 13-19 Target prices, target costs, activity-based costing Snappy Tiles is a small distributor of marble tiles Snappy identifies its three major activities and cost pools as ordering, receiving and storage, and shipping, and it reports the following details for 2016: For 2016, Snappy buys 250,000 marble tiles at an average cost of $3 per tile and sells them to retailers at an average price of $4 per tile Assume Snappy has no fixed costs and no inventories Required: Calculate Snappy’s operating income for 2016 For 2017, retailers are demanding a 5% discount off the 2016 price Snappy’s suppliers are only willing to give a 4% discount Snappy expects to sell the same quantity of marble tiles in 2017 as in 2016 If all other costs and cost-driver information remain the same, calculate Snappy’s operating income for 2017 Suppose further that Snappy decides to make changes in its ordering and receiving-and-storing practices By placing long-run orders with its key suppliers, Snappy expects to reduce the number of orders to 200 and the cost per order to $25 per order By redesigning the layout of the warehouse and reconfiguring the crates in which the marble tiles are moved, Snappy expects to reduce the number of loads moved to 3,125 and the cost per load moved to $28 Will Snappy achieve its target operating income of $0.30 per tile in 2017? Show your calculations 13-20 Target costs, effect of product-design changes on product costs Neuro Instruments uses a manufacturing costing system with one direct-cost category (direct materials) and three indirect-cost categories: a Setup, production-order, and materials-handling costs that vary with the number of batches b Manufacturing-operations costs that vary with machine-hours c Costs of engineering changes that vary with the number of engineering changes made In response to competitive pressures at the end of 2016, Neuro Instruments used value-engineering techniques to reduce manufacturing costs Actual information for 2016 and 2017 is as follows: The management of Neuro Instruments wants to evaluate whether value engineering has succeeded in reducing the target manufacturing cost per unit of one of its products, HJ6, by 5% Actual results for 2016 and 2017 for HJ6 are: Required: Calculate the manufacturing cost per unit of HJ6 in 2016 Calculate the manufacturing cost per unit of HJ6 in 2017 Did Neuro Instruments achieve the target manufacturing cost per unit for HJ6 in 2017? Explain Explain how Neuro Instruments reduced the manufacturing cost per unit of HJ6 in 2017 What challenges might managers at Neuro Instruments encounter in achieving the target cost? How might they overcome these challenges? 13-21 Target costs, effect of process-design changes on service costs Solar Energy Systems (SES) sells solar heating systems in residential areas of eastern Pennsylvania A successful sale results in the homeowner purchasing a solar heating system and obtaining rebates, tax credits, and financing for which SES completes all the paperwork The company has identified three major activities that drive the cost of selling heating systems: identifying new contacts (varies with the number of new contacts); traveling to and between appointments (varies with the number of miles driven); and preparing and filing rebates and tax forms (varies with the number of solar systems sold) Actual costs for each of these activities in 2016 and 2017 are: After experiencing high costs in 2016, SES used value engineering to reduce the cost of selling solar heating systems Managers at SES want to evaluate whether value engineering has succeeded in reducing the selling cost per sale by the targeted 8% in 2017 Actual results for 2016 and 2017 for SES are: Required: Calculate the cost per sale in 2016 Calculate the cost per sale in 2017 Did SES achieve the target cost per sale in 2017? Explain What challenges might managers at SES encounter in achieving the target cost and how might they overcome these challenges? 13-22 Cost-plus target return on investment pricing Jason Brady is the managing partner of a business that has just finished building a 60-room motel Brady anticipates that he will rent these rooms for 15,000 nights next year (or 15,000 room-nights) All rooms are similar and will rent for the same price Brady estimates the following operating costs for next year: The capital invested in the motel is $1,500,000 The partnership’s target return on investment is 20% Brady expects demand for rooms to be uniform throughout the year He plans to price the rooms at full cost plus a markup on full cost to earn the target return on investment Required: What price should Brady charge for a room-night? What is the markup as a percentage of the full cost of a room-night? Brady’s market research indicates that if the price of a room-night determined in requirement is reduced by 10%, the expected number of room-nights Brady could rent would increase by 10% Should Brady reduce prices by 10%? Show your calculations 13-23 Cost-plus, target pricing, working backward KidsPlay, Inc., manufactures and sells table sets In 2016, it reported the following: Units produced and sold Investment 3,000 $3,000,000 Markup percentage on full cost 10% Rate of return on investment 15% Variable cost per unit $600 Required: What was KidsPlay’s operating income in 2016? What was the full cost per unit? What was the selling price? What was the percentage markup on variable cost to achieve the selling price? What are the total fixed costs? KidsPlay is considering increasing the annual spending on advertising by $200,000 The managers believe that the investment will translate into a 10% increase in unit sales Should the company make the investment? Show your calculations Refer back to the original data In 2017, KidsPlay believes that it will be able to sell only 2,700 units at the price calculated in requirement Management has identified $185,000 in fixed cost that can be eliminated If KidsPlay wants to maintain a 10% markup on full cost, what is the target variable cost per unit? ... in requirement is reduced by 10% , the expected number of room-nights Brady could rent would increase by 10% Should Brady reduce prices by 10% ? Show your calculations 13- 23 Cost-plus, target pricing,... Will Snappy achieve its target operating income of $0.30 per tile in 2017? Show your calculations 13- 20 Target costs, effect of product-design changes on product costs Neuro Instruments uses a manufacturing... Neuro Instruments encounter in achieving the target cost? How might they overcome these challenges? 13- 21 Target costs, effect of process-design changes on service costs Solar Energy Systems (SES)