Problem Solutions, Ch 12--Pricing

ACCT 7310

Problem Solutions, Ch. 12--Pricing

Pr. 12-17Relevant Costing, Short-run pricing

Flat amt

Part 2addl considerations

12-33: Cost-plus and market-based prices1. Single rate = $11.91 per test-hour (TH) With 45% markup, hourly billing rate for HTT and ACT = $11.91 * 1.45 = $17.272. Individual activity [?] rates:Labor and supervision = = $4.64 per test-hourSetup and facility costs = = $503.275 per setup-hourUtilities = = $36.80 per machine-hour (MH)Pr 12-33 part 3HTTACTTotalLabor and supervision ($4.6463,600; 42,400 test-hrs)$295,104$196,736$ 491,840Setup and facility cost [25%/75%] ($503.275200; 600 setup-hrs)100,655301,965402,620Utilities ($36.805,000; 5,000 machine-hours)184,000 184,000 368,000Total cost$579,759$682,701$1,262,460Number of testing hours (TH) 63,600 TH 42,400 THCost per testing hour$9.12 per TH$ 16.10 per THMark-up 1.45 1.45Billing rate per testing hour$ 13.22 per TH$ 23.35 per THVs. $17.27 for either one106,000 hrs 60% = 63,600

Pr 12-33 part 4If competitors all charge $20/hr. for arctic testing, what can Best Test do to stay competitive?They apparently need to be more efficient in arctic testing. Roughly 44% of arctic testings total cost occurs in setups and facility costs. Can the setup activity can be redesigned to achieve cost savings? Also look for savings in the labor and supervision cost per test-hour and the total number of test-hours used in arctic testing, as well as the utility cost per machine-hour and the total number of machine hours used in arctic testing. This may require redesigning the test, redesigning processes, and achieving efficiency and productivity improvements.Pr. 12-34: Life-cycle costingTotal Project Life-Cycle CostsVariable costs: Metal extraction and processing ($100/ton 50,000 tons)$5,000,000Fixed costs: Metal extraction and processing ($4,000 24 months)96,000 Rent on temporary buildings ($2,000 27 months)54,000 Administration ($5,000 27 months)135,000 Clean-up ($30,000 3 months)90,000 Land restoration475,000 Selling land 150,000Total life-cycle cost$6,000,000Part 1Pr. 12-34 part 2Projected Life Cycle Income StatementRevenue ($150 per ton 50,000 tons)$7,500,000Sale of land (plug figure)500,000Total life-cycle cost(6,000,000)Life-cycle operating income ($40/ton 50,000 tons)$2,000,000

Mark-up percentage on project life-cycle cost = = 33 1/3 %Pr. 12-34 part 3Revenue ($140 per ton 50,000 tons)$7,000,000Sale of land [$100,000 less than in part 3] 400,000Total revenue$7,400,000Total life-cycle cost allowable given mark-up of 33%($7,400,000 1.333333)$5,550,000This is a reduction in total life-cycle costs of ($6,000,000 $5,550,000) =$ 450,000Checking the answer:Revenue$7,000,000Sale of land400,000Total life-cycle cost(5,550,000)Life-cycle operating income$1,850,000Mark-up percentage = 1,850000/5,550,000= 33%Pr. 12-35: Airline PricingFareBusiness fliersPleasure fliers$500200 @$435=$87,000100@$435= $43,500

$130,500$2,100180 @$1,925= $346,50020 @$1,925= $38,500$385,000If the fare is $500,Air Eagle would expect to have 200 business and 100 pleasure travelers.Variable costs per passenger would be $65.Contribution margin per passenger = $500 $65 = $435.If the fare is $2,100,Air Eagle would expect to have 180 business and 20 pleasure travelers.Variable costs per passenger would be $175.Contribution margin per passenger = $2,100 $175 = $1,925.Pr. 12-35: Airline PricingFareBusiness fliersPleasure fliers$500200 @$435=$87,000100@$435= $43,500

$130,500$2,100180 @$1,925= $346,50020 @$1,925= $38,500$385,000Potential with discrimination$346,500

$43,500$390,000If the fare is $500, expect to have 200 business and 100 pleasure travelers.Variable costs per passenger would be $65. CM/passenger = $500 $65 = $435.If the fare is $2,100, expect to have 180 business and 20 pleasure travelers.VC/ passenger would be $175. CM/passenger = $2,100 $175 = $1,925.Note: In deciding the prices, all other costs such as fuel costs, allocated annual lease costs, allocated ground services costs, and allocated flight crew salaries are irrelevant. They will not change whatever price Air Eagle charges.Pr. 12-35 part 3: How can price discrimination work?The elasticity of demand of the two classes of passengers drives the different demands of the travelers. Business travelers are relatively price insensitive because they must get to their destination during the week (exclusive of weekends) and their fares are paid by their companies. A 320% increase in fares from $500 to $2,100 will deter only 10% of the business passengers from flying with Air Eagle. A similar fare increase will lead to an 80% drop in pleasure travelers who are paying for their own travels, unlike business travelers, and who may have alternative vacation plans they could pursue instead.Since business travelers often want to return within the same week, while pleasure travelers often stay over weekends, a requirement that a Saturday night stay is needed to qualify for the $500 discount fare would discriminate between the passenger categories. This price discrimination is legal because airlines are service companies rather than manufacturing companies and because these practices do not, nor are they intended to, destroy competition.

IMA Code of Conduct (Ch. 1 of Horngren et al. and just about any other cost/managerial accounting textbookThe four standards of ethical conduct for management accountants as advanced by the Institute of Management Accountants:CompetenceConfidentialityIntegrityObjectivity 2012 Pearson Prentice Hall. All rights reserved.13CompetenceMembers have a responsibility to:1.Maintain an appropriate level of professional expertiseby continually developing knowledge and skills.2.Perform professional duties in accordance withrelevant laws, regulations, and technical standards.3.Provide decision support information and recommendationsthat are accurate, clear, concise, and timely.4.Recognize and communicate professional limitationsor other constraints that would preclude responsiblejudgment or successful performance of activity.The competence standard addresses members responsibilities related to the level of professional competence, the performance of professional duties, and the preparation of reports and recommendations.ConfidentialityMembers have a responsibility to:1.Keep information confidential except when disclosureis authorized or legally required.2.Inform all relevant parties regarding appropriate useof confidential information.3.Refrain from using confidential information for unethicalor illegal advantage.4.Monitor subordinates activities to ensure compliance.The confidentiality standard requires members to refrain from disclosing confidential information, to inform subordinates regarding the confidentiality of information acquired, and to refrain from using confidential information for personal gain. IntegrityMembers have a responsibility to:1.Mitigate actual conflicts of interest, regularly communicatewith business associates to avoid apparent conflicts ofinterest. Advise all parties of any potential conflicts.2.Refrain from engaging in any conduct that would prejudicecarrying out duties ethically.3.Abstain from engaging in or supporting any activity thatmight discredit the profession.The integrity standard addresses conflict of interest, the communication of unfavorable as well as favorable information, and the members responsibility to the profession.CredibilityMembers have a responsibility to:1.Communicate information fairly and objectively.2.Disclose all relevant information that could reasonablybe expected to influence an intended users understandingof the reports, analyses, or recommendations.3.Disclose delays or deficiencies in information, timeliness,processing, or internal controls in conformance withorganization policy and/or applicable law.And finally, the credibility standard refers to members responsibility to be fair and objective and to disclose all relevant information. 12-36: Ethics & Pricing1.The $500 spent on the basketball tickets is a sunk (past) cost, and is therefore irrelevant to the bid decision. Apex will incur the $500 cost whether it bids, loses the bid, or wins the bid.This is not a key part of the problems focus.

12-36: Ethics & Pricing2.Target price = $145,000Full cost allowed with 25% markup: $145,000/125% = $116,000Original full cost was $121,000, so this is a $5000 reductionTaken from framing costs, $40,000-$5000 = $35,000 target cost of frames.12-36: Ethics & PricingIt was unethical for Grant to use the basketball tickets to get the tip out of the purchasing agent. Knowing about Grants action and suggesting a way to use it is unethical on the part of Gomes. In assessing the situation, the specific Standards of Ethical Conduct for Management Accountants, described in Chapter 1 that the management accountant should consider are listed below.

Conclusions based on IMA CodeIntegrityThe management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Using unethically gathered information to compromise a sealed bid arrangement is clearly a violation of this standard. The Standards of Ethical Conduct require the management accountant to communicate favorable as well as unfavorable information. In this regard, both Grants and Gomess behavior could be viewed as unethical.CredibilityThe Standards of Ethical Conduct for Management Accountants require that information should be fairly and objectively communicated and that all relevant information should be disclosed. From a management accountants standpoint, revising a bid based on this kind of information violates both of these precepts.Grant and Gomes should leave the bid as it was originally produced, without using the unethically obtained inside information. The company should clarify its policy on business entertainment.