Cost15EChapter13Solutions.docx

Cost15EChapter13Solutions.docx

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Cost15EChapter13Solutions

CHAPTER13

PRICINGDECISIONSANDCOSTMANAGEMENT

13-1Thethreemajorinfluencesonpricingdecisionsare

1.Customers

2.Competitors

3.Costs

13-2Notnecessarily.Foraone-time-onlyspecialorder,therelevantcostsareonlythosecoststhatwillchangeasaresultofacceptingtheorder.Inthiscase,fullproductcostswillrarelyberelevant.Itismorelikelythatfullproductcostswillberelevantcostsforlong-runpricingdecisions.

13-3Fourpurposesofcostallocationareasfollows:

1.Toprovideinformationforeconomicdecisions

2.Tomotivatemanagersandotheremployees

3.Tojustifycostsorcomputereimbursementamounts

4.Tomeasureincomeandassets

13-4Activity-basedcostinghelpsmanagersinpricingdecisionsintwoways.

1.Itgivesmanagersmoreaccurateproduct-costinformationformakingpricingdecisions.

2.Ithelpsmanagerstomanagecostsduringvalueengineeringbyidentifyingthecostimpactofeliminating,reducing,orchangingvariousactivities.

13-5Twoalternativeapproachestolong-runpricingdecisionsarethefollowing:

1.Market-basedpricing,animportantformofwhichistargetpricing.Themarket-basedapproachasks,“Givenwhatourcustomerswantandhowourcompetitorswillreacttowhatwedo,whatpriceshouldwecharge?

”

2.Cost-basedpricingwhichasks,“Whatdoesitcostustomakethisproductand,hence,whatpriceshouldwechargethatwillrecoupourcostsandachieveatargetreturnoninvestment?

”

13-6Atargetcostperunitistheestimatedlong-runcostperunitofaproduct（orservice）that,whensoldatthetargetprice,enablesthecompanytoachievethetargetedoperatingincomeperunit.

13-7Valueengineeringisasystematicevaluationofallaspectsofthevalue-chainbusinessfunctions,withtheobjectiveofreducingcostswhilesatisfyingcustomerneeds.Valueengineeringviaimprovementinproductandprocessdesignsisaprincipaltechniquethatcompaniesusetoachievetargetcostperunit.

13-8Avalue-addedcostisacostthatcustomersperceiveasaddingvalue,orutility,toaproductorservice.Examplesarecostsofmaterials,directlabor,tools,andmachinery.Anonvalue-addedcostisacostthatcustomersdonotperceiveasaddingvalue,orutility,toaproductorservice.Examplesofnonvalue-addedcostsarecostsofrework,scrap,expediting,andbreakdownmaintenance.

13-9No.Itisimportanttodistinguishbetweenwhencostsarelockedinandwhencostsareincurredbecauseitisdifficulttoalterorreducecoststhathavealreadybeenlockedin.

13-10Cost-pluspricingisapricingapproachinwhichmanagersaddamarkuptocostinordertodetermineprice.

13-11Cost-pluspricingmethodsvarydependingonthebasesusedtocalculateprices.Examplesare（a）variablemanufacturingcosts;（b）manufacturingfunctioncosts;（c）variableproductcosts;and（d）fullproductcosts.

13-12Twoexampleswherethedifferenceinthecostsoftwoproductsorservicesismuchsmallerthanthedifferencesintheirpricesare:

1.Thedifferenceinpriceschargedforatelephonecall,hotelroom,orcarrentalduringbusyversusslackperiodsisoftenmuchgreaterthanthedifferenceincoststoprovidetheseservices.

2.Thedifferenceincostsforanairplaneseatsoldtoapassengertravelingonbusinessorapassengertravelingforpleasureisroughlythesame.However,airlinecompaniespricediscriminate.Theyroutinelychargebusinesstravelers––thosewhoarelikelytostartandcompletetheirtravelduringthesameweekexcludingtheweekend––amuchhigherpriceforthesameclassofservicethanpleasuretravelerswhogenerallystayattheirdestinationsoveratleastoneweekend.

13-13Life-cyclebudgetingisanestimateoftherevenuesandcostsattributabletoeachproductfromitsinitialR&Dtoitsfinalcustomerservicingandsupport.

13-14Threebenefitsofusingaproductlife-cyclereportingformatarethefollowing:

1.Thefullsetofrevenuesandcostsassociatedwitheachproductbecomesmorevisible.

2.Differencesamongproductsinthepercentageoftotalcostscommittedatearlystagesinthelifecyclearehighlighted.

3.Interrelationshipsamongbusinessfunctioncostcategoriesarehighlighted.

13-15Predatorypricingoccurswhenabusinessdeliberatelypricesbelowitscostsinanefforttodrivecompetitorsoutofthemarketandrestrictsupplyandthenraisespricesratherthanenlargedemand.UnderU.S.laws,dumpingoccurswhenanon-U.S.companysellsaproductintheUnitedStatesatapricebelowthemarketvalueinthecountrywhereitisproduced,andthislowerpricemateriallyinjuresorthreatenstomateriallyinjureanindustryintheUnitedStates.Collusivepricingoccurswhencompaniesinanindustryconspireintheirpricingandproductiondecisionstoachieveapriceabovethecompetitivepriceandsorestraintrade.

13-16（25–30min.）Value-added,nonvalue-addedcosts.

1.

Category

Examples

Value-addedcosts

a.Materialsandlaborforregularrepairs

$1,100,000

Nonvalue-addedcosts

b.Reworkcosts

c.Expeditingcostscausedbyworkdelays

g.Breakdownmaintenanceofequipment

Total

$90,000

65,000

75,000

$230,000

Grayarea

d.Materialshandlingcosts

e.Materialsprocurementandinspectioncosts

f.Preventivemaintenanceofequipment

Total

$80,000

45,000

55,000

$180,000

Classificationsofvalue-added,nonvalue-added,andgrayareacostsareoftennotclear-cut.Otherclassificationsofsomeofthecostcategoriesarealsoplausible.Forexample,somestudentsmayincludematerialshandling,materialsprocurement,andinspectioncostsandpreventivemaintenanceasvalue-addedcosts（coststhatcustomersperceiveasaddingvalueandasbeingnecessaryforgoodrepairservice）ratherthanasinthegrayarea.Preventivemaintenance,forinstance,mightberegardedasvalue-addedbecauseithelpspreventnonvalue-addingbreakdownmaintenance.

2.Totalcostsinthegrayareaare$180,000.Ofthis,weassume60%,or$108,000,arevalue-addedand40%,or$72,000,arenonvalue-added.

Totalvalue-addedcosts:

$1,100,000+$108,000$1,208,000

Totalnonvalue-addedcosts:

$230,000+$72,000302,000

Totalcosts$1,510,000

Nonvalue-addedcostsare$302,000÷$1,510,000=20%oftotalcosts.

Value-addedcostsare$1,208,000÷$1,510,000=80%oftotalcosts.

3.

EffectonCostsClassifiedas

Program

Value-Added

Nonvalue-Added

Gray

Area

（a）Qualityimprovementprogramsto

•reducereworkcostsby40%（0.40$90,000）

•reduceexpeditingcostsby40%

（0.40$65,000）

•reducematerialsandlaborcostsby5%

（0.05$1,100,000）

Totaleffect

–$55,000

–$55,000

–$36,000

–26,000

–$62,000

（b）Workingwithsuppliersto

•reducematerialsprocurementandinspectioncostsby20%（0.20$45,000）

•reducematerialshandlingcostsby30%

（0.30$80,000）

Totaleffect

Transferring60%ofgrayareacosts（0.60

$33,000=$19,800）asvalue-addedand40%

（0.40$33,000=$13,200）asnonvalue-added

Effectonvalue-addedandnonvalue-addedcosts

–$19,800

–$19,800

–$13,200

–$13,200

–$9,000

–24,000

–33,000

+33,000

$0

（c）Maintenanceprogramsto

•increasepreventivemaintenancecostsby70%

（0.70$55,000）

•decreasebreakdownmaintenancecostsby50%

（0.50$75,000）

Totaleffect

Transferring60%ofgrayareacosts（0.60$38,500=$23,100）asvalue-addedand40%（0.40$38,500=$15,400）asnonvalue-added

Effectonvalue-addedandnonvalue-addedcosts

+$23,100

+$23,100

–$37,500

–37,500

+15,400

–$  22,100

+$38,500

+38,500

–38,500

$0

Totaleffectofallprograms

Value-addedandnonvalue-addedcostscalculatedinrequirement2

Expectedvalue-addedandnonvalue-addedcostsasaresultofimplementingtheseprograms

–$51,700

1,208,000

$1,156,300

–$97,300

302,000

$204,700

Iftheseprogramshadbeenimplemented,totalcostswouldhavedecreasedfrom$1,510,000（requirement2）to$1,156,300+$204,700=$1,361,000,andthepercentageofnonvalue-addedcostswoulddecreasefrom20%（requirement2）to$204,700÷$1,316,000=15%.ThesearesignificantimprovementsinMagill’sperformance.

13-17（2530min.）Targetoperatingincome,value-addedcosts,servicecompany.

1.Theclassificationoftotalcostsin2013intovalue-added,nonvalue-added,orinthegrayareainbetweenfollows:

ValueGrayNonvalue-Total

AddedAreaadded（4）=

（1）

（2）（3）

（1）+

（2）+（3）

Doingcalculationsandpreparingdrawings

77%×$390,000$300,300$300,300

Checkingcalculationsanddrawings

3%×$390,000$11,70011,700

Correctingerrorsfoundindrawings

8%×$390,00031,20031,200

Makingchangesinresponsetoclient

requests5%×$390,00019,50019,500

Correctingerrorstomeetgovernment

buildingcode,7%×$390,00027,30027,300

Totalprofessionallaborcosts319,80011,70058,500390,000

Administrativeandsupportcostsat44%

（$171,600÷$390,000）ofprofessional

laborcosts140,7125,14825,740171,600

Travel15,000—15,000

Total$475,512$16,848$84,240$576,600

Doingcalculationsandrespondingtoclientrequestsforchangesarevalue-addedcostsbecausecustomersperceivethesecostsasnecessaryfortheserviceofpreparingarchitecturaldrawings.Costsincurredoncorrectingerrorsindrawingsandmakingchangesbecausetheywereinconsistentwithbuildingcodesarenonvalue-addedcosts.Customersdonotperceivethesecostsasnecessaryandwouldbeunwillingtopayforthem.Calvertshouldseektoeliminatethesecostsbymakingsurethatallassociatesarewell-informedregardingbuildingcoderequirementsandbytraininga