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Chapter 25: Q9RQ (page 1406)
Question: Explain the difference between price-takers and price-setters.
Answer
Price-takers are the companies who accept the prices as permarket competition. In contrast, price-setters are companies that control the price setting of theirproducts and services.
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Refer to Exercise E25-18. Cool Systems needs 79,000 optical switches. By outsourcing them, Cool Systems can use its idle facilities to manufacture another product that will contribute $225,000 to operating income.
Requirements
1. Identify the expected net costs that Cool Systems will incur to acquire 79,000 switches under three alternative plans: make the switches, buy the switches and leave facilities idle, buy the switches and use the idle facilities to make another product.
2. Which plan makes the best use of Cool System’s facilities? Support your answer.
Members of the board of directors of Security Check have received the following operating income data for the year ended May 31, 2018:
SECURITY CHECK Income Statement For the Year Ended May 31, 2018 |
Product Line |
Industrial Systems | Household Systems | Total |
Net Sales Revenue | \( 360,000 | \) 380,000 | \( 740,000 |
Cost of Goods Sold: | |||
Variable | 37,000 | 47,000 | 84,000 |
Fixed | 260,000 | 63,000 | 323,000 |
Total Cost of Goods Sold | 297,000 | 110,000 | 407,000 |
Gross Profit | 63,000 | 270,000 | 333,000 |
Selling and Administrative Expenses: | |||
Variable | 64,000 | 73,000 | 137,000 |
Fixed | 44,000 | 26,000 | 70,000 |
Total Selling and Administrative Expenses | 108,000 | 99,000 | 207,000 |
Operating Income (Loss) | \) (45,000) | \( 171,000 | \) 126,000 |
Members of the board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by \(80,000 and decrease fixed selling and administrative expenses by \)12,000.
Requirements
1. Prepare a differential analysis to show whether Security Check should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Security Check’s total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives’ income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement 2?
Heavenly Dessert processes cocoa beans into cocoa powder at a processing cost of \(9,700 per batch. Heavenly Dessert can sell the cocoa powder as is, or it can process the cocoa powder further into either chocolate syrup or boxed assorted chocolates. Once processed, each batch of cocoa beans would result in the following sales revenue:
Cocoa powder \)14,500
Chocolate syrup 103,000
Boxed assorted chocolates 204,000
The cost of transforming the cocoa powder into chocolate syrup would be \(72,000. Likewise, the company would incur a cost of \)183,000 to transform the cocoa powder into boxed assorted chocolates. The company president has decided to make assorted boxed chocolates due to their high sales value and to the fact that the cocoa bean processing cost of $9,700 eats up most of the cocoa powder profits. Has the president made the right or wrong decision? Explain your answer. Be sure to include the correct financial analysis in your response.
Johnson Builders builds 1,500-square-foot starter tract homes in the fast-growing suburbs of Atlanta. Land and labor are cheap, and competition among developers is fierce. The homes are a standard model, with any upgrades added by the buyer after the sale. Johnson Builders’s costs per developed sublot are as follows:
Land \(50,000
Construction 123,000
Landscaping 9,000
Variable selling costs 8,000
Johnson Builders would like to earn a profit of 14% of the variable cost of each home sold. Similar homes offered by competing builders sell for \)207,000 each. Assume the company has no fixed costs.
Requirements
1. Which approach to pricing should Johnson Builders emphasize? Why?
2. Will Johnson Builders be able to achieve its target profit levels?
3. Bathrooms and kitchens are typically the most important selling features of a home. Johnson Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost \(16,000 per home but would enable Johnson Builders to increase the sales prices by \)28,000 per home.
(Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Johnson Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?
Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector-Cardz with a special order. The Hall of Fame wishes to purchase 56,000 baseball card packs for a special promotional campaign and offers \(0.38 per pack, a total of \)21,280. Collector-Cardz’s total production cost is \(0.58 per pack, as follows:
Variable costs:
Direct materials \)0.11
Direct labor 0.09
Variable overhead 0.08
Fixed overhead 0.30
Total cost \(0.58
Collector-Cardz has enough excess capacity to handle the special order.
Requirements
1. Prepare a differential analysis to determine whether Collector-Cardz should accept the special sales order.
2. Now assume that the Hall of Fame wants special hologram baseball cards. Collector-Cardz will spend \)5,700 to develop this hologram, which will be useless after the special order is completed. Should Collector-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.38 per pack?
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