Beruflich Dokumente
Kultur Dokumente
customers
2.
competitors
3.
costs.
Question 9.5 Two alternative starting points for long-run pricing decisions
are
1.
Market-based pricing, an important form of which is target pricing.
The market-based approach asks, Given what our customers want and how
our competitors will react to what we do, what price should we charge?
2.
Cost-based pricing which asks, What does it cost us to make this
product and, hence, what price should we charge that will recoup our costs
and achieve a target return on investment?
Question 9.6 Cost-plus pricing is a pricing approach in which managers add
a mark-up to cost in order to determine price.
Question 9.8 Two examples where the difference in the costs of two
products or services is much smaller than the differences in their prices
follow:
1. The difference in prices charged for a telephone call, hotel room or car
rental during busy versus slack periods is often much greater than the
difference in costs to provide these services.
The difference in costs for an airplane seat sold to a passenger travelling on
business or a passenger travelling for pleasure is roughly the same.
However, airline companies price discriminate. They routinely charge
business travellersthose who are likely to start and complete their travel
during the same week excluding the weekenda much higher price than
pleasure travellers who generally stay at their destinations over at least one
weekend.
Question 9.10
Customer profitability analysis highlights to managers
how individual customers differentially contribute to total profitability. It
helps managers to see whether customers who contribute sizably to total
profitability are receiving a comparable level of attention from the
organisation.
Question 7.1
In market-based pricing we observe the market for the prices of similar
products or services and make adjustments where our product exhibits
attributes that are different from those of existing products. If we adopt a
cost-based approach to pricing we first establish the costs of the product or
service then add the desired mark-up to arrive at the selling price. In
reality, we will refer to the market to assess the validity of this price.
Question 7.3
Value engineering is a systematic evaluation of all aspects of the valuechain business functions, with the objective of reducing costs while
satisfying customer needs. Value engineering via improvement in product
and process designs is a principal technique that companies use to achieve
target costs per unit.
Question 7.8
Three benefits of using a product life-cycle reporting format are:
1.
The full set of revenues and costs associated with each product
becomes more visible.
2.
Differences among products in the percentage of total costs
committed at early stages in the life cycle are highlighted.
3.
Interrelationships among business function cost categories are
highlighted.
Exercise 9.16
All amounts in thousands of A dollars
Wholesale
Retail
Down
under
Stereo
World
market
$580,000
$130,000
$100,000
30,000
40,000
7,000
500
Revenues (at
actual prices)
390,000
540,000
123,000
99,500
Cost of goods
sold
325,000
455,000
118,000
90,000
Gross margin
65,000
85,000
5,000
9,500
Delivery
450
650
200
125
Order
processing
800
1,000
200
130
Sales visit
5,600
5,500
2,300
1,350
6,850
7,150
2,700
1,605
$ 58,150
$ 77,850
Revenues at list
prices
Price discounts
Australia
Wholesaler
New
Zealand
Wholesaler
$420,000
Customer-level
operating costs
Customer-level
operating
income
2,300
7,895
Wholesale Customers
Total
Total
Australian
New Zealand
Total
Down under
World
(all customers)
Wholesale
Wholesaler
Wholesaler
Retail
Stereo
Market
(3)
(4)
(6)
(7)
$390,000
$540,000
$123,000
$99,500
$1,152,500
$930,000
1,006,305
794,000
146,195
136,000
45,000
38,000
101,195
$ 98,000
Customer-level costs
Customer-level operating income
Distribution-channel costs
Distribution-channel-level oper. income
Corporate-sustaining costs
Operating income
Retail Customers
331,850 a
$ 58,150
65,000
$
36,195
$222,500
462,150 a
120,700 a
212,305
$ 77,850
10,195
7,000
$
3,195
2,300
91,605 a
$ 7,895
3.
If corporate costs are allocated to the channels, the retail channel
will show an operating loss of $10,805,000 ($3,195,000 $14,000,000), and
the wholesale channel will show an operating profit of $47,000,000
($98,000,000 $51,000,000). The overall operating profit, of course, is still
$36,195,000, as in requirement 2. There is, however, no cause-and-effect
or benefits-received relationship between corporate costs and any
allocation base, i.e., the allocation of $51,000,000 to the wholesale
channel and of $14,000,000 to the retail channel is arbitrary and not useful
for decision-making. Therefore, the management of Ramish Electronics
should not base any performance evaluations or investment/disinvestment
decisions based on these channel-level operating income numbers. They
may want to take corporate costs into account, however, when making
pricing decisions.
1.
Chapel Hill
Pharmacy
Pharmacy
Order processing,
A$40 13; A$40 10
A$ 520
A$ 400
351
540
350
500
154
200
80
2. Line-item ordering,
A$3 (13 9; 10 18)
3. Store deliveries,
A$50 7; $50 10
4. Carton deliveries,
A$1 (7 22; 10 20)
5. Shelf-stocking,
A$16 (7 0; 10 0.5)
Operating costs
A$1375
A$1720
Chapel Hill
Pharmacy
Pharmacy
Revenues,
A$2 400 7; A$1 800 10
A$16 800
A$18 000
14 700
16 500
Gross margin
2 100
1 500
Operating costs
1 375
1 720
Operating profit
A$
725
A$ (220)
Chapel Hill Pharmacy has a lower gross margin percentage than Charleston
(8.33% vs. 12.50%) and consumes more resources to obtain this lower margin.
Strong should use Charleston as a benchmark to find out in what areas and
how to improve the profitability of business with Chapel. Most of the resource
consumption measures reported is relatively high for Chapel given the revenue
earned. Strong should meet with Chapel to talk about the feasibility of fewer
and larger orders leading to fewer store deliveries which would reduce costs
and increase average revenue per delivery.
2.
$6,000,000
2,500,000
Contribution margin
3,500,000
2,200,000
$1,300,000
Selling price =
$6,000,000
= $12 per case.
500,000 cases
$12 - $9.40
= 27.66%
$9.40
3.
Budgeted Operating Income
For the year ending December 31, 20xx
Revenues ($14 475,000
cases*)
$6,650,000
2,375,000
Contribution margin
4,275,000
Fixed costs
2,200,000
Operating income
$2,075,000
Return on investment =
$2,075,000
= 15.96%
$13,000,000
Yes, increasing the selling price is a good idea because operating income
increases without increasing invested capital, which results in a higher return
on investment. The new return on investment exceeds the 10% target return
on investment.
A$225 000
375 000
A$600 000
A$45
Proof
Total room revenues (A$45 15 000 room-nights)
A$675 000
Total costs:
Variable costs (A$5 15 000)
A$ 75 000
Fixed costs
375 000
Total costs
450 000
Operating income
A$225 000
The full cost of a room-night = Variable cost per room-night + fixed cost per
room-night
The full cost of a room-night =
A$30
Mark-up per room-night = Rental price per room-night Full cost of a roomnight
= A$45 A$30 = A$15
Mark-up percentage as a fraction of full cost = A$15 A$30 = 50%
2.
If price is reduced by 10%, the number of room-nights Dubois
could rent would increase by 10%.
The new price per room would be 90% of A$45
A$40.50
16 500
A$35.50
A$585 750
Because the contribution margin of A$585 750 at the reduced price of A$40.50
is less than the contribution margin of A$600 000 at a price of A$42, Dubois
should not reduce the price of the rooms. Note that the fixed costs of A$375
000 will be the same under the A$42 and the A$37.80 price alternatives and
hence, are irrelevant to the analysis.
Variable cost per unit = Production cost per unit + Mktg and distribn. cost per unit
= $50 + $10 = $60
Total fixed costs over life of Boast = A$6 590 000+ A$1 450 000+ A$19 560 000+
A$5 242 000+ A$2 900 000
= $35,742,000
BEP in units =
Fixed costs
$35,742,000
= 714,840 units
=
Selling price Variable cost per unit
$110 $60
2a.
Revenues ($110 1,500,000 units)
$165,000,000
90,000,000
Fixed costs
35,742,000
Operating income
$ 39,258,000
2b.
Revenues
Year 2 ($240 100,000 units)
$ 24,000,000
132,000,000
156,000,000
78,000,000
Fixed costs
35,742,000
Operating income
$ 42,258,000
Old CP99
Cost Change
Direct materials
costs
Direct
manufacturing
labour costs
A$166 600
24 500
Machining costs
31 500
Testing costs
28 000
Rework costs
5 600
Ordering costs
2 100
Engineering costs
Total
manufacturing costs
21 140
A$279 440
Note 1:
10% of old CP99s are reworked. That is, 700 (10% of 7000) CP99s made are
reworked. Rework costs = A$20 per unit reworked 700 = A$14 000. If rework
falls to 4% of New CP99s manufactured, 280 (4% of 7000) New CP99s
manufactured will require rework. Rework costs = A$20 per unit 280 =
A$5600.
Note 2:
Ordering costs for New CP99 = 2 orders/month 50 components A$21/order
= A$2100
Unit manufacturing costs of New CP99 = A$279 440 7000 = A$39.92
2.
Total manufacturing cost reductions based on new design=A$315 000
A$279 440
= A$35 560
Reduction in unit manufacturing costs based on new design=A$35 560 7000
= A$5.08
per unit.
The reduction in unit manufacturing costs based on the new design can also
be calculated as:
Unit cost of old design, A$45 (A$315 000 7000 units) Unit cost of new