Cost Accounting: one-time-only special order, target cost, life-cycle revenues, pricing

Exercise 1.

Backwoods Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $80 per table, consisting of 70% variable costs and 30% fixed costs. The company has surplus capacity available. It is Backwoods' policy to add a 50% markup to full costs.

Required

a. Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Backwoods should bid on this one-time-only special order?

b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Backwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Backwoods should bid on this long-term order?

Exercise 2

Steven Corporation manufactures fishing poles that have a price of $21.00. It has costs of $16.32. A competitor is introducing a new fishing pole that will sell for $18.00. Management believes it must lower the price to $18.00 in order to compete in the highly cost-conscious fishing pole market. Marketing believes that the new price will maintain the current sales level. Steven Corporation's sales are currently 200,000 poles per year.

Required

a. What is the target cost for the new price if target operating income is 20% of sales?

b. What is the change in operating income for the year if $18.00 is the new price and costs remain the same?

c. What is the target cost per unit if the selling price is reduced to $18.00 and the company wants to maintain its same income level?

Exercise 3

Medical Equipment Company manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,800 and fixed costs of $1,000 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds.

A competitor is introducing a new hospital bed similar to Deluxe that will sell for $4,000. Management believes it must lower the price in order to compete. Marketing believes that the new price will increase sales by 25 percent a year. The plant manager thinks that production can increase by 25 percent with the same level of fixed costs. The company currently sells all the Deluxe beds it can produce.

Required

1. What is the annual operating income form Deluxe at the current price of $5,000?

2. What is the annual operating income form Deluxe if the price is reduced to 4,000 and sales in unites increase by 25 percent?

3. What is the target cost per unit for the new price if target profit is 20 percent of sales?

Exercise 4

Henderson Company is in the process of evaluating a new part using the following information.

• Part SLC2002 has one production run each month, each with $16,000 in setup costs.
• Part SLC2002 incurred $40,000 in development costs and is expected to be produced over the next three years.
• Direct costs of producing Part SLC2002 are $56,000 per run of 24,000 parts each.
• Indirect manufacturing costs charged to each run are $88,000.
• Destination charges for each run average $18,000
• Part SLC2002 is selling for $12.50 in the United States and $25 in all other countries. Sales are one-third domestic and two-thirds exported.
• Sales units equal production units each year.

Required

a. What are the estimated life-cycle revenues?

b. What is the estimated life-cycle operating income for the first year?

Critical Thinking - Exercise 5

Claudia Geer, controller, discusses the pricing of a new product with the sales manager, James Nolan. What major influences must Claudia and James consider in pricing the new product? Discuss each briefly.