Problems and essays:
1-In general, what two risks exist for companies that agree to special (lower) prices when they are not at capacity? Hint: one risk relates to existing customers and the other relates to future opportunities:
1)
2)
2-Assume that your friend is starting a business. Your friend's product is a high performance automobile tire made of an amazing new compound. The tire is manufactured in china and sold online. The tires are targeted toward the buyers of high-end Michelin and Goodyear tire models that average $200+/tire. your friend plans to sell the new tires for #75/tire. What is your professional advice regarding your friend's price strategy?
3-Miyamoto jewelers is considering a special order for 20 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $390 and its unit product cost is $264.00 as shown below:
Materials $143.00
Direct labor 86.00
Manufacturing overhead 35.00
Unit product cost $264.00
Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produce in any given period. However, $12 of the overhead is variable with respect to the number of bracelets produced. The customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $6 per bracelet and would also require acquisition of a special tool costing $1,500 that would have no other use once the special order is completed the order would have no effect on the company's regular sales and the order could be fulfilled using the company's existing capacity without affecting any other order, should this special order be accepted if the customer offers a price of $350 each? Show your work.
4-Steve (previously the meth dealer) is now considering importing commercial grade espresso maker to sell to restaurants in Indiana and surrounding areas. The specific product that interests him is from a Russian firm that uses an innovated milk storage system. Steve believes that he can sell 50 of these machines per year at a $4,000/unit price. The variable cost to sell each machine is estimated at $500 (for gas, lodging, and schmoozing with potential clients). In order to deal with this Russian firm, steve will be (invest) $50,000 with a nice man in Moscow who will "make the deal happen." Assuming that Steve require a 50% return on this risky investment, what is the maximum price that he should pay for each espresso maker?
5-Cases 1-3 below, assume that division A has a product that can be sold either to division B of the same company or to outside customers. The managers of both divisions are evaluated based on their own division's return on investment (ROI). The managers are free to decide in they will participate in any internal transfers. All transfer prices are negotiated. Treat each case independently.
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case
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Division A
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1
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2
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3
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4
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Capacity in unit
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50,000
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300,000
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100,000
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200,000
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Number of units now being sold to outside customers
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50,000
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300,000
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75,000
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200,000
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Selling price per unit on the outside market
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$100
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$40
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$60
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$45
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Variable costs per units
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$63
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$19
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$35
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$30
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Fixed costs per unit (based on capacity)
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$25
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$8
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$17
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$6
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Division B
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Number of units needed annually
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10,000
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70,000
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20,000
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60,000
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Purchases price now being paid to an outside
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$92
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$39
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$60*
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-
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Supplier quantity discount.
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A-Refer to Case 3 above, assume that division B is now receiving a 5% quantity discount for the outside supplier, within what range will the transfer price be?
Which end of the range will the final price tend toward? Why?
B-Refer to Case 4 above. Assume that division B wants division A to provide it with 60,000 units of a different product from the one the division A is now producing. The new product would require $25 per unit in variable costs and would require that division A cut back production of its present product by 30,000 units annually. what is the lowest acceptable transfer price from division A's perspective?
What else should division A be concerned about if it cuts production by 30,000 units to satisfy division B?
6-Jackson county senior services is a nonprofit organization devoted to providing essential service to seniors who live in their own homes within the Jackson county are three services are provided for senior (home nursing. Meals on wheels, and housekeeping). Data on revenue and expenses fo the past year following
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total
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home nursing
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meals on wheels
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housekeeping
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Revenue
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$900,000
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$260,000
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$400,000
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$240,000
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Less variable expenses
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490,000
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100,000
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210,000
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180,000
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Contribution margin
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410,000
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160,000
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190,000
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60,000
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Less fixed expenses
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|
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Depreciation
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68,000
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8,000
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40,000
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20,000
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Liability insurance
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42,000
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20,000
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7,000
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15,000
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Program administrators* salaries
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115,000
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40,000
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38,000
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37,000
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general administrators overhead*
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180,000
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52,000
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80,000
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48,000
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Total fixed expenses
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405,000
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120,000
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165,000
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120,000
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Net operating income (loss)
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$5,000
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$40,000
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$25,000
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($60,000)
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- Allocated on the basis of program revenues.
Administrator of Jackson county senior services is concerned about the organization' finances and consider the net operating income of $5,000. Last year to be razor-thin. Last year's results were very similar to results for previous years and are representative of what would be expected in the future housekeeping is clearly an area of concern. The depreciation in housekeeping is for a large van that is used to carry the housekeepers and their equipment from job to job. Every two years a new van is required at a cost of $40.000. Thus, depreciation is $20,000 per year. If the program were discontinued, the current van, which is 18 months old would be donated to a charitable organization, none of the general administrative overhead would be avoided if the housekeeping program was dropped, but the liability insurance and the salary of the program administrator would be avoided. Should the housekeeping program be discontinued? Show computation to support your conclusion(s). be sure to discuss how you considered the depreciationcharges.