Managerial Decision Making

Part A : For this activity, you need to complete Problems 5-56 (pp. 218) and 5-57 (pp. 218). First, however, you need to perform the following before completing the problems. (A 1-page answer is required.)

Part B: Complete text Problems 5-59 (pp. 219), 6-32 (pp. 252), and 6-56 (p. 261). Show all computations. (A 2-page response is required.)

Activity 6: Pricing & Costing

Name

Institution/Department

Course

Instructor

Due Date

Part A

Problem 5-56 on page 218

Q1. The Net income difference = Number of units *(selling price- variable cost per unit (selling and administrative expenses)- variable cost per unit (manufacturing costs). The variable costs per unit have to be considered in order to calculate the cost of every unit (Scott, 2019). Therefore, the net income difference = 300 units *(€40 – €25 – €10) = €1,500. This means that accepting special order for 300 units at a selling price of €40 would positively impact the net income since there would be an increase by €1,500.

Q2. The lowest price for which an additional 100 units could be sold would be €25 which is equal to the variable cost per unit in the cost of manufacture.

Q3. The irrelevant numbers include; €70,000 (fixed manufacturing cost total), €180,000 (total sales), €10 (variable cost per unit for selling and administrative expenses) and €30,000 (fixed selling and administrative expenses total). This means that all the numbers in the table are irrelevant except for €25 which is equal to variable cost per unit for manufacturing costs.

Q4. The selling price is €180,000 / 2,000 units = €90 while the plant capacity is 2,400 production units. The production units are doubled which makes a total of 2,400 plant capacity x 2 = 4,800 new plant capacity. Therefore, the total sales are 4,800 units * €90= €432,000.

The fixed expenses = the manufacturing costs + selling and administrative cost + (depreciation

=additional facilities cost/4 years)

Therefore, fixed expenses = €70,000 + €30,000 + (€500,000/4) = €225,000.

Variable expenses = 2,400 (old plant capacity) x 2 x (€25 (manufacturing cost) + €10 (selling and administrative expenses)) = 4,800 x €35 = €168,000.

The variable and fixed costs = €168,000 + €225,000 = €393,000

Thus the Net income is, €432,000- €393,00 = €39,000

Problem 5-57 on page 218

Q1. The budgeted fixed factory overhead per unit= Fixed factory overhead budget / operating income, $72,000,000 / $9,000,000 = $8

Q2. The Operating Income = sales-costs-selling and administrative costs

Where the cost = 150,000 units * $18 = $2,700,000

The sales are = $3,450, 000 and the selling and administrative cost is $10,000

Operating Income = $3,450,000 – $2,700,000 – $10,000 = $740,000

Q3. The president should consider accepting this offer since they will have profitable orders and the fact that he will compete effectively with other competitors.

Q4. The budgeted fixed factory overhead per unit would change to $72,000,000 / $4,500,000 = $16. The answer to number 2 would not change since the fixed costs will always remain the same despite the activity changes.

Part B

Problem 5-59 on page 219

Q1. Manufacturing Cost = $27

Gross margin = 20%

To determine the price charged for the motor, multiply the manufacturing cost with the gross margin which is 20% *$27 = $5.40. Then add to the price charged to get $32.40.  As the manager, I would not advice the manufacture of such a motor since we will not be able to sell it. The market research indicates that the garage door openers sell at $26 which means $32.40 is not a competitive price.

Q2. The company can start the garage door opener by charging the market price which is $26.

The following calculations would be essential in determining the highest acceptable manufacturing cost; 26/ [1.20 (100+20%)=

$26/1.20 = $21.67

Therefore, the highest acceptable manufacturing cost for the company would be $21.67.

Q3. In order for the managers to ensure that the production of the products is feasible, they would attempt to make the garage door opener motor with a manufacturing cost that is lower than $21.67. Therefore, if the garage door opener is unsuccessful in ensuring that the manufacturing cost is below $21.67, then at that point they should consider not producing the garage door opener motor.

Problem 6-32 on page 252

Q1. When comparing the purchasing and the making costs, the purchasing cost is less since the total purchasing costs is $420,000 while the making cost is $450,000. This means the purchasing cost is less costly by $30,000.

Q2. While evaluating whether to make or buy the component, the company should consider the supply component for the product and how it might influence the business operation. They should consider the benefit of taking over the supply component and whether it will bring more profit to the business.

Problem 6-56 on page 261

Q1. The Annual operating income = Units * (selling price per unit- expenses) * months (Horngren, Sundem, Burgstahler and Schatzberg, 2014).

Therefore, the annual operating income = 20,000 units * 12* ($19 – $11.35) = $1,836,000

Q2. Expected annual operating income

Annual Income = 20,000 units *(112% * $016) * 12 = $4,300,800

Variable expenses = $1.10 (variable overhead) + $0.95 (direct labor) + $4.30 (direct materials) + $2.90 (variable selling)] x 268,800 = $2,486,400

Fixed expenses = 240,000 * $2.10 = $504,000

Contribution margin = Annual income –variable expenses = $4,300,800$2,486,400 = $1,814,400

Operating Income = $1,814,400 – $504,000 = $1,310,400

Q3. Minimum break-even price per unit

Cost = fixed cost / units from the foreign customer = $8,160 / 6,800 = $1.20

Direct materials = $4.

Direct labor = $0.95

Variable overhead = $1.10

Variable selling expenses = $2.90 x 70% = $2.03

Minimum break-even price per unit for this special order = cost of new order + variable selling expenses + direct labor + variable overhead + direct materials = $1.20 + $2.03 + $0.95 + $1.10 + $4 = $9.58

Q4. The only unit cost that is essential for establishing the minimum selling price for the 7,000 units is the variable selling expenses of $2.90 which is the original variable selling expenses.

References

Horngren, C. T., Sundem, G. L., & Burgstahler, D., & Schatzberg, J. (2014).  Introduction to Management Accounting, (16th ed.). Boston, MA: Pearson

Scott, P. (2019). Introduction to Management Accounting. Oxford University Press, USA.