Businesses should ensure they price their goods and services reasonably to retain competitive advantage. An accurate method of costing is important as it can assist a business to determine a fair price for their final product.

With the above in mind, the CEO of GoGo Airlines has provided you with the following information:

Total Overheads = £200,000

Total Machine Hours = 100,000

You are required to calculate the unit costs of the vegan and non-vegan meals using:

• Traditional costing using machine hours as the basis of allocation of costs and
• ABC system

ABC Company manufactures and sells adjustable canopies that attach to motor homes and trailers. For its budget, ABC estimated the following: Selling price $420 Variable cost per canopy $205 Annual fixed costs $180,000 Net Income $240,000 Income Tax Rate 30% The May financial statements reported that sales were not meeting expectations. For the first 5 months of the year, only 350 units had been sold at the established price with variable costs as planned. It was clear that the net income projection for the year would not be reached unless some actions were taken. A management committee presented the following mutually exclusive alternatives to the president:

A. Reduce the selling price by $40 per unit. The sales forecast that at this significantly reduced price is which 2,800 units can be sold during the remainder of the year. Total fixed costs and variable costs per unit will stay as budgeted. B. Lower variable cost per unit by $10 through the use of less expensive direct materials and slightly modified manufacturing techniques. The selling price will also be reduced by $30 and sales of 2,200 units are expected for the remainder of the year. C. Reduce fixed costs by $10,000 and lower the selling price by 5%. Variable costs per unit will be unchanged and sales of 2,000 units are expected for the remainder of the year.

(1) If no changes are made to the selling price or cost structure, determine the number of units that ABC must sell to break even and achieve its net income objective.

(2) Determine which alternative ABC should select to achieve maximum net income.

QUESTION 1
1a) A community in Northern Namibia produces only two goods, TVs and CDs. With the aid of properly labelled production possibilities curves illustrate each of the following (putting TVs on the vertical axis).
i) A shift in production from CDs (services) towards TVs (goods). (5)
ii) An increase in the potential output of the community due to a greater availability of the factors of production. (5)
iii) Using well labelled diagrams, explain how the equilibrium price and equilibrium quantity of apples will change as a result of the following;
First scenario : A change in the wages of farm workers from R150 per day to R200 per day. (10)
Second Scenario : A decrease in the price of fertilizers and a concurrent increase in the demand for apple juice. (10)
1b)
i) Briefly explain price elasticity of demand and how it is measured. (5)
ii) Explain with diagrams and relevant examples, THREE (3) categories of price elasticity of demand. (9)
iii) Explain any THREE (3) determinants of price elasticity of demand. (6)
1c)
1c (i) Lonewolf Ltd is the sole manufacturer and supplier of solar panels in the country. As a result of this the CEO claimed in a recent meeting that he can set any price he wishes and sell as many units of his product as he wants at that price. Is this correct? Motivate your answer. (7)
c(ii)Explain using properly labelled diagrams, why a perfectly competitive firm will earn only normal profit in the long-run. (16)
c(iii) Explain SEVEN (7) conditions necessary for a perfectly competitive market to exist. (7)

Cinturon Corporation produces high-quality leather belts. The company's plant in Boise uses a standard costing system and has set the following standards for materials and labor:

During the first month of the year, the Boise plant produced 92,000 belts. Actual leather purchased was 286,500 strips at $3.30 per strip. There were no beginning or ending inventories of leather. Actual direct labor was 79,700 hours at $12.50 per hour.

Required:

1. Break down the total variance for materials into a price variance and a usage variance using the columnar and formula approaches. Enter favorable values as negative numbers and unfavorable values as positive numbers.

2. CONCEPTUAL CONNECTION Suppose the Boise plant manager investigates the materials variances and is told by the purchasing manager that a cheaper source of leather strips had been discovered and that this is the reason for the favorable materials price variance. Quite pleased, the purchasing manager suggests that the materials price standard be updated to reflect this new, less expensive source of leather strips. Should the plant manager update the materials price standard as suggested? Why or why not?

1. No , The suggestion of the purchasing manager is premature. A favorable materials price can produce an effect on both materials usage and labor variances.
2. Yes, the purchasing manager is correct. This will improve the overall profitability of the company.
3. No , The suggestion of the purchasing manager is incorrect. The matierals are not available and so changes to the price standard should not be made

1,2, or 3?

Buffalo Company manufactures and sells adjustable canopies that attach to motor homes and trailers. For its budget, Buffalo estimated the following:

Selling price                               $420

Variable cost per canopy $205

Annual fixed costs                       $180,000

Net Income                                $250,000

Income Tax Rate             30%

The May financial statements reported that sales were not meeting expectations. For the first 5 months of the year, only 350 units had been sold at the established price with variable costs as planned. It was clear that the net income projection for the year would not be reached unless some actions were taken. A management committee presented the following mutually exclusive alternatives to the president:

A. Reduce the selling price by $60 per unit. The sales forecast that at this significantly reduced price is which 2,850 units can be sold during the remainder of the year. Total fixed costs and variable costs per unit will stay as budgeted.

B. Lower variable cost per unit by $10 using less expensive direct materials and slightly modified manufacturing techniques. The selling price will also be reduced by $30 and sales of 2,200 units are expected for the remainder of the year.

C. Reduce fixed costs by $15,000 and lower the selling price by 5%. Variable costs per unit will be unchanged and sales of 2,000 units are expected for the remainder of the year.

Required:

(1) If no changes are made to the selling price or cost structure, determine the number of units that Buffalo must sell to break even and achieve its net income objective.

(2) Determine which alternative Buffalo should select to achieve maximum net income.

6. Buffalo Company manufactures and sells adjustable canopies that attach to motor homes and trailers. For its budget, Buffalo estimated the following:

Selling price            $420

Variable cost per canopy    $205

Annual fixed costs       $180,000

Net Income            $250,000

Income Tax Rate        30%

The May financial statements reported that sales were not meeting expectations. For the first 5 months of the year, only 350 units had been sold at the established price with variable costs as planned. It was clear that the net income projection for the year would not be reached unless some actions were taken. A management committee presented the following mutually exclusive alternatives to the president:

A. Reduce the selling price by $40 per unit. The sales forecast that at this significantly reduced price is which 2,800 units can be sold during the remainder of the year. Total fixed costs and variable costs per unit will stay as budgeted.

B. Lower variable cost per unit by $10 through the use of less expensive direct materials and slightly modified manufacturing techniques. The selling price will also be reduced by $30 and sales of 2,200 units are expected for the remainder of the year.

C. Reduce fixed costs by $10,000 and lower the selling price by 5%. Variable costs per unit will be unchanged and sales of 2,000 units are expected for the remainder of the year.

Required:

(1) If no changes are made to the selling price or cost structure, determine the number of units that Buffalo must sell to break even and achieve its net income objective.

(2) Determine which alternative Buffalo should select to achieve maximum net income.

7. Oligopoly differs from monopolistic competition in that it includes:

a. barriers to entry b. pricing powers. c. downward-sloping demand curves d. product differentiation

8. Which of the following statements are FALSE regarding the price elasticity of residual demand? Select all correct answers.

a. It is equal to negative infinity in the perfect competition model.

b. It is equal to the price elasticity of market demand times the number of firms.

c. It is less elastic for homogeneous goods than for heterogeneous goods.

d. The monopoly markup decreases as the price elasticity of residual demand becomes more negative.

9. Which of the following market structures is efficient?

a. Two-part pricing with non-identical customers

b. Third degree price discrimination

c. Second degree price discrimination with finite blocks

d. First degree price discrimination

10. Consider an oligopoly with five identical firms. If the market demand elasticity is -4, what is the Lerner Index?

a. 0.1

b. 0.05

c. 0.25

d. 0.20

11. Consider a market in which there are three firms that simultaneously choose prices, produce differentiated goods, and let the market determine the quantities. Which oligopoly model would best fit this market?

a. Cournot

b. None of these are appropriate for differentiated goods.

c. Bertrand

d. Stackelberg

12. Consider a monopolist using second degree price discrimination. If it expands the number of blocks it is using from two to three, what is the impact on consumer surplus, producer surplus, and the deadweight loss?

Select all correct answers.

a. Producer surplus decreases

b. Consumer surplus increases

c. Deadweight loss decreases

6. RETURN ON INVESTMENT VS RESIDUAL INCOME AND TRANSFER PRICING   

Part A

The Checkers Ltd produces a wide variety of sports equipment. Its newest division, Golf Technology, manufactures and sells a single product—AccuDriver, a golf club that uses global positioning satellite technology to improve the accuracy of golfers’ shots. The demand for AccuDriver is relatively insensitive to price changes. The following data are available for Golf Technology, which is an investment centre for Sports Equipment:

Total annual fixed costs                                                          $26 000 000

Variable cost per AccuDriver                                                  $600

Number of AccuDrivers sold each year                                   170 000 clubs

Average operating assets invested in the division                    $46 000 000

Required

1. Calculate The Checkers Ltd ROI if the selling price of AccuDrivers is $830 per club.

2. If management requires an ROI of at least 28% from the division, what is the minimum selling price that the Golf Technology Division should charge per AccuDriver club?                                                                                                     
3. Assume that The Checkers Ltd judges the performance of its investment centres on the basis of RI rather than ROI. What is the minimum selling price that Sports Equipment should charge per AccuDriver unit to achieve a $4 820 000 residual income if the company’s required rate of return is 18%?                                                    

Part B

Sampson Ltd has two divisions. The Forming Division produces moulds, which are then transferred to the Finishing Division. The moulds are further processed by the Finishing Division and are sold to customers at a price of $300 per unit. The Forming Division is currently required by Sampson Ltd to transfer its total yearly output of 100 000 moulds to the Finishing Division at 120% of full manufacturing cost. Unlimited numbers of moulds can be purchased and sold on the outside market at $180 per unit.

The following table gives the manufacturing cost per unit in the Forming and Finishing divisions for 2019:

^aManufacturing overhead costs in the Forming Division are 20% fixed and 80% variable.

^bManufacturing overhead costs in the Finishing Division are 65% fixed and 35% variable.

Required

1. Calculate the operating profits for the Forming and Finishing divisions for the 100 000 moulds transferred under the following transfer-pricing methods: (a) market price and (b) 120% of full manufacturing cost.

2. Suppose that Sampson Ltd rewards each division manager with a bonus, calculated as 2% of division operating profit (if positive). What is the amount of bonus that will be paid to each division manager under the transfer-pricing methods in requirement 1? Which transfer-pricing method will each division manager prefer to use?

3. What arguments would Scott Devon, manager of the Forming Division, make to support the transfer-pricing method that he prefers?

(Total: 20 marks)

Drugs-R-Us, Inc., produces equipment for manufacturing drugs. The costs of manufacturing and marketing this equipment at the company's normal volume of 3,000 units per month are shown in Exhibit 1.

                                                          EXHIBIT 1 - Costs per Unit for Equipment

Unit manufacturing costs:

            Variable materials                                        $200

            Variable labor                                                 300

            Variable overhead                                        150

            Fixed overhead                                             240

                       Total unit manufacturing costs                                 $   890

Unit marketing costs:

            Variable                                                        $100

            Fixed                                                            280

                       Total unit marketing costs                                        $   380

Total unit costs                                                                                $1,270

The following questions refer only to the data given above. Unless otherwise stated, assume there is no connection between the situations described in the questions; each is to be treated independently. Unless otherwise stated, a regular selling price of $1,580 per unit should be assumed. Ignore income taxes and other costs that are not mentioned in Exhibit 1 or in the question.

1.   Market research estimates that monthly equipment production could be increased to 3,500 units which is well within production capacity limitations, if the price were cut from $1,580 to $1,400 per unit. Assuming the cost behavior patterns implied by the data in Exhibit 1 are correct, would you recommend that this action be taken? What would be the impact on monthly sales, costs, and income?

2.   Drugs-R-Us has an opportunity to enter a foreign market in which price competition is keen. An attraction of the foreign market is that demand there is greatest when demand in the domestic market is quite low; thus, idle production facilities could be used without affecting domestic business. Unlike many foreign markets there are no government restrictions. An order for 1,000 units is being sought at a below-normal price in order to enter this market. Additional shipping and handling costs for this order will amount to $150 per unit, while the cost of obtaining the contract (marketing costs) will be $8,000 in addition to the normal variable marketing costs. Domestic business would be unaffected by this order. What is the minimum (e.g. breakeven) unit price Drugs-R-Us should consider for this order of 1,000 units?

How can I fill out the Relevant???

How can I distinguish between relevant cost and irrelevant cost?

3.   An inventory of 230 units of equipment remains in the stockroom. These must be sold through regular channels at reduced prices or the inventory will soon be valueless. What is the minimum price that would be acceptable for selling these units?

Drugs-R-Us, Inc., produces equipment for manufacturing drugs. The costs of manufacturing and marketing this equipment at the company's normal volume of 3,000 units per month are shown in Exhibit 1.

                                                          EXHIBIT 1 - Costs per Unit for Equipment

Unit manufacturing costs:

            Variable materials                                        $200

            Variable labor                                                 300

            Variable overhead                                        150

            Fixed overhead                                             240

                       Total unit manufacturing costs                                 $   890

Unit marketing costs:

            Variable                                                        $100

            Fixed                                                            280

                       Total unit marketing costs                                        $   380

Total unit costs                                                                                $1,270

The following questions refer only to the data given above. Unless otherwise stated, assume there is no connection between the situations described in the questions; each is to be treated independently. Unless otherwise stated, a regular selling price of $1,580 per unit should be assumed. Ignore income taxes and other costs that are not mentioned in Exhibit 1 or in the question.

1.   Market research estimates that monthly equipment production could be increased to 3,500 units which is well within production capacity limitations, if the price were cut from $1,580 to $1,400 per unit. Assuming the cost behavior patterns implied by the data in Exhibit 1 are correct, would you recommend that this action be taken? What would be the impact on monthly sales, costs, and income?

Fixed costs change when producing unit change? I'm confused with the total fixed costs after the change.

2.   Drugs-R-Us has an opportunity to enter a foreign market in which price competition is keen. An attraction of the foreign market is that demand there is greatest when demand in the domestic market is quite low; thus, idle production facilities could be used without affecting domestic business. Unlike many foreign markets there are no government restrictions. An order for 1,000 units is being sought at a below-normal price in order to enter this market. Additional shipping and handling costs for this order will amount to $150 per unit, while the cost of obtaining the contract (marketing costs) will be $8,000 in addition to the normal variable marketing costs. Domestic business would be unaffected by this order. What is the minimum (e.g. breakeven) unit price Drugs-R-Us should consider for this order of 1,000 units?

How can I fill out the Relevant???

How can I distinguish between relevant cost and irrelevant cost?

3.   An inventory of 230 units of equipment remains in the stockroom. These must be sold through regular channels at reduced prices or the inventory will soon be valueless. What is the minimum price that would be acceptable for selling these units?