Acc346 Managerial Accounting: Week 5 Assignments (P8-4, P8-8, P9-4)

Acc346 Managerial Accounting
Week 5 Assignments

PROBLEM 8-4. Determining the Profit-Maximizing Price
RoverPlus, a pet product superstore, is considering pricing a new RoverPlus-labeled dog food. The company will buy the premium dog food from a company in Indiana that packs the product with a RoverPlus label. Rover pays $7 for a 50-pound bag delivered to its store.
The company also sells Royal Dog Food (under the Royal Dog Food label), which it purchases for $10 per 50-pound bag and sells for $17.99. The company currently sells 26,000 bags of Royal Dog Food per month, but that is expected to change when the RoverPlus brand is introduced.
The company will continue to price the Royal Dog Food brand at $17.99. The quantity of RoverPlus and the quantity of Royal Dog Food that will be sold at various prices for Royal are estimated as:
Price RoverPlus Quantity RoverPlus Quantity Royal
7.99 36,000 12,000
8.99 35,500 12,300
9.99 35,000 12,500
10.99 34,000 13,000
11.99 31,000 14,000
12.99 26,000 15,000
13.99 16,000 16,000
14.99 11,000 20,000
15.99 6,000 22,000

For example, if RoverPlus is priced at $7.99, the company will sell 36,000 bags of RoverPlus and 12,000 bags of Royal at $17.99. If the company prices RoverPlus at $15.99, it will sell 6,000 bags of RoverPlus and 22,000 bags of Royal at $17.99. This is 4,000 fewer bags of Royal than is currently being sold.

Required
a. Calculate the profit-maximizing price for the RoverPlus brand, taking into account the effect of the sales of RoverPlus on sales of the Royal Dog Food brand.
b. At the price calculated in part a, what is the incremental profit over the profit earned before the introduction of the RoverPlus-branded dog food?

PROBLEM 8-8. Cost-Plus Pricing
Emerson Ventures is considering producing a new line of hang gliders. The company estimates that variable costs will be $400 per unit and fixed costs will be $400,000 per year.

Required
a. Emerson has a pricing policy that dictates that a product's price must be equal to full cost plus 50 percent. To calculate full cost, Emerson must estimate the number of units it will produce and sell in a year. At the beginning of the year, Emerson estimates that it will sell 2,000 gliders and sets its price according to that sales and production volume. What is the price?
b. Right after the beginning of the year, the economy takes a dive and Emerson finds that demand for their gliders has fallen drastically. Emerson revises its sales and production estimate to just 1,600 gliders for the year. According to company policy, what price must now be set?
c. What is likely to happen to the number of gliders sold if Emerson follows company policy and raises the glider price to that calculated in part b?
d. Why is setting price by marking up cost inherently circular for a manufacturing firm?

PROBLEM 9-4. Present Value and "What If" Analysis
National Cruise Line, Inc. is considering the acquisition of a new ship that will cost $200,000,000. In this regard, the president of the company asked the CFO to analyze cash flows associated with operating the ship under two alternative itineraries: Itinerary 1, Caribbean Winter/Alaska Summer and Itinerary 2, Caribbean Winter/Eastern Canada Summer. The CFO estimated the following cash flows, which are expected to apply to each of the next 15 years:
Caribbean / Alaska Caribbean / Eastern Canada
Net revenue 120,000,000 105,000,000
Less:
Direct program expenses (25,000,000) (24,000,000)
Indirect program expenses (20,000,000) (20,000,000)
Nonoperating expenses (21,000,000) (21,000,000)
Add back depreciation 115,000,000 115,000,000
Cash flow per year $169,000,000 $155,000,000

Required
a. For each of the itineraries, calculate the present values of the cash flows using required rates of return of both 10 and 15 percent. Assume a 15-year time horizon. Should the company purchase the ship with either or both required rates of return?
b. The president is uncertain whether a 10 percent or a 15 percent required return is appropriate. Explain why, in the present circumstance, spending a great deal of time determining the correct required return may not be necessary.
c. Focusing on a 10 percent required rate of return, what would be the opportunity cost to the company of using the ship in a Caribbean/Eastern Canada itinerary rather than a Caribbean/Alaska itinerary?
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