Acc301 Essentials of Accounting: Week 7 (E11-3, E11-11, P11-1A, P11-3A, BYP11-3, BYP11-6)

Acc301 Essentials of Accounting
Week 7 Homework
E11-3 Mucky Duck makes swimsuits and sells these suits directly to retailers. Although Mucky Duck has a variety of suits, it does not make the All-Body suit used by highly skilled swimmers. The market research department believes that a strong market exists for this type of suit. The department indicates that the All-Body suit would sell for approximately $110. Given its experience, Mucky Duck believes the All-Body suit would have the following manufacturing costs. Direct materials 25 Direct labor 30 Manufacturing overhead 45 Total costs 100

(a) Assume that Mucky Duck uses cost-plus pricing, setting the selling price 25% above its costs.
(1) What would be the price charged for the All-Body swimsuit?
(2) Under what circumstances might Mucky Duck consider manufacturing the All-Body swimsuit given this approach?
(b) Assume that Mucky Duck uses target costing. What is the price that Mucky Duck would charge the retailer for the All-Body swimsuit?
(c) What is the highest acceptable manufacturing cost Mucky Duck would be willing to incur to produce the All-Body swimsuit, if it desired a profit of $25 per unit? (Assume target costing.)

E11-11 Allied Company's Small Motor Division manufactures a number of small motors used in household and office appliances. The Household Division of Allied then assembles and packages such items as blenders and juicers. Both divisions are free to buy and sell any of their components internally or externally. The following costs relate to small motor LN233 on a per unit basis. Fixed cost per unit 5 Variable cost per unit 8 Selling price per unit 30

(a) Assuming that the Small Motor Division has excess capacity, compute the minimum acceptable price for the transfer of small motor LN233 to the Household Division.
(b) Assuming that the Small Motor Division does not have excess capacity, compute the minimum acceptable price for the transfer of the small motor to the Household Division.
(c) Explain why the level of capacity in the Small Motor Division has an effect on the transfer price.

P11-1A Lafluer Corporation needs to set a target price for its newly designed product M14-M16. The following data relate to this new product. Per Unit Total Direct materials 20 Direct labor 42 Variable manufacturing overhead 10 Fixed manufacturing overhead 1,440,000 Variable selling and administrative expenses 5 Fixed selling and administrative expenses 1,040,000 These costs are based on a budgeted volume of 80,000 units produced and sold each year. Lafluer uses cost-plus pricing methods to set its target selling price. The markup on total unit cost is 30%.

1. Compute the total variable cost per unit, total fixed cost per unit, and total cost per unit for M14 - M16.
2. Compute the desired ROI per unit for M14-M16.(Round answer to 2 decimal places, e.g. 10.50.)
3. Compute the target selling price for M14-M16.(Use the rounded amount from the previous question when calculating the answer for this question. Round answer to 2 decimal places, e.g. 10.50.)
4. Compute variable cost per unit, fixed cost per unit, and total cost per unit assuming that 60,000 M14 - M16s are sold during the year. (Round answers to 2 decimal places, e.g. 10.50.)

P11-3A Hawks Electronic Repair Shop has budgeted the following time and material for 2008. HAWKS ELECTRONIC REPAIR SHOP Budgeted Costs for the Year 2008 Time Charges Material Loading Charges Shop employees' wages and benefits 108,000 0 Parts manager's salary and benefits 0 25,400 Office employee's salary and benefits 20,000 13,600 Overhead (supplies, depreciation, advertising, utilities) 26,000 18,000 Total budgeted costs 154,000 57,000 Hawks budgets 5,000 hours of repair time in 2008 and will bill a profit of $5 per labor hour along with a 30% profit markup on the invoice cost of parts. The estimated invoice cost for parts to be used is $100,000. On January 5, 2008 Hawks is asked to submit a price estimate to fix a 72-inch big-screen TV. Hawks estimates that this job will consume 20 hours of labor and $500 in parts. Instructions (a) Compute the labor rate for Hawks Electronic Repair Shop for the year 2008. (b) Compute the material loading charge percentage for Hawks Electronic Repair Shop for the year 2008. (c) Prepare a time-and-material price quotation for fixing the big-screen TV. BYP11-3 Real World Focus Merck & Co., Inc. is a global, research-driven pharmaceutical company that discovers, develops, manufacturers, and markets a broad range of human and animal health products. The following are excerpts from the financial review section of the company's annual report. MERCK & CO INC Financial Review Section (partial) In theUnited Statesthe Company has been working with private and governmental employers to slow the increase of health care costs. Outside of theUnited Statesin difficult environments encumbered by government cost containment actions, the Company has worked with payers to help them allocate scarce resources to optimize healthcare outcomes, limiting potentially detrimental effects of government actions on sales growth. Several products face expiration of product patents in the near term. The Company along with other pharmaceutical manufacturers, received a notice from the Federal Trade Commission (FTC) that it was conducting an investigation into pricing practices. Instructions Answer each of the following questions. a) In light of the above excerpts from Merck's annual report, discuss some unique pricing issues faced by companies that operate in the pharmaceutical industry. b) What are some reasons why the same company often sells identical drugs for dramatically different prices in different countries? How can the same drug used for both humans and animals cost significantly different prices? c) Suppose that Merck has just developed a revolutionary new drug for the treatment of arthritis. Discuss the steps it would go through in setting a price. Include a discussion of the information it would need to gather, and the issues it would need to consider.

BYP11-6 Ethics Case

Giant Airlines operates out of three main "hub" airports in theUnited States. Recently Mosquito Airlines began operating a flight fromReno,Nevada, into Giant's Metropolis hub for $190. Giant Airlines offers a price of $425 for the same route. The management of Giant is not happy about Mosquito invading its turf. In fact, Giant has driven off nearly every other competing airline from its hub, so that today 90% of flights into and out of Metropolis are Giant Airline flights. Mosquito is able to offer a lower fare because its pilots are paid less, it uses older planes, and it has lower overhead costs. Mosquito has been in business for only 6 months, and it services only two other cities. It expects the Metropolis route to be its most profitable. Giant estimates that it would have to charge $210 just to break even on this flight. It estimates that Mosquito can break even at a price of $160. Within one day of Mosquito's entry into the market, Giant dropped its price to $140, whereupon Mosquito matched its price. They both maintained this are for a period of 9 months, until Mosquito went out of business. As soon as Mosquito went out of business, Giant raised its fare back to $425. Instructions Answer each of the following questions. (a) Who are the stakeholders in this case? (b) What are some of the reasons why Mosquito's breakeven-point is lower than that of Giant? (c) What are the likely reasons why Giant was able to offer this price for this period of time, while Mosquito couldn't? (d) What are some of the possible courses of action available to Mosquito in this situation? (e) Do you think that this kind of pricing activity is ethical? What are the implications for the stakeholders in this situation?
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