cH 4 432

Given variable manufacturing costs of $1.25 per unit, direct fixed overhead of $3,000 and a cost to outsource of $1.50 per unit, the company will be indifferent to make or buy (in terms of cost) at a volume of ____________ units.

12,000 ($3,000 + $1.25x = $1.50x) ($3,000 = $.25x) (x=12,000 units)

constraints

Activities, resources, or policies that limit or bound the attainment of an objective

Price Fixing

Agreement among businesses to set prices at a particular level

Special Orders

An order that will not affect other sales and is usually a short-run occurrence

Contribution Margin per Unit of Scarce Resource

Contribution margin per unit of a particular input with limited availability

Sunk Costs

Costs incurred in the past that cannot be changed by present or future decisions A sunk cost is NOT relevant for making decisions.

Dumping

Exporting a product to another country at a price below domestic price

True or false: In both the short and long run, the differential approach leads to the correct pricing decision.

F, In both the short and long run, the differential approach indicates only the minimum acceptable price, not necessarily the correct one.

True or false: In both the short and long run, the differential approach leads to the correct pricing decision. True false question. True

False

Price Discrimination

Practice of selling identical goods to different customers at different prices (okay to some extent)

Predatory Pricing

Practice of setting price below cost with the intent to drive competitors out of business

Peak-load Pricing

Practice of setting prices highest when the quantity demanded for the product approaches capacity.

Which of the following is NOT a short-run pricing decision? Pricing a main product in a large market A one-time special order Adjusting product mix and volume in a competitive environment

Pricing a main product in a large market

life-Cycle Product Costing and Pricing

R & D Design Manufacturing Marketing and distribution Customer service Take back (disposal)

Bob's Bakery has a nearly unlimited demand for his cakes and pies. Each cake requires 2 direct labor hours and provides a contribution margin of $90. Each pie requires 1/4 labor hour and provides a contribution margin of $15. Bob has a total of 100 labor hours available each month and his fixed costs are $1,500. Calculate the maximum operating profit Bob can earn each month.

Reason: Bob needs to focus on contribution margin per direct labor hour which is $45 for cakes ($90/2) and $60 for pies ($15 x 4). If Bob allocates all 100 hours to pies, his contribution margin will equal $6,000 and his net profit will be $4,500 ($6,000 - $1,500).

Which of the following statements are correct?

The differential approach indicates the minimum acceptable price for a product. Following the differential approach in the short run may lead to underpricing in the long run. Fixed costs are generally irrelevant in short-term pricing decisions.

Short Run

The period of time over which capacity will be unchanged, usually one year.

Target Price

The price based on customers' perceived value for the product and the price that competitors charge. • What would a customer pay? • How much profit do I need? • Can I make it at this cost? Target price - Desired profit = Target cost

Differential Analysis

The process of estimating revenues and costs of alternative actions available to decision makers and of comparing these estimates to the status quo.

When a company engages in predatory pricing, the ultimate goal is to ______.

act like a monopolist

The theory of constraints focuses on

bottlenecks. Cost minimization is an important aspect of the theory of constraints. The theory of constraints assumes few variable costs.

Jacki's Jewels has a limited number of skilled direct labor hours to make necklaces and bracelets. Each necklace has a contribution margin of $175 and requires 1 hour of labor. Each bracelet has a contribution margin of $100 and requires 1/2 hour of labor. In order to maximize contribution margin, Jacki should first use labor hours to make

bracelets

Determining what products or services to offer is a

common managerial decision. Product decisions may be limited by capacity in the short-run.

Product Choice Decisions

constraints Contribution Margin per Unit of Scarce Resource

Sanders, Inc. makes two products. Due to a limited availability of skilled labor hours, demand for the products exceeds production capability. In deciding how to allocate resources, Sanders' measure of profitability should be ______.

contribution margin per direct labor hour

Product life-cycle is concerned with covering

costs in all categories of the life cycle.

Comparing alternative actions with the status quo in order to make decisions is the focus of ______.

differential analysis

Question Mode Fill in the Blank Question Fill in the blank question. The process of estimating revenues and costs of alternative actions and comparing them to the status quo is called

differential analysis

When considering the differential costs versus total costs approach, the ______.

differential format can be derived from the total format total cost approach provides information regarding total resources required

When a company exports its product to consumers in another country at an export price below the domestic price,

dumping has happened

Using full costs for pricing decisions can be justified when a firm ______.

enters into a long-term contractual relationship to supply a product enters into a contract with a governmental agency to supply a product

Full cost includes all ______.

fixed and variable costs of manufacturing and selling a unit of product

Full cost is the sum of all

fixed and variable costs of manufacturing and selling a unit. --Full costs are relevant for the long-term pricing decisions.

When considering a special order, ______.

fixed costs may be irrelevant

When setting prices, most firms rely on ______.

full cost information

The time value of money ______.

is immaterial for short-run decisions

Cradle to grave costing is another term for ______ costing.

life-cycle

Pricing a product in a market where there in considerable leeway in setting prices is an example of a(n)

long run pricing decision

Differential costs ______.

may be approximated by full costs in the long run

The theory of constraints focuses on ______.

minimizing investments throughput contribution

For convenience the short run is considered to be ______.

one year

A company is considering whether to continue to make a component or buy it from an outside supplier. Because the company has no alternative use of the manufacturing facilities that are currently used to make the product, the

opportunity cost associated with the decision is zero

Question Mode Fill in the Blank Question Fill in the blank question. Utility companies often engage in

peak load pricing in providing services at high demand levels

Setting prices highest when the quantity demanded for the product approaches the physical capacity to produce it is ______.

peak-load pricing

Market segmentation is required with ______.

price discrimination

When airlines sell tickets to customers who stay over Saturday night for less than tickets to customers who fly on Saturday, they are engaging in

price discrimination

The time from initial research and development to the time when customer support is withdrawn is called the

product life cycle

differential costs are also known as

relevant costs

Opportunity costs are typically not

reported with other accounting cost data When a benefit is forgone, it is not always possible to determine if an opportunity cost estimate is realistic.

Differential costs change

response to alternative courses of action. Sunk costs are never differential.

Decision horizons over which capacity will be unchanged are referred to by the term

short trun

If a company is not operating at full capacity, accepting a(n) _ from a customer will not affect other sales and is usually a short-run occurrence

special order

If a company is not operating at full capacity, accepting a(n) _________ ___________ from a customer will not affect other sales and is usually a short-run occurrence.

special order

Determining opportunity costs involves

subjectivity. Some opportunity costs are not readily quantified.

Costs incurred in the past that cannot be changed and are never relevant are called

sunk costs

In a make-or-buy decision, if a company has an alternative use of the facilities currently used to make the product, the opportunity cost of using the facility to continue to make the product is ______.

the differential contribution from the alternative use

The full-cost fallacy occurs when decision makers ______.

think that fixed costs are variable

Sales dollars minus direct materials costs and other variable costs such as energy and piecework labor equals

throughput contribution

When doing an analysis, an advantage of the ______ format is that it provides information to managers about all resources required.

total

In the short run, differential costs may be

very low. In the long run, differential costs are higher than in the short run

very low. In the long run, differential costs are higher than in the short run

very low. In the long run, differential costs are higher than in the short run

A company is considering whether to continue to make a component or buy it from an outside supplier. If they buy the component the manufacturing facility currently being used will be idle. If the company has no alternative use of the facility, the opportunity cost associated with this decision is ______.

zero