Accounting for Decision Makers

ACT 5060 – Accounting for Decision Makers

HW #4

Directions: Answer all five questions. Please submit your work in Word or PDF formats only. You can submit an Excel file to support calculations, but please “cut and paste” your solutions into the Word or PDF file. Be sure to show how you did your calculations. Also, please be sure to include your name at the top of the first page of your file. You can use any sources you wish, except for other people. Please be sure to document any source you use. The assignment is due by 9:00 AM on Wednesday, November 19^th. Please run spell check and proofread your answers. If you have any questions,

Question #1

Consider the following information, prepared based on a monthly capacity of 80,000 units:

Category

Cost per Unit

Variable manufacturing costs

$18

Fixed manufacturing costs

$5

Variable selling costs

$4

Fixed selling costs

$3

Capacity cannot be added in the month and the firm currently sells the product for $33 per unit.

Consider each of these scenarios independent of each other.

a) The company is currently producing 72,000 units per month. A potential customer has contacted the firm and offered to purchase 8,000 units this month only. The customer is willing to pay $28 per unit. Since the potential customer approached the firm, there will be no variable selling costs incurred. Should the company accept the special order? Why or why not? Be specific.

b) Assume the same facts as in part a, except that the company is producing 80,000 units per month. Should the company accept the special order? Why or why not? Be specific.

c) List and describe other factors (not those addressed in parts a and b) that should be taken into consideration when deciding whether to accept a special order? Be specific in your responses.

Question #2

Consider the following information, prepared based on monthly production and sales of 20,000 units:

Category

Cost per Unit

Variable manufacturing costs

$3.00

Variable marketing costs

$1.50

The firm has total fixed costs of $28,000 and currently sells the product for $6 per unit.

a)      Assume the company is producing and selling 20,000 units per month. It is considering an arrangement where an outside manufacturer would produce and ship the product directly to customers. Under this arrangement, variable marketing costs would decrease 20% per unit and $5,000 in fixed costs would be avoided. What is the maximum amount per unit the company would be willing to pay to the outside manufacturer? 

b)      List and describe other factors that should be taken into consideration when deciding whether to accept this offer. Be specific in your responses.

Question #3

A consulting company performs a “basic” market analysis for a client. It incurs costs of $9,000 in performing the analysis and plans to sell the report to the client for $17,000. After reviewing the initial report, the client asks the firm if it is willing to do a more extensive report. The client offers to pay $35,000 for a more extensive report. If the more extensive report is done, the client will NOT pay the $17,000. If the consulting firm estimates it will require $12,000 in additional expenses to complete the more extensive report, should it agree to do the more extensive report? Why or Why not? Be specific in your response.

Question #4

Assume an engineering company provides services for 3 types of clients. Each service requires a different amount of a specific form of specialized labor that is in limited supply. If the company is limited to 4,000 hours of this specialized labor, how many clients of each type should it accept in order to maximize operating income?

Client Type

A

B

C

Revenue per client

$1,500

$4,000

$2,400

Variable costs per client

$700

$1,600

$1,000

Specialized labor hours required per client

2

10

4

Maximum clients available

350

400

600

Question #5

a) What is target pricing? Under what specific circumstances can it be most useful? What are some potential problems with using this approach? Be specific in your responses.

b) What is cost-plus pricing? Under what specific circumstances can it be most useful? What are some potential problems with using this approach? Be specific in your responses.