# Please complete the following exercises and/or problems from the

Please complete the following exercises and/or problems from the textbook:

• E25-10
• E25-13
• E25-18
• E25-15
• CP25-34

Prepare your answers in an Excel workbook, using one worksheet per exercise or problem.

E25-10 Making special pricing decisions

Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached

Hobby-Cardz with a special order. The Hall of Fame wishes to purchase 57,000

baseball card packs for a special promotional campaign and offers \$0.41 per pack, a

total of \$23,370. Hobby-Cardz’s total production cost is \$0.61 per pack, as follows:

Variable costs:

Direct materials \$ 0.13

Direct labor 0.06

Total cost \$ 0.61

Hobby-Cardz has enough excess capacity to handle the special order.

1616

chapter 25

C H A P T E R 2 5

E25-12 Making pricing decisions

Stenback Builders builds 1,500-square-foot starter tract homes in the fast-growing

suburbs of Atlanta. Land and labor are cheap, and competition among developers is

the sale. Stenback Builders’ costs per developed sublot are as follows:

Land \$ 59,000

Construction 124,000

Landscaping 6,000

Variable selling costs 5,000

Stenback Builders would like to earn a profit of 14% of the variable cost of each

home sale. Similar homes offered by competing builders sell for \$208,000 each.

Assume the company has no fixed costs.

Requirements

1. Which approach to pricing should Stenback Builders emphasize? Why?

2. Will Stenback Builders be able to achieve its target profit levels?

3. Bathrooms and kitchens are typically the most important selling features of a

home. Stenback Builders could differentiate the homes by upgrading the bathrooms

and kitchens. The upgrades would cost \$22,000 per home but would

enable Stenback Builders to increase the selling prices by \$38,500 per home.

value of any home.) If Stenback Builders makes the upgrades, what will the new

cost-plus price per home be? Should the company differentiate its product in

this manner?

E25-13 Making dropping a product decisions

Top managers of Movie Street are alarmed by their operating losses. They are

considering dropping the DVD product line. Company accountants have

prepared the following analysis to help make this decision:

Learning Objective 2

2. Desired profit \$27,160

Learning Objective 3

1. \$(31,000)

Total Fixed Expenses

Operating Income (Loss)

Blu-ray

Discs

DVD

Total Discs

\$ (41,000)

72,000

15,000

MOVIE STREET

Income Statement

For the Year Ended December 31, 2014

\$ 32,000

123,000

52,000

\$ (9,000)

128,000 71,000 57,000

195,000

67,000

Contribution Margin

Sales Revenue

Variable Costs

Manufacturing

Fixed Costs:

31,000

96,000

155,000

150,000

186,000

246,000

\$ 432,000 \$ 305,000 \$ 127,000

Total fixed costs will not change if the company stops selling DVDs.

Requirements

1. Prepare a differential analysis to show whether Movie Street should drop the

DVD product line.

2. Will dropping DVDs add \$41,000 to operating income? Explain

E25-18 Making outsourcing decisions

Fiber Systems manufactures an optical switch that it uses in its final product. The

switch has the following manufacturing costs per unit:

Direct Material \$ 9.00

Direct Labor 1.50

Manufacturing Product Cost \$ 24.50

Another company has offered to sell Fiber Systems the switch for \$18.50 per unit.

If Fiber Systems buys the switch from the outside supplier, the manufacturing

facilities that will be idled cannot be used for any other purpose, yet none of the

fixed costs are avoidable.

Prepare an outsourcing analysis to determine whether Fiber Systems should

E25-15 Making product mix decisions

Lifemaster produces two types of exercise treadmills: regular and deluxe. The

exercise craze is such that Lifemaster could use all its available machine hours to

produce either model. The two models are processed through the same production

departments. Data for both models is as follows:

Per Unit

Deluxe Regular

Sale Price \$ 1,020 \$ 560

Costs:

Direct Material 300 90

Direct Labor 88 188

Variable Operating Expenses 111 65

Total Costs 901 477

Operating Income \$ 119 \$ 83

*allocated on the basis of machine hours

Requirements

1. What is the constraint?

2. Which model should Lifemaster produce? (Hint: Use the allocation of fixed

manufacturing overhead to determine the proportion of machine hours used by

each product.)

3. If Lifemaster should produce both models, compute the mix that will maximize

operating income.

P25-34 Making sell or process further decisions

This problem continues the Davis Consulting, Inc. situation from Problem P24-37

of Chapter 24. Davis Consulting provides consulting services at an average price

of \$175 per hour and incurs variable costs of \$100 per hour. Assume average fixed

costs are \$5,250 a month.

Davis has developed new software that will revolutionize billing for companies.

Davis has already invested \$200,000 in the software. It can market the software as

is at \$30,000 per client and expects to sell to eight clients. Davis can develop the

cost of \$120,000. The additional development will allow Davis to sell the

software for \$38,000 each, but to 20 clients.

Should Davis sell the software as is or develop it further?

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