When only differential manufacturing costs are taken into account for special-order pricing, an essential assumption is that
Answer(s): C
Granting a lower-than-normal price for a special order has potential ramifications for regular sales because other customers may demand the same price. Thus, the decision to consider differential manufacturing costs only should be based on a determination that all other costs are not relevant, that is, that these other costs do not vary with the option chosen.
Clay Co. has considerable excess manufacturing capacity. A special job order's cost sheet includes the following applied manufacturing overhead costs:Fixed costs $21,000Variable costs 33,000The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead, the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?
Answer(s): B
Given excess capacity, the company presumably will not incur opportunity costs if it accepts the special order. Assuming also that fixed costs will be unaffected, the incremental cost of the order (the minimum acceptable price) will be $40,750 ($33,000 VC + $7,750 cost of external design).
Vince, Inc. has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device?I). Quality of the new deviceIl). Life of the new deviceIll). Customers' relative preference for quality compared with price
Answer(s): D
Product pricing is a function of consumer demand, competitive factors, and the seller's cost structure and profit objectives. Thus, the seller must consider the trade-off between the price and quality effects on demand. A better-quality' product, for example, one with a relatively long useful life, is more costly to produce and therefore sells for a higher price, which in turn reduces the amount demanded.
If a U.S. manufacturer's price in the U.S. market is below an appropriate measure of costs and the seller has a reasonable prospect of recovering the resulting loss in the future through higher prices or a greater market share, the seller has engaged in
Predatory pricing is intentionally pricing below cost to eliminate competition and reduce supply. Federal statutes and many state laws prohibit the practice. The U.S. Supreme Court has held that pricing is predatory when two conditions are met (1)the seller's price is below "an appropriate measure of its costs," and (2) it has a reasonable prospect of recovering the resulting loss through higher prices or greater market share.
Briar Co. signed a government construction contract providing for a formula price of actual cost plus 10%. In addition, Briar was to receive one-half of any savings resulting from the formula price's being less than the target price of $2.2 million. Briar's actual costs incurred were $1,920,000. How much should Briar receive from the contract?
The formula price is 110% of actual cost, or $2,112,000 (110% x $1,920,000), a savings of $88,000 on the $2,200,000 target price. Accordingly, Briar should receive $2,156,000 {$2,1 12,000 + [50% x ($2,200,000 -- $2,1 1 2,000)]}.
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