2. ACCT 7310 Problem Solutions, Ch. 12-- Pricing

3. Pr. 12-17—Relevant Costing, Short-run pricing Flat amt

4. Part 2—add’l considerations

5. 12-33: Cost-plus and market-based prices 1. Single rate = $11.91 per test-hour (TH)  With 45% markup, hourly billing rate for HTT and ACT = $11.91 * 1.45 = $17.27 2. Individual activity [?] rates:  Labor and supervision = = $4.64 per test-hour  Setup and facility costs = = $503.275 per setup-hour  Utilities = = $36.80 per machine-hour (MH)

6. Pr 12-33 part 3 HTTACTTotal Labor and supervision ($4.64×63,600; 42,400 test-hrs) $295,104$196,736$ 491,840 Setup and facility cost [25%/75%] ($503.275×200; 600 setup-hrs) 100,655301,965402,620 Utilities ($36.80×5,000; 5,000 machine- hours) 184,000 368,000 Total cost $579,759 $682,701$1,262,460 Number of testing hours (TH) ÷ 63,600 TH ÷ 42,400 TH Cost per testing hour $9.12 per TH $ 16.10 per TH Mark-up × 1.45 Billing rate per testing hour $ 13.22 per TH $ 23.35 per TH Vs. $17.27 for either one 106,000 hrs 60% = 63,600

7. Pr 12-33 part 4 If competitors all charge $20/hr. for arctic testing, what can Best Test do to stay competitive?  They apparently need to be more efficient in arctic testing. Roughly 44% of arctic testing’s total cost occurs in setups and facility costs. Can the setup activity can be redesigned to achieve cost savings?  Also look for savings in the labor and supervision cost per test- hour and the total number of test-hours used in arctic testing, as well as the utility cost per machine-hour and the total number of machine hours used in arctic testing.  This may require redesigning the test, redesigning processes, and achieving efficiency and productivity improvements.

8. Pr. 12-34: Life-cycle costing Total Project Life-Cycle Costs Variable costs: Metal extraction and processing ($100/ton × 50,000 tons)$5,000,000 Fixed costs: Metal extraction and processing ($4,000 × 24 months)96,000 Rent on temporary buildings ($2,000 × 27 months)54,000 Administration ($5,000 × 27 months)135,000 Clean-up ($30,000 × 3 months)90,000 Land restoration475,000 Selling land 150,000 Total life-cycle cost$6,000,000 Part 1

9. Pr. 12-34 part 2 Projected Life Cycle Income Statement Revenue ($150 per ton 50,000 tons) $7,500,000 Sale of land (plug figure) 500,000 Total life-cycle cost (6,000,000) Life-cycle operating income ($40/ton × 50,000 tons) $2,000,000 Mark-up percentage on project life-cycle cost = = 33 1/3 %

10. Pr. 12-34 part 3 Revenue ($140 per ton 50,000 tons) $7,000,000 Sale of land [$100,000 less than in part 3] 400,000 Total revenue $7,400,000 Total life-cycle cost allowable given mark-up of 33 ⅓ % ($7,400,000 ÷ 1.333333) $5,550,000 This is a reduction in total life-cycle costs of ($6,000,000 – $5,550,000) = $ 450,000 Checking the answer: Revenue $7,000,000 Sale of land 400,000 Total life-cycle cost (5,550,000) Life-cycle operating income $1,850,000 Mark-up percentage = 1,850000/5,550,000= 33 ⅓ %

11. Pr. 12-35: Airline Pricing FareBusiness fliersPleasure fliers $500200 @$435 =$87,000 100@$435 = $43,500 $130,500 $2,100180 @$1,925 = $346,500 20 @$1,925 = $38,500 $385,000 If the fare is $500, Air Eagle would expect to have 200 business and 100 pleasure travelers. Variable costs per passenger would be $65. Contribution margin per passenger = $500 – $65 = $435. If the fare is $2,100, Air Eagle would expect to have 180 business and 20 pleasure travelers. Variable costs per passenger would be $175. Contribution margin per passenger = $2,100 – $175 = $1,925.

12. Pr. 12-35: Airline Pricing FareBusiness fliersPleasure fliers $500200 @$435 =$87,000 100@$435 = $43,500 $130,500 $2,100180 @$1,925 = $346,500 20 @$1,925 = $38,500 $385,000 Potential with discrimination$346,500$43,500$390,000 If the fare is $500, expect to have 200 business and 100 pleasure travelers. Variable costs per passenger would be $65. CM/passenger = $500 – $65 = $435. If the fare is $2,100, expect to have 180 business and 20 pleasure travelers. VC/ passenger would be $175. CM/passenger = $2,100 – $175 = $1,925. Note: In deciding the prices, all other costs such as fuel costs, allocated annual lease costs, allocated ground services costs, and allocated flight crew salaries are irrelevant. They will not change whatever price Air Eagle charges.

13. Pr. 12-35 part 3: How can price discrimination work? The elasticity of demand of the two classes of passengers drives the different demands of the travelers. Business travelers are relatively price insensitive because they must get to their destination during the week (exclusive of weekends) and their fares are paid by their companies. A 320% increase in fares from $500 to $2,100 will deter only 10% of the business passengers from flying with Air Eagle. A similar fare increase will lead to an 80% drop in pleasure travelers who are paying for their own travels, unlike business travelers, and who may have alternative vacation plans they could pursue instead. Since business travelers often want to return within the same week, while pleasure travelers often stay over weekends, a requirement that a Saturday night stay is needed to qualify for the $500 discount fare would discriminate between the passenger categories. This price discrimination is legal because airlines are service companies rather than manufacturing companies and because these practices do not, nor are they intended to, destroy competition.

14. IMA Code of Conduct (Ch. 1 of Horngren et al. and just about any other cost/managerial accounting textbook The four standards of ethical conduct for management accountants as advanced by the Institute of Management Accountants:  Competence  Confidentiality  Integrity  Objectivity © 2012 Pearson Prentice Hall. All rights reserved.

15. Competence Members have a responsibility to: 1.Maintain an appropriate level of professional expertise by continually developing knowledge and skills. 2.Perform professional duties in accordance with relevant laws, regulations, and technical standards. 3.Provide decision support information and recommendations that are accurate, clear, concise, and timely. 4.Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of activity.

16. Confidentiality Members have a responsibility to: 1.Keep information confidential except when disclosure is authorized or legally required. 2.Inform all relevant parties regarding appropriate use of confidential information. 3.Refrain from using confidential information for unethical or illegal advantage. 4.Monitor subordinates’ activities to ensure compliance.

17. Integrity Members have a responsibility to: 1.Mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. 2.Refrain from engaging in any conduct that would prejudice carrying out duties ethically. 3.Abstain from engaging in or supporting any activity that might discredit the profession.

18. Credibility Members have a responsibility to: 1.Communicate information fairly and objectively. 2.Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. 3.Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

19. 12-36: Ethics & Pricing 1.The $500 spent on the basketball tickets is a sunk (past) cost, and is therefore irrelevant to the bid decision. Apex will incur the $500 cost whether it bids, loses the bid, or wins the bid.  This is not a key part of the problem’s focus.

20. 12-36: Ethics & Pricing 2.Target price = $145,000  Full cost allowed with 25% markup: $145,000/125% = $116,000  Original full cost was $121,000, so this is a $5000 reduction  Taken from framing costs, $40,000-$5000 = $35,000 target cost of frames.

21. 12-36: Ethics & Pricing It was unethical for Grant to use the basketball tickets to get the tip out of the purchasing agent. Knowing about Grant’s action and suggesting a way to use it is unethical on the part of Gomes. In assessing the situation, the specific “Standards of Ethical Conduct for Management Accountants,” described in Chapter 1 that the management accountant should consider are listed below.

22. Conclusions based on IMA Code Integrity The management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Using unethically gathered information to compromise a sealed bid arrangement is clearly a violation of this standard. The Standards of Ethical Conduct require the management accountant to communicate favorable as well as unfavorable information. In this regard, both Grant’s and Gomes’s behavior could be viewed as unethical. Credibility The Standards of Ethical Conduct for Management Accountants require that information should be fairly and objectively communicated and that all relevant information should be disclosed. From a management accountant’s standpoint, revising a bid based on this kind of information violates both of these precepts. Grant and Gomes should leave the bid as it was originally produced, without using the unethically obtained inside information. The company should clarify its policy on business entertainment.