EXERCISE 12A-6 Value-Based Pricing; Absorption Costing Approach to Cost-Plus Pricing LO12-8, LO12-10
Valmont Company has developed a new industrial piece of equipment called the XP-200. The company is considering two methods of establishing a selling price for the XP-200-absorption cost-plus pricing and value-based pricing.
Valmont’s cost accounting system reports an absorption unit product cost for XP-200 of $8,400. Its markup percentage on absorption cost is 85%. The company's marketing managers have expressed concerns about the use of absorption cost-plus pricing because it seems to overlook the fact that the XP-200 offers superior performance relative to the comparable piece of equipment sold by Valmont's primary competitor. More specifically the XP-200 can be used for 20,000 hours before replacement. It only requires $1,000 of preventive maintenance during its useful life and it consumes $120 of electricity’ per 1,000 hours used.
These figures compare favorably to the competing piece of equipment that sells for $15,000: needs to be replaced after 10,000 hours of use, requires $2,000 of preventive maintenance during its useful life and comes $140 of electricity per 1,000 hours used.
Required:
- If Valmont uses absorption cost-plus pricing; what price will it establish for the XP-200?
- What is XP-200's economic value to the customer (EVC) over its 20:000-hour life?
- If Valmont uses value-based pricing, what range of possible prices should it consider when setting a price for the XP-200?
- What advice would you give Valmont's managers when choosing between absorption cost-plus pricing and value-based pricing?
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Chapter 12 Solutions
Managerial Accounting
- Variable costing income statement and effect on income of change in operations Kimbrell Inc. manufacture three sizes of utility tablessmall (S), medium (M), and large (L). The income statement has consistently indicated a net loss for the M size, and management is considering three proposals: (1) continue Size M, (2) discontinue Size M and reduce total output accordingly, or (3) discontinue Size M and conduct an advertising campaign to expand the sales of Size S so that the entire plant capacity can continue to be used. If Proposal 2 is selected and Size M is discontinued and production curtailed, the annual fixed production costs and fixed operating expenses could be reduced by 142,500 and 28,350. respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of 85,050 for the salary of an assistant brand manager (classified as a fixed operating expense) would yield an additional 130% in Size S sales volume. It is also assumed that the increased production of Size S would utilize the plant facilities released by the discontinuance of Size M. The sales and costs have been relatively stable over the past few years, and they are expected to remain so for the foreseeable future. The income statement for the past year ended December 31, 20Y8, is as follows: Instructions 1. Prepare an income statement for the past year in the variable costing format. Use the following headings: Size S M L Total Data for each style should be reported through contribution margin. The fixed costs should lie deducted from the total contribution margin, as reported in the Total" column, to determine income from operations. 2. Based on the income statement prepared in (1) and the other data presented above, determine the amount by which total annual income from operations would be reduced below its present level if Proposal 2 is accepted. 3. Prepare an income statement in the variable costing format, indicating the projected annual income from operations if Proposal 3 is accepted. Use the following headings: Size S L Total Data for each style should be reported through contribution margin. The fixed costs should lie deducted from the total contribution margin as reported in the "Total" column. For purposes of this problem, the additional expenditure of 85,050 for the assistant brand manager's salary can be added to the fixed operating expenses. 4. By how much would total annual income increase above its present level if Proposal 3 is accepted? Explain.arrow_forwardSegment variable costing income statement and effect on income of change in operations Valdespin Company manufactures three sizes of camping tentssmall (S), medium (M), and large (L). The income statement has consistently indicated a net loss for the M size, and management is considering three proposals: (1) continue Size M, (2) discontinue Size M and reduce total output accordingly, or (3) discontinue Size M and conduct an advertising campaign to expand the sales of Size S so that the entire plant capacity can continue to be used. If Proposal 2 is selected and Size M is discontinued and production curtailed, the annual fixed production costs and fixed operating expenses could be reduced by 46,080 and 532,240. respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of 34,560 for the rental of additional warehouse space would yield an additional 130% in Size S sales volume. It is also assumed that the increased production of Size S would utilize the plant facilities released by the discontinuance of Size M. The sales and costs have been relatively stable over the past few years, and they are expected to remain so for the foreseeable future. The income statement for the past year ended June 30, 20Y9, is as follows: Instructions 1. Prepare an income statement for the past year in the variable costing: format. Use the following headings: Data for each style should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin, as reported in the Total column, to determine income from operations. 2. Based on the income statement prepared in (1) and the other data presented, determine the amount by which total annual income from operations would be reduced below its present level if Proposal 2 is accepted. 3. Prepare an income statement in the variable costing format, indicating the projected annual income from operations if Proposal 3 is accepted. Use the following headings: Data for each style should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin as reported in the Total column. For purposes of this problem, the expenditure of 34,560 for the rental of additional warehouse space can be added to the fixed operating expenses. 4. By how much would total annual income increase above its present level if Proposal 3 is accepted? Explain.arrow_forwardQUESTION 4 (TOPIC 8) Nuraz Sdn Bhd (NSB) manufactures modern vase in northern areas and the price per unit is RM50. Currently, company uses absorption costing and the owner is considering to change the reporting method to variable costing. Thus, he asked the accountant to show the difference in income using both methods. To do so, the accountant rely on the information below: Production 70,000 units Beginning finished goods inventory 17,500 units Sales RM3,125,000 Direct materials RM840,000 Direct labor RM630,000 Variable manufacturing overhead RM280,000 Variable selling and administrative expenses RM700,000 Fixed manufacturing overhead RM350,000 Fixed selling and administrative RM700,000 REQUIRED: 1. Calculate ending finished goods inventory (in RM) using: Absorption costing. Variable costing. 2. Without preparing income statement, calculate the different in income reported under absorption costing and variable…arrow_forward
- Exercise A-2 Absorption Costing Approach to Setting a Selling Price [LOA-2] Martin Company is considering the introduction of a new product. To determine a selling price, the company has gathered the following information: Number of units to be produced and sold each year 15,500 Unit product cost $ 50 Projected annual selling and administrative expenses $ 66,000 Estimated investment required by the company $ 450,000 Desired return on investment (ROI) 18 % The company uses the absorption costing approach to cost-plus pricing. Required: 1. Compute the markup required to achieve the desired ROI. ((Round your final answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) 2. Compute the selling price per unit. (Round your intermediate and final answers to 2 decimal places. )arrow_forwardQ. 8 Which following costs need to be considered for both make or buy options? O. Fixed overhead O. Variable overhead O. Rental revenue Q. 9 What is the per unit cost to purchase from the vendor? Round to the nearest penny. Q. 10 Based on your analysis, the CreativeStationary Co. should make the product in-house or buy them from the vender? O. Make O. Buy Do (Q8,9,10 plz)arrow_forwardQUESTION FOUR By use of an example demonstrate how relevant costs are used in short term decision making. Describe Activity Based Costing (ABC) method and how it is used to determine the cost of a product or service. Consider the following information: Contribution to Sales (C/S) Ratio = 25% Selling Price per unit = K70 Total Fixed Costs = K140,000 Required: Calculate Contribution per Unit Variable cost per Unit Break Even Point in Quantity and Sales value termsarrow_forward
- Item8 2.5 points Return to questionitem 8 Exercise 11-19A (Algo) Margin of safety LO 11-6 Information concerning a product produced by Ender Company appears here: Sales price per unit $172 Variable cost per unit $91 Total annual fixed manufacturing and operating costs $502,200 Required Determine the following: Contribution margin per unit. Number of units that Ender must sell to break even. Sales level in units that Ender must reach to earn a profit of $291,600. Determine the margin of safety in units, sales dollars, and as a percentage. a. Contribution margin per unit. b. Number of units that Ender must sell to break even. c. Sales level in units that Ender must reach to earn a profit of $291,600. a. Contribution margin b. Break-even in units c. Break-even in units to earn profit of $291,600 Determine the margin of safety in units, sales dollars, and as a percentage. Note: Round "Percentage" answer to 1 decimal place ( I.e., 0.234 should be entered as 23.4). Units? Sales ? Percentage…arrow_forwardExercise 11-6 (Algo) Managing a Constrained Resource [LO11-6] Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the company's products far exceeds its manufacturing capacity. The bottleneck (or constraint) in the production process is upholstery labor-hours. Information concerning three of Portsmouth's products appears below: Recliner Sofa Love Seat Selling price per unit $ 1,360 $ 1,885 $ 1,240 Variable cost per unit $ 800 $ 1,300 $ 900 Upholstery labor-hours per unit 8 hours 13 hours 4 hours Required: 1. Portsmouth is considering paying its upholstery laborers hourly compensation, in addition to their usual salaries, to work overtime. Assuming that this extra time would be used to produce sofas, up to how much of an overtime rate per hour should the company be willing to pay to keep the upholstery shop open after normal working hours? 2. A small nearby upholstering company has offered to…arrow_forwardExercise 18-22 (Algo) CVP analysis with two products LO P3 Handy Home sells windows (80% of sales) and doors (20% of sales). The selling price of each window is $330 and of each door is $760. The variable cost of each window is $190 and of each door is $480. Fixed costs are $940,800. (1) Compute the weighted-average contribution margin (2) Compute the break-even point in units using the weighted-average contribution margin (3) Compute the number of units of each rpoduct that will be sold at the break-even pointarrow_forward
- Financial & Managerial AccountingAccountingISBN:9781337119207Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning