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Pertemuan 11 dan 12 – Decision Making dan Pricing

1.
In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,”
said Walter Black, managing director of Antilles Refining. At a price of $18 per drum, we would be
paying $5 less than it costs us to manufacture the drums in our own plant. Since we use 60.000
drums a year, that would be an annual cost savings of $300.000. Antilles Refining’s present cost to
manufacture one drum is given below (based on 60.000 drums per year)

Direct Material $10,35

Direct Labor $5,00

Variable FOH $2,50

Fixed FOH $5,15


($2,8 general company overhead, $1,6 depreciation, and $0,75 supervision)

Total cost per drum $23,00

A decision about whether to make or buy the drums is especially important at this time since the
equipment being used to make the drums is completely worn out and must be replaced. The choices
that the company faces are :

Alternative 1 : Purchase new equipment and continue to make drums. The equipment would cost
$810.000, it would have six years useful life and no salvage value. The company uses straight line
depreciation.

Alternative 2 : Purchase the drums from an outside supplier at $18 per drum under six-year contract.

The new equipment would be more efficient than the equipment that Antilles Refining has been
used and, according to the manufacture, would reduce direct labor and variable overhead costs by
25%. The old equipment has no resale value. Direct material costs per would not be affected by new
equipment. The company’s total general company overhead would be unaffected by this decision,
while the rest can be eliminated. Supervisor is a short-term contract employee with the firm. If the
company chooses to buy from outside supplier, the supervisor’s contract will not be renewed.

Required:

1. Prepare an analysis showing what the total costs and cost per drum would be under each of the
two alternatives given above. Assume that 60.000 drums are needed each year. Which course of
action would you recommend to the managing director?

2. Would your recommendation in (1) above be the same with 75.000 drums per year or 90.000
drums per year.

3. What other qualitative factors that the company should consider?


Pertemuan 11 dan 12 – Decision Making dan Pricing

2.
The Medallion Company manufactures medals for winners of athletic events and other contests. Its
manufacturing plant has the capacity to produce 10.000 medals each month. Current production and
sales are 7.500 medals per month. The company normally charges $150 per medal. Cost information
for the current activity level is as follows:

Variable Costs that Vary with numbers of units produced


DM $ 262,500
DL $ 300,000
Variable costs that Vary with number of batches $ 75,000
Fixed Manufacturing costs $ 275,000
Fixed Marketing Costs $ 175,000
Total Costs $ 1,087,500

Medallion has just received a special one-time-only order for 2.500 medals at $100 per medals.
Accepting the special order would not affect the company’s regular business. Medallion makes medals
for its existing customers in batch of 50 medals (150 batches x 50 medals per batch = 7.500 medals).
The special order requires Award Plus to make the medals in 25 batches of 100 medals.

1. Should Award Plus accept this special order? Show your calculations!
2. Suppose plant capacity were only 9000 medals instead of 10.000 medals each month. The
special order must either be taken in full or be rejected completely. Should Award Plus accept
the special order? Show your calculation!

As in requirement 1, assume that monthly capacity is 10.000 medals. Award Plus is concerned that if
it accepts the special order, its existing customers will immediately demand a price discount of $10 in
the month in which the special order is being filled. They would argue that Award Plus’s capacity costs
are now being spread over more units 4and that existing customers should get the benefit of these
lower costs. Should Award Plus accept the special order under these condition? Show your
calculations

3.
Cheers Co. cans peaches for sale to food distributors. All costs are classified as either manufacturing
or marketing. Burst prepares monthly budgets. The March 2012 budgeted absorption-costing income
statement is as follows:

Revenues (1,000 crates @$117) $ 117,000


COGS $ 65,000
Gross Margin $ 52,000
Marketing Costs $ 30,000
Operating Income $ 22,000
- Gross margin gross percentage of COGS = 80% (52.000 : 65.000)
Pertemuan 11 dan 12 – Decision Making dan Pricing

- Monthly costs are classified as fixed or variable (with respect to the number of crates
produced for manufacturing costs and with respect to the number of crates sold for marketing
costs)

Fixed Variable
Manufacturing $ 30,000 $ 35,000
Marketing $ 13,000 $ 17,000

- Cheers Co. has the capacity to produce 2,000 crates per month. The relevant range in which
monthly fixed manufacturing costs will be “fixed” is from 500 to 2,000 crates per month.
- Monthly costs are classified as fixed or variable:

Required

1. Calculate the markup percentage based on total variable costs.


2. Assume that a new customer approaches Cheers Co.to buy 200 crates at $55 per crate for
cash. The customer does not require any marketing effort. Additional manufacturing costs of
$3,000 (for special packaging) will be required. Cheers Co believes that this is a one-time-only
special order because the customer is discontinuing business in six weeks’ time. Cheers Co.is
reluctant to accept this 200-crate special order because the $55 per crate price is below the
$65 per crate full manufacturing cost. Do you agree with this reasoning? Explain.
3. Assume that the new customer decides to remain in business. How would this longevity affect
your willingness to accept the $55 per crate offer? Explain.

4.
Paul is the managing partner of a business that has just finished building a 60-room motel. Paul
anticipates that he will rent these rooms for 15,000 nights next year (or 15,000 room-nights). All rooms
are similar and will rent for the same price. Paul estimates the following operating costs for next year:

Variable Cost $ 5 Per Room-noght


Fixed Costs
Salaries and Wages $ 173,000
Maintenance of Building and Pool $ 52,000
Other Operating and Administration Costs $ 150,000
Total Fixed Costs $ 375,000
The capital invested in the motel is $900,000. The partnership’s target return on investment is 25%.
Paul expects demand for rooms to be uniform throughout the year. It plans to price the rooms at full
cost plus a markup on full cost to earn the target return on investment. For simplicity, ignore the time
value of money.

Required
1. What price should Paul charge for a room-night? What is the markup as a percentage of the
full cost of a room-night?
2. Paul’s market research indicates that if the price of a room-night determined in requirement
1 is reduced by 10%, the expected number of room-night Paul could rent would increase by
10%. Should Paul reduce prices by 10%? Show your calculations.
Pertemuan 11 dan 12 – Decision Making dan Pricing