Question 3 Costing & Pricing (20 marks)

Ginas jeans business uses a costing system for all customers who get a custom jeans made. The business uses a pre-determined indirect cost rate for allocating indirect costs/overheads to individual customers, with operating hours used as the cost driver. In August, the business had a budgeted allocation base of 500 operating hours. The budgeted business indirect overhead costs for August were $23,000. Customer Georg wanted to acquire a new custom jeans and visited the store for three hours during August. Other direct costs related to the three-hour session include $34 for the used materials, 30$/hour for labour, and $10 for other supplies.

Required:

1. Calculate the pre-determined indirect cost rate (PICR) the business used for August. (4 marks)

2. Calculate the total cost to the business for these sessions. (6 marks)

3. Assume the business applies a cost-based pricing model to set prices to customers, adding a mark-up of 25%. What price should Ginas jeans business charge Georg for his session and jeans? Explain your answer. (4 marks)

4. Volume-based cost drivers are no longer appropriate in todays business environment.

Is this statement true? Discuss and explain why you agree/disagree with this statement. (6 marks)

Please help with the above questions

Below is the example question with solutions just like the above one:

Question 3 Costing & Pricing 10 marks Heally Good Hospital uses a costing system for all customers who have surgery. The Hospital uses a pre-determined indirect cost rate for allocating indirect costs/overheads to patient visits, with operating hours used as the cost driver. In July, the Hospital had a budgeted allocation base of 1,000 operating hours. The budgeted Hospital indirect overhead costs for July were $66 000. Patient Peter Peters was in the surgery for four hours during July. Other costs related to Peter's four hour surgery include: Cost of therapist $250 Cost of products used $3,500 Other supplies Required: 1. Calculate the pre-determined indirect cost rate (PICR) the Hospital used for July? (2 marks) PICR Estimated Indirect Costs Estimated level of Cost Driver $800 PICR $66,000 1,000 operating hours = $66 per operating hour Page 6 of Direct Costs: Cost of therapist $250 Cost of products used $3,500 Other supplies $800 TOTAL $4,550 Indirect Cost: indirect cost rate x actual usage of cost driver $66 per operating hour x 4 operating hours = $264 Total Cost: = $4,550 + $264 = $4,814 3. Assume the Hospital applies a cost-based pricing model to charge prices to patients, adding a mark-up of 30%. What price should Heally Good Hospital charge Peter Peters' for his surgery? (2 marks) Cost $4,814 Markup $30% $4,814 x 1.3 $6,258.20 Question 4 Capital Investment Decisions 20 marks Crazy Joan's Mobiles is considering a new machine which will cost $10 000 in the current year, but will affect future cash flows as follows: Year Annual Inflows $2,000 Price 1 2 $3,000 3 $4,000 4 $5,000 5 $6,000 $7,000 6 - - - It is estimated the machine will be sold for $500 at the end of its useful life. Crazy Joan's Mobiles has a cost of capital equal to 15%, and management prefer projects with a payback period of less than 4 years. 1. Calculate the Net Present Value (NPV) of the project: (8 marks) NPV = PV of all inflows - PV of all outflows. PV FV i = 15% Year NPV 0 (10000) 1 2000/(1.15) - 1,739.130435 2 3 000/(1.15)2 = 2,268.431002 4000/(1.159 2,630.06493 5 000/(1.15) - 2,858.766228 6 000/(1.15) 2983.060412 7 500/(1.15) = 3242.456969 5721.909976 $5.721.91 3 4 5 6 2. Calculate the Payback Period (PP) of the project. (8 marks) Amount Amount Recovered In Total Year 1 $2,000 $2,000 N $3,000 $5,000 3 $4,000 $9,000 $5,000 $14,000 5 $6,000 $20,000 6 $7,500 $27,500 Payback = 3 years +1,000/5,000 = 3.2 years 2. Based on your calculations of NPV and PP, should the Crazy Joan's Mobile proceed with the purchase of the machine? Why? (4 marks) Crazy Joan's Mobile should proceed with the purchase of the machine as: The NPV of the project is positive, at $5721.91. The PP of 3.2 years is less than management's preference of 4 years or less and is well within the life of the 6 year project