Use of Cost information in management decision making

1. Prot-Maximizing Price: Erin Hamill is the ownerioperator of a tanning salon. She is considering four price levels for a weekly tanning pass. Her estimate of price and quantity demanded are: Price uanti Demanded Ph p540 330 495 380 450 390 405 430 Monthly costs of providing the tanning service include PhP67,500 xed costs and variable costs of PhP112.5 per service. Required: Which price will yield the largest monthly prot? Analyzing a Special Order: PowerDrive, Inc. produces a hard disk drive that sells for PhP7,875 per unit. The cost of producing 25,000 drives in the prior year was: Direct material PhP28,125,000 Direct labor 16,875,000 Variable overhead 5,625,000 Fixed overhead 6? 500 000 Total cost 118,125,000 At the start of the current year, the company received an order for 3,000 drives from a computer company in China. Management of PowerDrive has mixed feelings about the order. On one hand, they welcome the order because they currently have excess capacity. Also, this is the company's rst international order. On the other hand, the company in China is willing to pay only PhP5,625 per unit. Required: What will be the effect on prot of accepting the order? Cost-Plus Pricing: World View is considering production of a lighted world globe that the company would price at a mark-up of 20% above full cost. Management estimates that the variable cost of the globe will be PhP2,250 per unit and xed costs per year will be PhP4,500,000. Required: a. Assuming sales of 1,000 units, what is the full cost of a globe and what is the price with a 20% markup? b. Assume that quantity demanded at the price calculated in part a is only 500 units. What is the full cost of the globe and what is the price with a 20% markup? C. Is the company likely to sell 500 units at the price calculated in part b? Why? 1. Computer Village sells computer equipment and home ofce furniture. Currently the furniture product line takes up approximately 50 percent of the company's retail floor space. The manager of Computer Village is trying to decide whether the company should continue offering furniture or concentrate on computer equipment. Below is a product line income statement for the company. If furniture is dropped. salaries and other direct xed costs can be avoided. In addition. sales of computer equipment can increase by 13 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative sales. Computer Home Total Equipment Furniture Sales 1.200000 800.000 2,000,000 Cost of goods sold 700,000 500.000 1.200.000 Gross margin 500,000 300.000 800.000 Less direct xed costs: Salaries 175,000 175.000 350,000 Other 80.000 60.000 120.000 Less allocated xed costs: Rent 14,118 9.882 24.000 Insurance 3,529 2.471 8.000 Cleaning 4,117 2.883 7.000 President's salary 76,470 53.530 130,000 Other 7,058 4.942 12,000 Net income 159 708 8 708 151 000 Required: Determine whether Computer Village should discontinue the furniture line and the financial benet (cost) of dropping it. . Bailey Products produces two joint products (A & B). Prior to split-off point, the company incurs costs of 6.000. Product A weighs 30 pounds, and Products B weighs 120 pounds. Product A sells for 100 per pound, and Product B sells for 35 per pound. Required: a. Based on a physical measure of output, allocate joint costs to Products A and B. b. Based on relative sales values at the split-off point. allocate joint costs to Products A and B. 1. Computer Without Home Total (With Equipment Furniture Home Furniture) Sales 1,200,000 2,000,000 Cost of goods sold 700,000 1,200,000 Contribution margin 500,000 800,000 Less direct fixed costs: Salaries 175,000 350,000 Other 60,000 120,000 Less allocated fixed costs: Rent 14, 118 24,000 Insurance 3,529 6,000 Cleaning 4,117 7,000 President's salary 76,470 130,000 Other 7,058 12,000 Net income 159,708 151,000 Incremental Analysis Lost Sales Cost savings: Cost of goods sold Salaries Other direct fixed costs Total cost savings Net loss from dropping 2. Should discontinue the furniture line and the financial benefit (cost) of dropping it