ACCT2112 Week 12 Tutorial Questions Pricing Decisions S2 2023

1. Three major influences on pricing decisions are _________.

a. variable costs, fixed costs, and mixed costs

b. total costs, target costs and target pricing
c. competition, costs, and customers
d. competition, demand, and production efficiency
e. Both (a) and (d).

2. Relevant costs for pricing a special order include ___________.

a. existing fixed manufacturing overhead

b. nonmanufacturing costs that will not change even if the special order is accepted
c. additional setup costs for the special order
d. All of these answers are correct.
e. None of the answers.

3. For pricing decisions, full product costs ___________.

a. include all costs that are traceable to the product

b. include all manufacturing and selling costs
c. include all direct costs plus an appropriate allocation of the indirect costs of all business
functions
d. allow for the highest possible product prices
e. Both (a) and (b) are correct.

Question 4
Give two examples of a value-added cost and two examples of a non-value-added cost.

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Question 5
Alpha Company sells and services plumbing, heating, and air-conditioning systems. Alpha’s
cost accounting system tracks two cost categories: direct labour and direct materials. Alpha
uses a time-and-materials pricing system, with direct labour marked up 80% and direct
materials marked up 60% to recover indirect costs of support staff, support materials, and
shared equipment and tools and to earn a profit.
During a hot summer day, the central air conditioning in Mr Murray’s home stops
working. Alpha’s technician inspects Mr Murray’s air conditioner. He considers two options:
replace the compressor or repair it. The cost information available to the technician follows:

Labour Materials
Repair option 7 hrs. $120
Replace option 4 hrs. $230
Labour rate $45 per hr.
Required:
a. If the technicial presents Mr Murray with the replace or repair options, what price would
he quote for each?
b. If the two options were equally effective for the 3 years that Mr Murray intends to live in
the home, which option would he choose?
c. If the technician’s objective is to maximize profits, which option would he recommend to
Mr Murray? What would be the ethical course of action?

Question 6

John Branch is the managing partner of a business that has just finished building a 60-room
motel. Branch anticipates that he will rent these rooms for 16,000 nights next year (or 16,000
room-nights). All rooms are similar and will rent for the same price. Branch estimates the
following operating costs for next year:

Variable operating costs $4 per room-night

Fixed costs
Salaries and wages $170,000
Maintenance of building and pool 48,000
Other operating and administration costs 122,000
Total fixed costs $340,000

The capital invested in the motel is $1,000,000. The partnership’s target return on investment
is 20%. Branch expects demand for rooms to be uniform throughout the year. He plans to
price the rooms at full cost plus a markup on full cost to earn the target return on investment.

Required:
a. What price should Branch charge for a room-night? What is the markup as a percentage
of the full cost of a room-night?
b. Branch’s market research indicates that if the price of a room-night determined in
requirement (a) is reduced by 10%, the expected number of room-nights Branch could
rent would increase by 10%. Should Branch reduce prices by 10%? Show your
calculations.

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Question 7 (Additional practice question for students)
Beta Company evaluates the reaction of materials to extreme increases in temperature.
Much of the company’s early growth was attributable to government contracts, but recent
growth has come from expansion into commercial markets. Two types of testing at Beta
are Heat Testing (HTT) and Arctic-Condition Testing (ACT). Currently, all of the
budgeted operating costs are collected in a single overhead pool. All of the estimated
testing-hours are also collected in a single pool. One rate per test-hour is used for both
types of testing. This hourly rate is marked up by 30% to recover administrative costs and
taxes and to earn a profit.
Beta’s controller, Mr Xavier, believes that there is enough variation in the test
procedures and cost structure to establish separate costing rates and billing rates at a 30%
markup. He also believes that the inflexible rate structure the company is currently using is
inadequate in today’s competitive environment. After analyzing the company data, he has
divided operating costs into the following three cost pools:

Labour and supervision $ 436,800

Setup and facility costs 351,820
Utilities 435,600
Total budgeted costs for the period $1,224,220

Mr Xavier budgets 112,000 total test-hours for the coming period. Test-hours is also the cost
driver for labour and supervision. The budgeted quantity of cost driver for setup and facility
costs is 700 setup hours. The budgeted quantity of cost driver for utilities is 12,000 machine-
hours.
Mr Xavier has estimated that HTT uses 70% of the test-hours, 20% of the setup-hours,
and half the machine-hours.

Required:
a. Find the single rate for operating costs based on test-hours and the hourly billing rate
for HTT and ACT.
b. Find the three activity-based rates for operating costs.
c. What will the billing rate for HTT and ACT be based on the activity-based costing
structure? State the rates in terms of test-hours. Referring to both requirements a and b,
which rates make more sense for Beta Company?
d. If Beta Company’s competitors all charge $23 per hour for arctic testing, what can Q
Beta Company do to stay competitive?