Pricing Class Examples

Horngren, Foster, Datar and Gowing.

Cost Accounting: A Managerial Emphasis,
Fifth Canadian Edition. 2009

Life-Cycle Product Costing

(P12-22)

Intential Inc. manufactures game systems. Intential has

decided to create and market a new system with wireless
controls and excellent video graphics. Intentials
managers are thinking of calling the system the YEW.
Based on experience, they expect the total life of the YEW
to be four years. They budget the following costs for the
YEW:

Total fixed
costs over
four years
Year 1 R&D costs
Year
2-4

Design costs
Production costs
Marketing &
distribution costs
Customer-service costs

Variable
cost per
unit

$6,590,000 not applicable

$1,450,000 not applicable
$19,560,000
$50 per unit
$5,242,000

$10 per unit

$2,900,000 not applicable

1.

Suppose the managers price the YEW at $110 per

unit. How many units do they need to sell to break
even?
Breakeven sales
= $35,742,000/($110-$60)
= 714,840 units

2.

The managers are reviewing two alternative pricing

strategies:
a. Sell the YEW at $110 each from the outset. At this
price, they expect to sell 1,500,000 units over its life
cycle.
b. Boost the selling price of the YEW to year 2 when it
first comes out to $240. At this price, they expect to
sell 100,000 units in year 2. In years 3 and 4, they
will drop the price to $110 per unit and believe unit
sales will be 1,200,000.
What pricing strategy would you recommend? Explain

Alternative a:
Profits
= ($110-$60) x 1,500,000 - $35,742,000
= $39,258,000
Alternative b:
Profits
= ($240-$60) x 100,000 + ($110-$60) x 1,200,000 $35,742,000
=$42,258,000

Pricing of Special Orders

(P12-25)

Taylor Ltd. manufactures cosmetic bags. The average selling

price of the bag is $15. Each bag has variable
manufacturing costs of $7.20 per unit and applied fixed
production costs of $4.60. These cosmetic bags are sold
through specialty gift shops, and Taylors salespeople earn
a 10% commission for sales in these distributors. Fixed
selling and administrative costs are $150,000 per year.
One of Taylors sales staff has obtained a request to bid on
an order for 1,500 units. Taylor is currently operating
above the breakeven point.

1.

Assume that Taylor has sufficient capacity, what is the

minimum selling price Taylor should charge on the order?
Minimum selling price, p
p = $7.20 + 0.10p
0.90 p= $7.20
p = $8.00

2. Now assume that Taylor will have to incur setup costs of

$7,950. What is the bid price for the order if Taylor
requires a 10% return?
Let p = bid price
1,500p - $7.20x1,500 0.10x1,500p $7,950 = 0.10x1,500p
1,200p = $18,750
p = $15.625

3. Assume that Taylor requires a target return of 12%.

What is the bid price for the order?
Let p = bid price
1,500p$7.20x1,5000.10x1,500p-$7,950 = 0.12x1,500p
1,170p = $18,750
Bid price, p = $16.025

4. Return to the original data. Assume the cosmetic bags

produced for this order will be sold through a number of
retailers. The customer would like to retail the bags for
$16 and supply the bags at incremental cost plus $0.25
profit per bag. The customer will take a $0.10 profit per
bag and donate the rest to the charity. Under this
proposal, the sales person would receive a $0.50
commission per unit.
a. What will be Taylors rate of return if it agrees to the
customers proposal?
b. How much money will be raised for the charity
assuming all bags are sold.
c. Should Taylor accept the customers proposal?

Bid price
= ($7.20 + $0.50) + $0.25
= $7.95
a. Taylors rate of return
= ($7.95 $7.70)/$7.95
= 3.14%
b. Money raised by charity
= ($16 - $7.95 - $0.10) x 1,500
= $11,925