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accounting solutions for textbook
Typology: Exercises
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Problem 4A-1 (20 minutes)
Campaign A: .3(–100) + .6(200) + .1(800) –30 + 120 + 80 = $
Campaign B: .3(20) + .6(150) + .1(900) 6 + 90 + 90 = $
The marketing manager should choose Campaign B because it has a higher expected profit. There is also no loss identified as possible so it may be considered less risky.
© McGraw-Hill Ryerson, 2015. All rights reserved. 2 Managerial Accounting, 10th Canadian Edition
Problem 4A-2 (20 minutes)
(a) Decision Tree
(b)For “make” alternative:
Expected profits = (.3 × 150) + (.4 × 90) + (.3 × -30) = 45 + 36 – 9 = 72 = $72,
For “buy” alternative: Expected profits = (.3 × 105) + (.4 × 90) + (.3 × 25) = 31.5 + 36 + 7. = 75 = $75,
The company should buy the subassembly because it has a higher expected operating profit. There is also no loss identified which indicates a lower risk.
(CGA-Canada Solution, adapted)
© McGraw-Hill Ryerson Ltd., 2015. All rights reserved. Solutions Manual, Appendix 4A 1
Case 4A-4 (45 minutes)
Unit Contribution Margin Analysis
Expected contribution margins per unit at the three suggested selling prices are as follows: Selling price........................................ $24.00 $27.00 $31. Variable costs ($2,800,000 ÷ 350,000) 8.00 8.
Contribution margin/unit..................... $16.00 $19.00 $23.
Expected Value Analysis
Market Research Data
Volume Probabilit y
Expected Volume
Unit CM
Total Expected Contribution Margin
Ranking
Selling price = $24. 500,000 .20 100, 400,000 .50 200, 300,000 .30 90, 1.00 390,000 $16.00 $6,240,000 2
Selling price = $27.
400,000 .25 100, 350,000 .45 157, 250,000 .30 75, 1.00 332,500 $19.00 $6,317,500 1
Selling price = $31.
300,000 .30 90, 250,000 .50 125, 200,000 .20 40, 1.00 255,000 $23.50 $5,992,500 3
© McGraw-Hill Ryerson Ltd., 2015. All rights reserved. Solutions Manual, Appendix 4A 1
© McGraw-Hill Ryerson, 2015. All rights reserved. 2 Managerial Accounting, 10th Canadian Edition
(Note, in all cases for both market research and president’s data, CM is high enough to cover fixed overhead.)
From the preceding analysis, we arrive at two different optimum solutions. Using the market research data, setting the selling price
slightly below the competition at $27.00 would yield the highest expected contribution. However, the president’s data indicate that it would be best to set the price above that of the
competition, representing full cost plus 100 percent. Because the rankings are significantly different, we must examine other factors to determine the best pricing strategy.
© McGraw-Hill Ryerson, 2015. All rights reserved. 2 Managerial Accounting, 10th Canadian Edition
Case 4A-4 (continued)
Factors to Consider
assumptions on which the data are based. Although the market research data are based on “extensive” market testing, the manner in which the testing was conducted, the composition of the test market, the design of the test, etc., must be examined for their appropriateness. Key factors such as quality of product, warranties, etc., may exist which may not have been considered in the market test. Since the president has past experience to draw from and also has knowledge of factors other than price, his data may be more accurate. On the other hand, the president could be imposing personal biases and “wishful thinking” which could render his data to be overly optimistic.
Case 4A-4 (continued)
However, if BL enters the market with a price of $27.00 or $24.00, competitors may react by undercutting BL, and starting a price war, especially if the competitors have cost structures similar to BL (i.e., relatively low variable costs resulting in high contribution margins).
BL’s past relations and reputation with its customers would have a great impact on the success of the new product. Customers may be willing to pay more for BL’s product if, in the past, factors such as product and service quality, warranties, credit terms, flexibility, effectiveness of advertising, brand-name loyalties, etc., have resulted in customers favouring its products. Conversely, customer relations with competitors would also have an impact on the demand that BL can expect for its product. BL must consider how customers would perceive a low, middle, or high price (i.e., if priced at $24.00, would customers think the product is inferior or that it is a better buy?)
maximum expected annual demand over the next 5 years is 500,000 units, we need only be concerned with the opportunity costs of producing cordless curling irons versus utilizing the same capacity by producing some other product. BL must examine whether there are more profitable options for utilizing this capacity in both the short term and the long term. Also, BL should consider if it can profitably utilize the excess capacity if it adopts a high- price/low-volume pricing strategy.
© McGraw-Hill Ryerson, 2015. All rights reserved. 2 Managerial Accounting, 10th Canadian Edition
© McGraw-Hill Ryerson, 2015. All rights reserved. 2 Managerial Accounting, 10th Canadian Edition
Case 4A-4 (continued)
Full-cost pricing considers all costs in the pricing decision. However, determination of full costs requires an allocation of joint costs to products. Allocation bases are arbitrary, and very different cost structures can result depending on the allocation base. Also, this pricing strategy is circular. When products are price elastic, price determines volume and, in full-cost pricing, volume determines unit cost, and unit cost determines price. For example, using the president’s data, a $31.50 price for the new curling iron would result in an expected volume of say 265,000 units. Full cost per unit, therefore, would be $8.00 + $10.24 = $18.24. Full cost + 100 percent equals a selling price of $36.48. At this price, the expected volumes would certainly drop.
Other pricing policies that could be considered in the short term are market pricing, target gross margin, return on assets employed, standard costs plus, and pricing to achieve some target market share.
Assuming that the president’s data took into account some non-
price competitive advantages which the market research data did not consider, I would recommend setting the price initially at $31.50 and consider lowering the price after one or two years
once the product life has matured a bit and any economies of scale have been achieved. This strategy would allow BL to take advantage of its idle capacity for other opportunities.
Consideration should be given to supporting the product introduction with an extensive advertising and promotional campaign.
Another valid recommendation could be to set the price initially at $27.00. This strategy would undercut the competition but would likely not cause a price war. With this strategy, BL would maintain its quality image by emphasizing to customers that it is letting
© McGraw-Hill Ryerson Ltd., 2015. All rights reserved. Solutions Manual, Appendix 4A 1
