PRICING A PRODUCT
1. A company estimates variable costs to be N$30 per unit and fixed costs to be
N$300 000 per year. The plant capacity is set at 20 000 units per year. It is
estimated that 10 000 units can be sold at a price of N$100 each.
REQUIRED
(a) At what price would the sales of 20 000 units yield the same amount of product
that the company has been realizing on the sale of 10 000 units at N$100 each.
ACCEPT OR REJECT A SPECIAL ORDER
2. Vineta Company produces golf discs which it normally sells to retailers for N$6
each. The cost of manufacturing 25 000 golf discs was:
N$
Materials 10 000
Labour 30 000
Variable overheads 20 000
Fixed overheads 40 000
Vineta Company also incurs 5% sales commission on each disc sold.
Addington Corporation offer Brooks N$4,25 per disc for 5 000 discs. If Vineta
Company accepts the new offer, its fixed overhead will increase from N$40 000 to
N$45 000 due to the purchase of a new imprinting machine. No sales commission
will result from the special order.
REQUIRED
(a) Prepare an analysis to determine if Vineta Company must accept or reject the
special order.
MAKE OR BUY DECISION
3. The Cooper Corporation makes Furniture. One of the Cooper’s divisions
makes lounge chairs. The lounge chair division has the following cost structure.
Total units produced 10 000
Total direct materials N$100 000 Total direct labour N$60 000
Total variable overhead N$40 000
Total allocated fixed overhead N$55 000
The Drake Corporation has offered to make the lounge chairs for Cooper for N$18,00
each. If the offer is accepted, the allocated fixed overheads will have to be
reallocated to other divisions.
REQUIRED
(a) Should Cooper Cooper Corporation make or buy this product?
1
CONTINUE OR DISCONTINUE PRODUCTION
4. All-Mart is a department store with three major departments: Housewares,
Hardware, and Electronics. Company management is very concerned about the
performance of the electronics department, noting that it seems to be a drag on the
company based on its most recent fiscal quarter. A company-wide segmented
income statement follows:
Housewares Hardware Electronics Total
Sales $150,000 $220,000 $200,000 $570,000
Variable expenses 60,000 100,000 140,000 300,000
Contribution margin 90,000 120,000 60,000 270,000
Fixed expenses 50,000 100,000 90,000 240,000
Profit (loss) $40,000 $20,000 $(30,000) $30,000
The company notes that if the electronics department were dropped, the other
departments could expect a 10% decrease in foot traffic and sales. Also, $20,000 of
the electronics department’s fixed costs are allocated and would continue even if the
department was dropped. The company has no planned use for the space currently
used by the electronics department.
REQUIRED
(a) Should All-Mart close the lose-making department?
2
5. A customer offers to buy 100 baby strollers and would like to pay N$550
per stroller. Our company normally sells these strollers for N$699.
The following is the cost schedule of fulfilling the special order.
N$
Direct materials 37 200
Direct labour 9 000
Variable overheads 1 200
Fixed overheads 7 000
Customer acquisition/advertising 2 000
Should the business accept or reject this special order?
6. A business in Karibib makes small stature from granite. These statutes have the
following pricing and cost structure.
N$
Selling price 15,00
Direct material per unit 4,00
Variable overheads per unit 1,20
Direct labour per unit 1,80
Fixed overheads per unit 1,00
Variable selling expense per unit 1,50
A company in Windhoek has asked for a special order of 500 units at a price of N$10
per unit. The Karibib business has excess capacity to complete the special order
without impacting on regular production. No selling expense will be incurred for the
special order.
Should the Karibib business accept this special order?
3
9. Erongo Company manufactures cars and trucks. The cost structure for each
division is as follows.
Cars Trucks
N$ N$
Variable costs 110 000 140 000
Sales 200 000 200 000
Salaries 50 000 50 000
Rent 20 000 20 000
Salaries relates to each division’s manager pay while the rent relates to the long-term
rent agree for the entire building.
Should Erongo Company discontinue a loss-making division?
10. All-Mart is a department store with three major departments: Housewares,
Hardware, and Electronics. Company management is very concerned about the
performance of the electronics department, noting that it seems to be a drag on the
company based on its most recent fiscal quarter. A company-wide segmented
income statement follows:
Housewares Hardware Electronics Total
Sales $150,000 $220,000 $200,000 $570,000
Variable 60,000 100,000 140,000 300,000
expenses
Contribution 90,000 120,000 60,000 270,000
margin
Fixed expenses 50,000 100,000 90,000 240,000
Profit (loss) $40,000 $20,000 $(30,000) $30,000
The company notes that if the electronics department were dropped, the other
departments could expect a 10% decrease in foot traffic and sales. Also, $20,000 of
the electronics department’s fixed costs are allocated and would continue even if the
department was dropped. The company has no planned use for the space currently
used by the electronics department.
REQUIRED
(a) Should All-Mart close the lose-making department?
4
12. The Motor Go Corporation makes steering wheel covers for cars. The
steering wheel covers have the following cost structure.
Units produced 5 000
Variable cost per unit N$12,00 Fixed cost per unit N$4,00
The Auto Fun Corporation has offered to make the steering wheel covers for N$15,00
each. If the over is accepted the variable cost will be eliminated, but the fixed cost
will remain.
Should Motor Go make or buy this product?
13. The Cooper Corporation makes Furniture. One of the Cooper’s divisions
makes lounge chairs. The lounge chair division has the following cost structure.
Total units produced 10 000
Total direct materials N$100 000
Total direct labour N$60 000
Total variable overhead N$40 000
Total allocated fixed overhead N$55 000
Total costs N$255 000
The Drake Corporation has offered to make the lounge chairs for Cooper for N$18,00
each. If the offer is accepted, the allocated fixed overheads will have to be
reallocated to other divisions.
Should Cooper Cooper Corporation make or buy this product?
