Week 7

E11-3  E11-11 P8-3A  BYP11-6

E11-3 Mucky Duck makes swimsuits and sells these suits directly to retailers. Although Mucky Duck has a variety of suits, it does not make the All-Body suit used by highly skilled swimmers. The market research department believes that a strong market exists for this type of suit. The department indicates that the All-Body suit would sell for approximately $110. Given its experience, Mucky Duck believes the All-Body suit would have the following manufacturing costs.
Direct materials 25
Direct labor 30
Manufacturing overhead   45
Total costs 100

Instructions
(a) Assume that Mucky Duck uses cost-plus pricing, setting the selling price 25% above its costs. (1) What would be the price charged for the All-Body swimsuit? (2) Under what circumstances might Mucky Duck consider manufacturing the All-Body swimsuit given this approach?
(b) Assume that Mucky Duck uses target costing. What is the price that Mucky Duck would charge the retailer for the All-Body swimsuit?
(c) What is the highest acceptable manufacturing cost Mucky Duck would be willing to incur to produce the All-Body swimsuit, if it desired a profit of $25 per unit? (Assume target costing.)

E11-11 Allied Company’s Small Motor Division manufactures a number of small motors used in household and office appliances. The Household Division of Allied then assembles and packages such items as blenders and juicers. Both divisions are free to buy and sell any of their components internally or externally. The following costs relate to small motor LN233 on a per unit basis.
Fixed cost per unit 5
Variable cost per unit 8
Selling price per unit 30

Instructions
(a) Assuming that the Small Motor Division has excess capacity, compute the minimum acceptable price for the transfer of small motor LN233 to the Household Division.
(b) Assuming that the Small Motor Division does not have excess capacity, compute the minimum acceptable price for the transfer of the small motor to the Household Division.
(c) Explain why the level of capacity in the Small Motor Division has an effect on the transfer price.

P8-3A
Hawks Electronic Repair Shop has budgeted the following time and material for 2008.
HAWKS ELECTRONIC REPAIR SHOP
Budgeted Costs for the Year 2008
Time Charges
Material Loading Charges
Shop employees’ wages and benefits 108000 —
Parts manager’s salary and benefits — 25400
Office employee’s salary and benefits    20,000    13,600
Overhead (supplies, depreciation, advertising, utilities)   26,000  18,000
Total budgeted costs 154000   57000
Hawks budgets 5,000 hours of repair time in 2008 and will bill a profit of $5 per labor hour along with a 30% profit markup on the invoice cost of parts. The estimated invoice cost for parts to be used is $100,000.
On January 5, 2008 Hawks is asked to submit a price estimate to fix a 72-inch big-screen TV. Hawks estimates that this job will consume 20 hours of labor and $500 in parts.
Instructions
(a) Compute the labor rate for Hawks Electronic Repair Shop for the year 2008.
(b) Compute the material loading charge percentage for Hawks Electronic Repair Shop for the year 2008.
(c) Prepare a time-and-material price quotation for fixing the big-screen TV.

BYP 11-6
BYP11-6 Giant Airlines operates out of three main “hub” airports in the United States.  Recently Mosquito Airlines began operating a flight from Reno, Nevada, into Giant’s Metropolis hub for $190.  Giant Airlines offers a prcie of $425 for the same route.  The management of Giant is not happy about Mosquito invading its turf.  In fact, Giant has driven off nearly every other competing airline from its hub, so that today 90% of flights into and out of Metropolis are Giant Airline flights.  Mosquito is able to offer a lower fare because its pilots are paid less, it uses older planes, and it has lower overhead costs.  Mosquito has been in business for only 6 months, and it services only two other cities.  It expects the Metropolis route to be tis most profitable.
Giant estimates that it would have to charge $210 just to break even on this flight.  It estimates that Mosquito can break even at a price of $160.  Within one day of Mosquito’s entry into the market, Giant dropped its price to $140, whereupon Mosquito matched its price.  They both maintained this are for a period of 9 months, until Mosquito went out of business.  As soon as Mosquito went out of business, Giant raised its fare back to $425.

Instructions
Answer each of the following questions.
(a) Who are the stakeholders in this case?
(b) What are some of the reasons why Mosquito’s breakeven-pont is lower than that of Giant?
(c) What are the likely reasons why Giant was able to offer this price for this period of time, while Mosquito couldn’t?
(d) What are some of the possible courses of action available to Mosquito in this situation?
(e) Do you think that this kind of pricing activity is ethical?  What are the implicaitons for the stakeholders in this situation?