Please complete the following exercises and/or problems from the textbook:
Prepare your answers in an Excel workbook, using one worksheet per exercise or problem.
E25-10 Making special pricing decisions
Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached
Hobby-Cardz with a special order. The Hall of Fame wishes to purchase 57,000
baseball card packs for a special promotional campaign and offers $0.41 per pack, a
total of $23,370. Hobby-Cardz’s total production cost is $0.61 per pack, as follows:
Direct materials $ 0.13
Direct labor 0.06
Variable overhead 0.12
Fixed overhead 0.30
Total cost $ 0.61
Hobby-Cardz has enough excess capacity to handle the special order.
C H A P T E R 2 5
E25-12 Making pricing decisions
Stenback Builders builds 1,500-square-foot starter tract homes in the fast-growing
suburbs of Atlanta. Land and labor are cheap, and competition among developers is
fierce. The homes are a standard model, with any upgrades added by the buyer after
the sale. Stenback Builders’ costs per developed sublot are as follows:
Land $ 59,000
Variable selling costs 5,000
Stenback Builders would like to earn a profit of 14% of the variable cost of each
home sale. Similar homes offered by competing builders sell for $208,000 each.
Assume the company has no fixed costs.
1. Which approach to pricing should Stenback Builders emphasize? Why?
2. Will Stenback Builders be able to achieve its target profit levels?
3. Bathrooms and kitchens are typically the most important selling features of a
home. Stenback Builders could differentiate the homes by upgrading the bathrooms
and kitchens. The upgrades would cost $22,000 per home but would
enable Stenback Builders to increase the selling prices by $38,500 per home.
(Kitchen and bathroom upgrades typically add about 175% of their cost to the
value of any home.) If Stenback Builders makes the upgrades, what will the new
cost-plus price per home be? Should the company differentiate its product in
E25-13 Making dropping a product decisions
Top managers of Movie Street are alarmed by their operating losses. They are
considering dropping the DVD product line. Company accountants have
prepared the following analysis to help make this decision:
Learning Objective 2
2. Desired profit $27,160
Learning Objective 3
Selling and Administrative
Total Fixed Expenses
Operating Income (Loss)
For the Year Ended December 31, 2014
128,000 71,000 57,000
$ 432,000 $ 305,000 $ 127,000
Total fixed costs will not change if the company stops selling DVDs.
1. Prepare a differential analysis to show whether Movie Street should drop the
DVD product line.
2. Will dropping DVDs add $41,000 to operating income? Explain
E25-18 Making outsourcing decisions
Fiber Systems manufactures an optical switch that it uses in its final product. The
switch has the following manufacturing costs per unit:
Direct Material $ 9.00
Direct Labor 1.50
Variable Overhead 5.00
Fixed Overhead 9.00
Manufacturing Product Cost $ 24.50
Another company has offered to sell Fiber Systems the switch for $18.50 per unit.
If Fiber Systems buys the switch from the outside supplier, the manufacturing
facilities that will be idled cannot be used for any other purpose, yet none of the
fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Fiber Systems should
make or buy the switch.
E25-15 Making product mix decisions
Lifemaster produces two types of exercise treadmills: regular and deluxe. The
exercise craze is such that Lifemaster could use all its available machine hours to
produce either model. The two models are processed through the same production
departments. Data for both models is as follows:
Sale Price $ 1,020 $ 560
Direct Material 300 90
Direct Labor 88 188
Variable Manufacturing Overhead 264 88
Fixed Manufacturing Overhead* 138 46
Variable Operating Expenses 111 65
Total Costs 901 477
Operating Income $ 119 $ 83
*allocated on the basis of machine hours
1. What is the constraint?
2. Which model should Lifemaster produce? (Hint: Use the allocation of fixed
manufacturing overhead to determine the proportion of machine hours used by
3. If Lifemaster should produce both models, compute the mix that will maximize
P25-34 Making sell or process further decisions
This problem continues the Davis Consulting, Inc. situation from Problem P24-37
of Chapter 24. Davis Consulting provides consulting services at an average price
of $175 per hour and incurs variable costs of $100 per hour. Assume average fixed
costs are $5,250 a month.
Davis has developed new software that will revolutionize billing for companies.
Davis has already invested $200,000 in the software. It can market the software as
is at $30,000 per client and expects to sell to eight clients. Davis can develop the
software further, adding integration to Microsoft products at an additional development
cost of $120,000. The additional development will allow Davis to sell the
software for $38,000 each, but to 20 clients.
Should Davis sell the software as is or develop it further?
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