Chapter 5
Strategic Planning Regarding Operating Processes
Questions
- Which pricing strategy sets its initial selling price low in an attempt to gain a share of the market from its competitors?
- Which pricing practice sells products below cost in an attempt to drive out competition?
- Which pricing strategy sets the initial selling price high in an attempt to appeal to those individuals who want to be the first to have the product and who are not concerned about price?
- Which pricing practice sets excessively high prices?
- Which pricing strategy attempts to set a selling price for the life of the product based on its total life-cycle costs?
- Which pricing strategy first determines the selling price of the product and then decides whether to enter the market?
- What type of environment has a large number of sellers producing and distributing virtually identical products and services?
- What type of environment has many companies whose products or services are similar but not identical.
- What type of environment consists of a company that has exclusive control over a product, service or geographic market?
- What type of environment consists of a few firms controlling the types of products and services and their distribution?
Exercises
E5.1Use the following information to determine the economic order quantity for Conover Company.
Units required during the year65,000
Cost to place the order$75
Cost of carrying a unit in inventory$15
E5.2Preston Products has determined its economic order quantity to be 450 units. Demand for the year is 48,000 units. Four days elapse between the time an order is placed until it is received. Preston Products conducts business 300 days per year. What is the reorder point?
E5.3Lempke has calculated its economic order quantity at 135 units (rounded). The ordering cost is $20 per order and the carrying cost is $12 per unit. Demand for the year is 5,500 units. What is the total ordering plus carrying cost for the year?
E5.4Wallford, Inc. has calculated its economic order quantity at 300 units. The cost to place an order is $5 and the cost to carry one unit in inventory is $2. What is the expected demand for the year?
E5.5Starline Company expects its gross payroll for the period to be $32,000. Assuming that its FICA rate is 7.65 percent, its FUTA rate is .8 percent, and its SUTA rate is 3.5 percent, what is the expected payroll tax for the period?
E5.6Meyer Manufacturing Company expects its gross payroll to be $54,000. It expects to withhold 7.65 percent of the gross payroll for FICA taxes, 15 percent for federal income taxes, and 5 percent for state income taxes. What is the expected net pay for the period?
E5.7Refer to E5.6. Assuming Meyer remits the taxes to the proper authorities during the same period as the employees are paid, what is the expected cash outflow for Meyer (ignore employer taxes)?
E5.8Ferrarri, Inc. plans to pay its managers a bonus to encourage performance. The bonus rate is 10% and the bonus base is net income before bonus or taxes. Ferrarri’s expected income before bonus or taxes is $125,000. Its tax rate is 30%. Determine the amount of the expected bonus.
E5.9Refer to E5.8. Determine the amount of the expected cash outflow assuming that taxes and bonus are paid in the budgeting period.
E5.10Brenneman Co. plans to pay its managers a bonus to encourage performance. The bonus rate is 10 percent and the bonus base is net income after bonus but before taxes. Brenneman’s expected income before bonus or taxes is $125,000. Its tax rate is 30 percent. Determine the amount of the expected bonus.
E5.11Refer to E5.10. What is the expected cash outflow for bonus and taxes if the bonus and the taxes are paid in the budgeting period?
E5.12Curry plans to pay its managers a bonus to encourage performance. The bonus rate is 10% and the bonus base is net income after bonus and after taxes (net income). Curry’s expected income before bonus or taxes is $125,000. Its tax rate is 30 percent. Determine the expected bonus.
E5.13Refer to E5.12. What is the expected cash outflow for bonus and taxes if the bonus and the taxes are paid in the budgeting period?
E5.14MCB, Inc. estimates its cost per unit at $70. Its markup is 120 percent. What is the selling price? What is the selling margin? What is the selling margin percentage?
Problems
P5.1Refer to Amazon (amazon.com). Based on your knowledge of this company, answer the following questions.
- Describe its customers, competitors, and legal/social environment.
- Do you believe this company sets its selling prices based primarily on market factors or primarily on cost? Why?
- Describe Amazon’s short-term and long-term costs and ordering costs.
- Describe its suppliers.
- What inventory method do you believe Amazon uses? Why?
- What type of compensation package do you think it provides for its employees? Why?
- What does the annual report tell you about executive compensation?
P5.2Comley Enterprises has provided the following budgeting information for you to determine its expected bonus payments and cash outflows. Comley’s bonus rate is 8 percent and its tax rate is 30 percent.
Sales$900,000
Less cost of goods sold576,000
Gross Margin$324,000
Less operating costs150,000
Expected income before bonus or taxes$174,000
Required:
- If Comley’s bonus base is income before bonus or taxes, what is the expected bonus amount?
- If Comley’s bonus base is income before taxes (after bonus), what is the expected bonus amount?
- If Comley’s bonus base is net income (after taxes, after bonus), what is the expected bonus amount?
- What are the expected cash outflows for bonus and taxes for each of the above alternatives?
P5.3Refer to P5.2. Assume Comley changes the bonus rate to 10%.
Required:
- If Comley’s bonus base is income before bonus or taxes, what is the expected bonus amount?
- If Comley’s bonus base is income before taxes (after bonus), what is the expected bonus amount?
- If Comley’s bonus base is net income (after taxes, after bonus), what is the expected bonus amount?
- What are the expected cash outflows for bonus and taxes for each of the above alternatives?
P5.4After surveying the market, Dichetti set a target selling price of $500 for its product. Dichetti believes it can sell 75,000 units of this product over its three-year life. Dichetti requires a 20 percent return on selling price. Therefore its target cost per unit is $400. Dichetti has gathered the following budgeted cost data:
Unit cost 240
Batch cost (1,000 units per batch)3,000
Product-sustaining costs (annual)96,000
Facility-sustaining costs (annual)180,000
In addition to the above costs, Dichetti will incur $1,000,000 in research and development costs before the product is manufactured.
Required:
- What is the total target cost for this product’s life?
- What is the total budgeted cost for this product over its three-year life?
- Should Dichetti develop this product? Why?
P5.5Maxwell Company is considering a switch to JIT. It has gathered the following data:
Increase in prevention quality costs$168,000
Increase in appraisal quality costs280,800
Increase in employee training costs31,400
Increase in ordering costs114,700
Decrease in carrying costs570,300
Decrease in internal failure costs22,160
In addition, Maxwell estimates that its relationship with its customers will improve by 15 percent. Because it will use fewer suppliers, however, there is a greater risk associated with purchasing.
Required:
- What is the total cost savings associated with switching to JIT?
- How should Maxwell Company determine the costs or cost savings associated with increased customer satisfaction and purchasing risk?
- Should Maxwell Company make the switch to JIT? Why?
Case
Select a company that is featured in this week’s issue of BusinessWeek. Based on your knowledge of the company, answer the following questions:
- Describe its customers, competitors, and legal/social environment.
- Do you believe the company sets its selling prices based primarily on market factors or primarily on cost? Why?
- Describe its short-term and long-term carrying costs and ordering costs.
- Describe its suppliers.
- What inventory method do you believe it uses? Why?
- What type of compensation package do you think it provides for its employees? Why?
- What does the annual report tell you about executive compensation?