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Ch. 12 Study Guide

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Chapter 12 Study Guide – Week 3 Assignment a. The minimum selling price Ed Berg Jr. could quote without decreasing or increasing operating income is $13,800.
Variable cost of boat:
Direct material $5,000
Direct labor $8,000
Variable overhead (10% x 8000) = $800
$13,8000
Total overhead = $150,000, which is 25% of direct labor.
Direct labor = 150,000/0.25= $600,000
Variable overhead rate = variable cost/direct labor = ($150,000-$90,000)/$600,000
= $60,000 divided by $600,000 = 10%

b. An increase in income before taxes of $1,200 would result from accepting the offer of 15,000.
Customer offer $15,000
Variable costs $13,800
Contribution to profit $1,200

2. The contribution margin approach focuses on the relationship between future costs incurred as a result of taking an order and the revenue the order will produce. The impact of a specific order on profits can be estimated and the lower limits on price can be observed.
3. The major pitfall to the contribution margin approach to pricing is its failure to recognize the fixed costs explicitly. Although they can be overlooked in the short run, the fixed costs must be covered in the long run if the business is to continue.

1. a.Total target return on investment = $25,000,000 x 0.20 = $5,000,000
Target returnon investment per unit = $5,000,000 / 125,000 = $40
Prospective selling price = $240
b.Total target return on investment = $25,000,000 x 0.20 = $5,000,000
Target return on investment per unit = $5,000,000 / 80,000 = $62.50
Markup as a percentage of full cost of the product = $62.50 / $250 =…...

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