Module 4A

x Product Life Cycle Management (Stages, Life Cycle Income Statement, Postpurchase Costs)

Module 4B
x Market/Demand-Based Pricing (Target Pricing, Target Costing, Profit-Maximizing)
x Cost-Based Pricing (Cost Plus, Time and Material Pricing)
x Special Orders and Short-Run Pricing Decisions

Module 4C
x Product Bundling (Stand-alone, Incremental, Shapley Value)
x Product Mix Decisions (Optimal Mix, Optimal Contribution Margin)
x Linear Programming (Graphic Method, Algebraic Method)
x Profit-Related Variances (Static-budget, Flexible-budget, Sales-volume, Sales-mix, Sales-quantity, Market-share, Market-s
antity, Market-share, Market-size)
Product Life Cycle Management
Life Cycle Cost Development Cost + Production Cost + Logistics Cost
Whole Life Cost Life Cycle Cost + Postpurchase Cost
Life Cycle Profit Life Cycle Revenues - Life Cycle Costs
Target Cost Predetermined Selling Price - Desired Profit

Pricing Products and Services

Selling Price Cost + Mark-up
Profit-Maximizing Price Variable Cost x (1 + Mark-up)
Profit-Maximizing Mark-up (%) [- 1 / (1 + Price Elasticity)]
Price Elasticity (Ed) ln(1 + %change in demand) / ln(1 + %change in price)
Time and Material Price Time Charges + Material Charges
Time Charges Hourly labor cost + Hourly overhead cost + Mark-up
Hourly Overhead cost Annual overhead / Annual Labor hours
Material Charges Material cost + Handling and Storage cost + Mark-up
Handling and Storage cost Material cost x (Handling and Storage cost / Material cost)
Special Order Pricing Variable Cost + Opportunity Cost

Product Bundling
Stand-alone Weights based on SP, Unit Cost, or Physical Quantities
Incremental Sequential / Step-down
Shapley Value Average / Weighted Average Incremental

Product Mix
Contribution Margin per Input Unit Contribution Margin / Input per Unit
Linear Programming Decision Variables; Objective Function; Constraints

Profit-Related Variances
Static-budget variance Actual Total CM - Budgeted Total CM
Flexible-budget variance (Actual Unit CM - Budgeted Unit CM) x Actual Volume
Sales-volume variance (Actual Volume - Budgeted Volume) x Budgeted Unit CM
Sales-mix variance (Actual Mix - Budgeted mix) x Actual Total Sales Volume x Budgeted Unit CM
Sales-quantity variance (Actual Quantity- Budgeted quantity) x Budgeted mix x Budgeted Unit CM
Market-share variance (Actual market share - budgeted market share) x Actual Industry x Budgeted Unit CM (a
Market-size variance (Actual industry - budgeted industry) x Budgeted market share x Budgeted Unit CM (ave
 Static-budget
variance

eted Unit CM
Flexible-budget Sales-volume
y x Budgeted Unit CM (average) variance variance
x Budgeted Unit CM (average)

Sales-Quantity
Sales-Mix variance Variance

Market Share
Variance
Sales-Quantity
Variance

Market Size Variance

(1) (a) Stand-alone revenue allocation method (using Selling Price)
Revenue
Selling Price Weight Allocation
Lodging $ 800 58.18% $ 581.82
Food 200 14.55% 145.45
Recreation 375 27.27% 272.73
Total package $ 1,375 100.00% $ 1,000.00

(b) Incremental revenue allocation method

Revenue $ 1,000
(1) Recreation $ 375
(2) Lodging 625
(3) Food -

(2) Pros and Cons

Stand-alone Incremental
Simple to use/implement Shows primary driver of sale
Pros No zero revenue allocation
Allocation is based on market
(i.e. selling price)
Can be manipulated Hard to rank
Possible for a product to have
Cons Ignores primary driver of sale
zero revenue
Volatile if prices change

(3) (a) Shapley Value Method

Incremental 1 Incremental 2 Average
Revenue $ 900 $ 900 $ 900
Lodging 800 700 $ 750
Food 100 200 $ 150

(b) Weighted Shapley Value Method

Incremental 1 Weight Incremental 2 Multiplier Average
Revenue $ 900 75.0% $ 900 25.0% $ 900
Lodging 800 75.0% 700 25.0% $ 775
Food 100 75.0% 200 25.0% $ 125
(14-13) (1) Product Mix Decisions with Capacity Constraints
Model A Model B
Selling Price $ 20 $ 35
Unit Variable Cost 15 15
Unit Contribution Margin (CM) $ 5 $ 20
Machine hours 0.5 2.5
CM per hour $ 10 $ 8

Capacity 40,000 0
Mahine hour 0.5 2.5
Optimal Product Mix 80,000 0
Unit CM $ 5 $ 20
Total CM $ 400,000 $ - $ 400,000

(2) Product Mix Decisions with Demand and Capacity Constraints

Demand Constraint of Model A 50,000
Machine hours per unit of Model A 0.5
Utilized Resource 25,000

Available Resource for Model B (40,000 - 25,000) 15,000

Machine hours per unit of Model B 2.5
Number units of Model B 6,000

Model A Model B
Optimal Product Mix 50,000 6,000
Unit CM $ 5 $ 20
Total CM $ 250,000 $ 120,000 $ 370,000
(12-15) (1) Product Mix Decisions with Capacity Constraints
14-D 33-P
Unit Contribution Margin (CM) $ 12 $ 10
Machine hours 4 2
CM per hour $ 3 $ 5

Capacity 0 12,000
Mahine hours 4 2
Optimal Product Mix 0 6,000
Unit CM $ 12 $ 10
Total CM $ - $ 60,000 $ 60,000

(2) Product Mix Decisions with Demand and Capacity Constraints

Demand Constraint of 33-P 5,000
Machine hours per unit of 33-P 2
Utilized Resource 10,000

Available Resource for 14-D (12,000 - 10,000 hours) 2,000

Machine hours per unit per 14-D 4
Number units of 14-D 500

14-D 33-P
Optimal Product Mix 500 5,000
Unit CM $ 12 $ 10
Total CM $ 6,000 $ 50,000 $ 56,000

(12-16) (1) Linear Programming

Decision variables: Let x = number of 14-D produced
Let y = number of 33-P produced
Let z = total profits

Objective function: z = $12x + $10y

Capacity constraints: 4x + 2y <= 12,000 hours

Demand constraints: x <= 2,000 units
y <= 5,000 units
x >= 0 units
y >= 0 units

(2) Graphical Solution

Coordinates x y Formula: 4x + 2y < 12,000 hours

0 6,000 4(0) + 2y = 12,000 hours; y = (12,000 - 0) / 2
Machine Hour Constraint
3,000 0 4x + 2(0) = 12,000 hours; x = (12,000 - 0) / 4
2,000 0
x <= 2,000 units
x <= 2,000 units
2,000 6,000
0 5,000
y <= 5,000 units
3,000 5,000

Intercepts x y z = $12x + $10y

(0, 0) 0 0 $0
(0, 5000) 0 5,000 $50,000
(500, 5000) 500 5,000 $56,000 4x + 2(5,000) = 12,000 hours; x
(2000, 2000) 2,000 2,000 $44,000 4(2,000) + 2y = 12,000 hours; y
(2000, 0) 2,000 0 $24,000

Optimal Product Mix is 500 units of 14-D and 5,000 units of 33-P.

(3) Optimal Contribution Margin is $56,000 (computed as 500 units x $12 + 5,000 units x $10)
 7,000

6,000

5,000
12,000 - 0) / 2
4,000
12,000 - 0) / 4
Feasible Region
3,000

2,000

1,000
 5,000

4,000

Feasible Region
3,000

2,000

1,000

0
0 500 1,000 1,500 2,000 2,500 3,000 3,500

4x + 2(5,000) = 12,000 hours; x = (12,000 - 10,000) / 4

4(2,000) + 2y = 12,000 hours; y = (12,000 - 8,000) / 2
3,000 3,500
(12-16) (1) Linear Programming
Decision variables: Let P = number of units of Premier Cuisine
Let H = number of units of Haute Cuisine
Let z = total profits

Objective function: z = $120P + $90H

Capacity constraints:
[Preparation] 2P + 1H <= 60 hours
[Cooking] 2P + 3H <= 120 hours
[Freezing] 1P + 0H <= 45 hours
Demand constraints: P >= 0 units
H >= 0 units

(2) Graphic Method

Coordinates P H
0 60 2(0) + 1H = 60 hours; H = (60 - 0) / 1
Preparation Constraint
30 0 2P + 1(0) = 60 hours; P = (60 - 0) / 2
0 40 2(0) + 3H = 120 hours; H = (120 - 0) / 3
Cooking Constraint
60 0 2P + 3(0) = 120 hours; P = (120 - 0) / 2
45 0 1(0) + 0 = 45 hours; H = 0
Freezing Constraint
45 60 1P + 0 = 45 hours; P = 45

(3) Optimal Product Mix

Graphic Method:
Intercepts P H z = $120P + $90H
(0, 0) 0 0 $0
(0, 40) 0 40 $3,600
(15, 30) 15 30 $4,500
(30, 0) 30 0 $3,600

Optimal Product Mix is 15 units of Premier and 30 units of Haute.

Algebraic Method:
2P + 1H = 60
2P + 3H = 120

H = 60 - 2P
2P + 3(60 - 2P) = 120
2P + 180 - 6P = 120
-4P = -60
P = 15

H = 60 - 2P
 H = 60 - 2(15)
H = 30

(4) Optimal Contribution Margin is $4,500 (computed as 15 units x $120 + 30 units x $90)

(5) New Optimal Solution

Graphic Method:
Intercepts P H z = $120P + $90H
(0, 0) 0 0 $0
(0, 40) 0 40 $3,600
(45, 10) 45 10 $6,300
(45, 0) 45 0 $5,400

Algebraic Method:
2P + 3H = 120
1P + 0H = 45

P = 45
2(45) + 3H = 120
90 + 3H = 120
3H = 30
H = 10

Optimal Product Mix is 45 units of Premier and 10 units of Haute, with optimal contribution margin of $6,300.
70

60

50

40

30

20 Feasible Region

10

0
0 10 20 30 40 50 60 70
 70

60

50

40

30

20 Feasible Region

10

0
0 10 20 30 40 50 60 70

n of $6,300.
(14-25) (14-26) Profit-Related Variances

Actual Budget
Unit CM Volume Mix Total CM Unit CM Volume
Kola $ 2.70 467,500 17.0% $ 1,262,250 $ 3.00 480,000
Limor $ 2.00 852,500 31.0% $ 1,705,000 $ 2.20 720,000
Orlem $ 2.20 1,430,000 52.0% $ 3,146,000 $ 2.00 1,200,000
$ 2.22 2,750,000 $ 6,113,250 $ 2.26 2,400,000

Four-Way Variance Analysis F/(U)

Level 1 Level 2 Level 3
Flexible- Sales-
Static-budget Budget Sales-Volume Sales-Mix Quantity
Kola $ (177,750) (140,250) (37,500) $ (247,500) $ 210,000
Limor 121,000 (170,500) 291,500 60,500 231,000
Orlem 746,000 286,000 460,000 110,000 350,000
$ 689,250 $ (24,750) $ 714,000 $ (77,000) $ 791,000

Actual Budget
Company 2,750,000 2,400,000
Industry 27,500,000 20,000,000
Market Share 10.0% 12.0%
 Budget
Mix Total CM
20.0% $ 1,440,000
30.0% $ 1,584,000
50.0% $ 2,400,000
$ 5,424,000

s F/(U)
Level 4

Market-Share Market-size

$ (1,243,000) $ 2,034,000