Module 4B Practice Problems
Module 4B Practice Problems
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
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
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
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
14-D 33-P
Optimal Product Mix 500 5,000
Unit CM $ 12 $ 10
Total CM $ 6,000 $ 50,000 $ 56,000
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
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
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
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)
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
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