【正文】 of goods sold is equal to selling and administrative expense plus desired operating ine divided by cost of goods sold. The markup is not pure profit because it includes selling and administrative expense. 3. Target costing is a method of determining the cost of a product or service based on the price that customers are willing to pay. In essence, target costing is price driven. Once the target price is determined, the cost is calculated by subtracting desired profit from price. The remainder is the target cost. 4. Peration pricing is the pricing of a new product at a low initial price, perhaps even lower than cost, to build market share quickly. Price skimming is a pricing strategy in which a higher price is charged at the beginning of a product’s life cycle and then lowered at later phases of the life cycle. 5. There are a number of possible reasons。 427 CHAPTER 19 PRICING AND PROFITABILITY ANALYSIS QUESTIONS FOR WRITING AND DISCUSSION 1. Perfectly petitive markets are characterized by the following: many buyers and sellers—no one of which is large enough to influence the market。 a homogeneous product (one pany’s product is virtually identical to any other pany’s product)。 here are two. First, interstate highway gas purchasers are often tourists. They do not have a longterm relationship with the gas station owner。 (b) Loser is projected to begin making a profit in a year or so。 and (d) Loser is really part of the marketing efforts for the entire pany. 10. Absorption costing differs from variable costing in that fixed factory overhead is included in unit cost under absorption costing. The result is that absorptioncosting operating ine is sensitive to fluctuations in inventory. Increases in inventory during a period will raise absorptioncosting ine above variablecosting ine. The reverse is true if inventory decreases during a period. 428 11. Net ine must be calculated for external reporting purposes. An advantage is that ine is calculated according to GAAP so outside parties have an understanding of the way in which ine is calculated. Net ine is fairly objective。 they average $65 per hour for a reason—clients will not pay much more than that amount. Accounting is a monopolistically petitive industry. There are many accountants, but they vary somewhat in age, experience, and preferred type of work (auditing, tax, management advisory services, inhouse bookkeeping for clients, etc.). As a result, the price will not vary greatly among the firms. Since Amin is new in town, he might adopt a peration pricing strategy. He is in the introduction stage of his ―service life cycle.‖ He needs to get some clients so that he can demonstrate his expertise and start some favorable ―word of mouth‖ advertising of his services. His college GPA will be irrelevant to potential clients。 rent or purchase of the building。 hangers and racks for display。 equipment (., cash registers)。 hiring carpenters and locating subcontractors。 payroll taxes on direct labor (., carpenters)。 and so on. 4. The direct labor rate charged includes overhead and profit on labor. (No doubt the materials price also includes some profit on the purchase and sale of materials.) The overhead embedded in the direct labor price includes payroll taxes for the mechanics, supplies (., rags, grease), small and large tools, garage space, utilities, and so on. 19–5 1. a. b. Absorption unit cost: Variable unit cost: Direct materials ............. $ Direct materials ............ $ Direct labor..................... Direct labor.................... Variable overhead ........ Variable overhead ....... Fixed overhead ............. Total.......................... $ 431 Total .......................... $ 432 19–5 Continued 2. Vaquero, Inc. AbsorptionCosting Ine Statement Sales (21,300 $35)....................................................... $ 745,500 Cost of goods sold (21,300 $) ....................... $ 479,250 Less: Overapplied overhead* ...................................... (7,000) 472,250 Gross margin ............................................................. $ 273,250 Less: Selling and administrative expense................ 186,900 Net ine ................................................................. $ 86,350 *The budgeted fixed overhead rate of $9 per direct labor hour was puted based on 12,000 direct labor hours. Therefore, budgeted fixed overhead must have been $108,000. Since actual fixed overhead was $12,000 less than budgeted, actual fixed overhead must be $96,000. Similarly, the variable overhead rate of $6 per direct labor hour implies budgeted variable overhead of $72,000 ($6 12,000 direct labor hours). Since actual variable overhead was $5,000 higher than budgeted overhead, actual variable overhead must be $77,000. Both variable and fixed overhead were applied on the basis of direct labor hours. Since 12,000 hours were worked, total applied overhead amounts to $180,000. Actual overhead was $173,000 (actual fixed of $96,000 plus actual variable of $77,000). Applied overhead ............................... $ 180,000 Actual overhead.................................. (173,000) Overapplied overhead................ $ 7,000 3. Vaquero, Inc. VariableCosting Ine Statement Sales (21,300 $35)....................................................... $ 745,500 Variable cost of goods sold (21,300 $18) ............. $ 383,400 Add: Overapplied variable overhead ......................... 5,000 (388,400) Variable selling expense (21,300 $3) ..................... (63,900) Contribution margin ............................................... $ 293,200 Less: Fixed factory overhead ..................