Question
Transcribed Text
Question #1. 25%
High drugcosts often the news. Consumer groups contendt the pricing for some drugs "too
high' considering that the costs manufacture each dose low. They talk of price gouging and
excessive profits. companies defend the price charged nthe basis ofnonmanufacturing
costs such research and development and others
The following generic value chain for
Rand D
Design
Production
Marketing
Distribution
Questions
Which cost consumer groups? The pharmaceutical companies?
Which cost doyou the cost with price?
3.
Ifyouwere how would you use the value chainto prepare:
defense
your
4.
How could you use the thain improve the profitability of the firm
when prices arese by Give real life example how approach this problem (for the
pharma industry) from
Question 2. CVP analysis with Changing Cost Structure. 25%
Billot Telephone was formedinthe 19405 to bring telephone remote areas of the US Midwest
early equipment was quite primitive by today standards All call were handled manually by perators,
and customers partylines By the 1970's however, all private lines ad
mechanical switching devices handled routine local long distance calls Operator: remained available
for
directory assistance, credit card calls and emergencies Inthe 1990: Billot Telephone added local internet
connections noptional service oits regular customers Italso established optional cellular service,
identifiedas Home Ranger.
A. Using unit level analysis, develop graph with two lines representin Billot's cost structure Be sure to
label the axes and lines
In the 1940s
In the late 1990s
B.
With sales revenues the independent variable, what isthelikely impact ofthe changed cost structure
on Billot's:
Contribution Margin Percent
Break Even Point
C. Discuss how the change the cost structure affected Billot's oper ating leverage and how this affects
profitability under rising falling sales scenarios.
D. Provide specific managerial decisions that can have impacto the degree operating leverageo
firm.
Question 25%
The LawnCompany provides commercial landscaping services in Sar Diego. The firm's owner wantsto
develop cost estimates that she canuse toprepare bids onjobs. After analyzing the firm's costs, she has
developed the followine preliminary cost estimate for each 1000 square feet if landscaping:
Direct Materials
$390
Direct Labor hours $11 per hour)
$55
Overhead ($18 per direct labor hour)
$90
Total cost per 1000square feet
$535
She quite certain about the estimates for direct materials and for labor However the not as comfortable
with overhead estimate The estimate direct labor hour was determined by dividing the total
overhead for the 12 month period($1 296,000) by the total direct labor hours (72,000).
Byusing regression overhead on direct labor hours the following cost formula was obtained:
Overhead $52,400 $9.25 DLH
Questions:
1.
The overhead developed from the least square regressioni different from her preliminary estimate of $18
direct labor hour. Explain the differencei the two overheadrates
2.
Prepare
abid
fora
50.000
square
feet
project
under
both
formulas
Whichone
would
ou recommend
tobeused
the
project?
4.
management does not feel comfortable with the fixed/variable cost relationship that currently
exists could she osomething about it? Come up with managerial recommen dation on how to
deal with this situation?
5.
How far can manager go into changing the microeco nomics of a firm (i.e Fixed to Variable costs
ratio).
there
industry
effect
that
determines
that
ratio?
6. Amazon's Inc. success can hardly be questioned How does Amazon's strategy relate to this
question?
Question #4. 25%
The budgeted costs for Connor Company for direct materials, direct production labor and direct distributionlabor are
$40, $8 and $12, respectively. The vice-president deeply satisfied withthe following performance report:
Real Costs
Master Static Budget
Variation
Direct Materials
$364,000
$400,000
$36,000F
DL Production
78,000
80,000
2,000 F
LDistribution
110,000
120,000
10,000F
The real number of units produced was 8.000.
a. Prepare performance evaluation report that uses flexible and static budget. Please assume that all the costs are
variable. (The variance analysis detail not require for this question).
b. the vice- president': satisfaction justified answer after you complete part a.)?
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Question 1.1. Generally the production costs of medicines are relatively low compared to the research and development costs that go into the innovation of such medicines. The consumer groups take into consideration only the production costs and hence see them as very higher. However the pharmaceutical companies include the costs that start from all stages of the value chain right from R & D, Design, production, marketing and distribution and this is done to cover all the costs incurred in the value chain.
2. The costs incurred in the value chain must be considered when comparing the cost of the drugs with their prices and this is mainly because when these costs are not covered it will result in huge losses for the firm which will not motivate the firm to innovate new drugs through R & D. Hence the costs incurred in the value chain should be considered when fixing the price....
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