Problem

Use of Cost Functions for Pricing Study Appendix 3. Read the previous problem. If you worked that problem, use your measured cost functions. If you did not work the previous problem, assume the following measured cost functions:

Y = $9,000/week + ($6 × direct labor hours); R2 = .10

Y = $20,000/week + ($14 × number of boards completed); R2 = .40

Y = $5,000/week + ($350 × average cycle time); R2 = .80

1. Which of the support cost functions would you expect to be the most reliable for explaining and predicting support costs? Why?

2. Assume that American Micro Devices prices its products by adding a percentage markup to its product costs. Product costs include assembly labor, components, and support costs. Using each of the cost functions, compute the circuit board portion of the support cost of an order that used the following resources:

a. Effectively used the capacity of the assembly department for 3 weeks

b. Assembly labor hours: 20,000

c. Number of boards: 6,000

d. Average cycle time: 180 hours

3. Which cost driver would you recommend that American Micro Devices use? Why?

4. Assume that the market for this product is extremely cost competitive. What do you think of American Micro Devices' pricing method?