Exam 18: Pricing Decisions

Target costing involves adding a target profit per unit to actual unit cost to determine the selling price.

Ecob Corporation uses the absorption costing approach to cost-plus pricing as described in the text to set prices for its products. Based on budgeted sales of 19,000 units next year, the unit product cost of a particular product is $16.00. The company's selling and administrative expenses for this product are budgeted to be $250,800 in total for the year. The company has invested $440,000 in this product and expects a return on investment of 14%. The markup on absorption cost for this product would be closest to:

A product's economic value to the customer is the variable cost of the product plus the value of what differentiates the product from that alternative.

Wenner Corporation would like to use target costing for a new product it is considering introducing. At a selling price of $44 per unit, management projects sales of 10,000 units. The new product would require an investment of $900,000. The desired return on investment is 10%. The target cost per unit is closest to:

Chasin Industries Inc. has developed a new robot, model JB-32, that is designed to offer superior performance to a comparable robot sold by Chasin's main competitor. The competing robot sells for $11,000 and needs to be replaced after 1,000 hours of use. It also requires $1,000 of preventive maintenance during its useful life. Model JB-32's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $1,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what is the reference value that Chasin should consider when pricing model JB-32?

Marvel Corporation estimates that the following costs and activity would be associated with the manufacture and sale of product Y: If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 15% rate of return on investment (ROI), the required markup on absorption cost for product Y would be:

The markup over cost under the absorption costing approach would decrease if the required rate of return increases, holding everything else constant.

Acri Corporation manufactures numerous products, one of which is called Omicron09. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Acri decreases the price of Omicron09 to $71.76, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $78.00? (Your answer should be rounded to the nearest 0.1%.)

Hennig Plastics Equipment Corporation has developed a new injection mold-model XP-30-that has been designed to outperform a competitor's best-selling injection mold. Model XP-30 has a useful life of 60,000 hours of service and its operating cost is $1.20 per hour. In contrast, the competitor's product has a useful life of 30,000 hours of service and has operating costs that average $2.10 per hour. The competitor's injection mold sells for $149,000. Hennig has not yet established a selling price for model XP-30. From a value-based pricing standpoint what is XP-30's economic value to the customer over its 60,000 hour useful life?