Exam 28: Pricing Decisions

Eytchison Industrial Products Inc.has developed a new industrial grinder,model OK-23,that is designed to offer superior performance to a comparable grinder sold by Eytchison's main competitor.The competing grinder sells for $33,000 and needs to be replaced after 1,000 hours of use.It also requires $6,000 of preventive maintenance during its useful life.Model OK-23's performance capabilities are similar to the competing grinder with two important exceptions-it needs to be replaced only after 3,000 hours of use and it requires $12,000 of preventive maintenance during its useful life. Required: From a value-based pricing standpoint what is model OK-23's economic value to the customer over its 3,000 hour life?

In value-based pricing,the economic value to the customer equals the reference value less the differentiation value.

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 desired profit according to the target costing calculations is:

Morr Logistic Solutions Corporation has developed a new forklift-model QY-49-that has been designed to outperform a competitor's best-selling forklift. The competitor's product has a useful life of 10,000 hours of service, has operating costs that average $3.70 per hour, and sells for $109,000. In contrast, model QY-49 has a useful life of 40,000 hours of service and its operating cost is $2.10 per hour. Morr has not yet established a selling price for model QY-49. -From a value-based pricing standpoint what range of possible prices should Morr consider when setting a price for QY-49?

Jaakola Corporation makes a product with the following costs: The company uses the absorption costing approach to cost-plus pricing described in the text.The pricing calculations are based on budgeted production and sales of 28,000 units per year.The company has invested $360,000 in this product and expects a return on investment of 15%.The markup on absorption cost would be closest to:

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 selling price based on the absorption costing approach for this product would be closest to:

Conaghan Avionics Corporation has developed a new high pressure pump-model RA-79-that has been designed to outperform a competitor's best-selling high pressure pump.The competitor's product has a useful life of 30,000 hours of service,has operating costs that average $3.60 per hour,and sells for $159,000.In contrast,model RA-79 has a useful life of 60,000 hours of service and its operating cost is $2.00 per hour.Conaghan has not yet established a selling price for model RA-79. From a value-based pricing standpoint what is RA-79's economic value to the customer over its 60,000 hour useful life?

Twisdale Corporation manufactures numerous products, one of which is called Omicron52. The company has provided the following data about this product: -Assume that the total traceable fixed expense does not change.How many units of product Omicron52 would Twisdale need to sell at a price of $40.32 to earn the same net operating income that it currently earns at a price of $42.00? (Round your answer up to the nearest whole number.)

Ralph Plastics Equipment Corporation has developed a new injection mold-model IX-94-that has been designed to outperform a competitor's best-selling injection mold.Model IX-94 has a useful life of 50,000 hours of service and its operating cost is $2.00 per hour.In contrast,the competitor's product has a useful life of 10,000 hours of service and has operating costs that average $3.50 per hour.The competitor's injection mold sells for $129,000.Ralph has not yet established a selling price for model IX-94. Required: From a value-based pricing standpoint what is model IX-94's economic value to the customer over its 50,000 hour useful life?

Buzby Corporation manufactures numerous products,one of which is called Epsilon39.The company has provided the following data about this product: Required: a.Management is considering decreasing the price of Epsilon39 by 5%,from $43.00 to $40.85.The company's marketing managers estimate that this price reduction would increase unit sales by 10%,from 60,000 units to 66,000 units.Assuming that the total traceable fixed expense does not change,what net operating income will Epsilon39 earn at a price of $40.85 if this sales forecast is correct? b.Assuming that the total traceable fixed expense does not change,how many units of Epsilon39 would Buzby need to sell at a price of $40.85 to earn the same net operating income that it currently earns at a price of $43.00? (Round your answer up to the nearest whole number.)

Morice Industries Inc. has developed a new injection mold, model IA-05, that is designed to offer superior performance to a comparable injection mold sold by Morice's main competitor. The competing injection mold sells for $54,000 and needs to be replaced after 1,000 hours of use. It also requires $7,000 of preventive maintenance during its useful life. Model IA-05'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 $8,000 of preventive maintenance during its useful life. -From a value-based pricing standpoint what is the reference value that Morice should consider when pricing model IA-05?

The management of Musselman Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product: Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%. -The markup percentage on the new product would be closest to:

Chruch Corporation manufactures numerous products, one of which is called Tau42. The company has provided the following data about this product: -From a value-based pricing standpoint what range of possible prices should Wermers consider when setting a price for model LS-88?

Eastwood Corporation manufactures numerous products,one of which is called Beta96.The company has provided the following data about this product: Management is considering decreasing the price of Beta96 by 8%,from $88.00 to $80.96.The company's marketing managers estimate that this price reduction would increase unit sales by 10%,from 60,000 units to 66,000 units.Assuming that the total traceable fixed expense does not change,what net operating income will product Beta96 earn at a price of $80.96 if this sales forecast is correct?

Ludy Mechanical Corporation has developed a new industrial grinder-model YS-48-that has been designed to outperform a competitor's best-selling industrial grinder.Model YS-48 has a useful life of 100,000 hours of service and its operating cost is $0.90 per hour.In contrast,the competitor's product has a useful life of 20,000 hours of service and has operating costs that average $1.50 per hour.The competitor's industrial grinder sells for $169,000.Ludy has not yet established a selling price for model YS-48. From a value-based pricing standpoint what is the differentiation value offered byYS-48 relative to the competitor's offering for each 100,000 hours of service?

The target costing approach was developed in recognition of two important characteristics of markets and costs.First,many companies have less control over price than they like to think.Second,most of a product's cost is determined when it is designed.

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.

Tavis Robotics Corporation has developed a new robot-model FI-73-that has been designed to outperform a competitor's best-selling robot. The competitor's product has a useful life of 10,000 hours of service, has operating costs that average $4.60 per hour, and sells for $109,000. In contrast, model FI-73 has a useful life of 30,000 hours of service and its operating cost is $2.60 per hour. Tavis has not yet established a selling price for model FI-73. -From a value-based pricing standpoint what is FI-73's economic value to the customer over its 30,000 hour useful life?

Starowicz Corporation manufactures numerous products,one of which is called Beta10.The company has provided the following data about this product: Management is considering decreasing the price of Beta10 by 7%,from $12.00 to $11.16.The company's marketing managers estimate that this price reduction would increase unit sales by 15%,from 120,000 units to 138,000 units.Assuming that the total traceable fixed expense does not change,what net operating income will product Beta10 earn at a price of $11.16 if this sales forecast is correct?

Under the absorption approach to cost-plus pricing described in the text,all fixed costs are included in the cost base in setting a selling price.