Exam 28: Pricing Decisions

Perwin Corporation estimates that an investment of $800,000 would be needed to produce and sell 50,000 units of Product B each year.At this level of activity,the unit product cost would be $50.Selling and administrative expenses would total $400,000 each year.The company uses the absorption costing approach to cost-plus pricing described in the text.If a 20% rate of return on investment is desired,then the required markup for Product B would be closest to:

After introducing the product,the company finds that it has excess capacity.A foreign dealer has offered to purchase 5,000 units of the product at a special price of $21 per unit.This sale would not disturb regular business.If the special price is accepted on the 5,000 units,the effect on total net income for the year should be:

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:

In value-based pricing,the value of what differentiates a product from the best available alternative is known as the differentiation value

The management of Giammarino Corporation is considering introducing a new product--a compact barbecue.At a selling price of $78 per unit,management projects sales of 10,000 units.Launching the barbecue as a new product would require an investment of $100,000.The desired return on investment is 11%.The target cost per barbecue is closest to:

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:

Lodholz Corporation would like to use target costing for a new product that is under consideration.At a selling price of $93 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 17%. Required: Determine the target cost per unit for the new product.

Boggess Corporation manufactures numerous products, one of which is called Alpha41. The company has provided the following data about this product: -Management is considering increasing the price of Alpha41 by 10%,from $86.00 to $94.60.The company's marketing managers estimate that this price hike would decrease unit sales by 20%,from 120,000 units to 96,000 units.Assuming that the total traceable fixed expense does not change,what net operating income will product Alpha41 earn at a price of $94.60 if this sales forecast is correct?

Kopec Corporation manufactures numerous products,one of which is called Delta42.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 Delta42 would Kopec need to sell at a price of $60.50 to earn the same net operating income that it currently earns at a price of $55.00? (Round your answer up to the nearest whole number.)

Pascal Corporation manufactures numerous products, one of which is called Gamma66. The company has provided the following data about this product: -Management is considering decreasing the price of Gamma66 by 4%,from $51.00 to $48.96.The company's marketing managers estimate that this price reduction would increase unit sales by 10%,from 100,000 units to 110,000 units.Assuming that the total traceable fixed expense does not change,what net operating income will product Gamma66 earn at a price of $48.96 if this sales forecast is correct?

Generally speaking,managers should set higher prices when demand is elastic and lower prices when demand is inelastic.

Thoen Heavy Machinery Corporation has developed a new drill press-model OU-84-that has been designed to outperform a competitor's best-selling drill press.The competitor's product has a useful life of 30,000 hours of service,has operating costs that average $1.60 per hour,and sells for $189,000.In contrast,model OU-84 has a useful life of 120,000 hours of service and its operating cost is $1.00 per hour.Thoen has not yet established a selling price for model OU-84. Required: From a value-based pricing standpoint what range of possible prices should Thoen consider when setting a price for model OU-84?

Kinsley Corporation manufactures numerous products, one of which is called Kappa03. The company has provided the following data about this product: -What is the net operating income for product Kappa03 at the current price?

Reppond Corporation manufactures numerous products,one of which is called Gamma38.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 Gamma38 would Reppond need to sell at a price of $94.05 to earn the same net operating income that it currently earns at a price of $99.00? (Round your answer up to the nearest whole number.)

Kingsford Pure Water Solutions Corporation has developed a new water purification system-model PC-97-that has been designed to outperform a competitor's best-selling water purification system.Model PC-97 has a useful life of 100,000 hours of service and its operating cost is $0.70 per hour.In contrast,the competitor's product has a useful life of 20,000 hours of service and operating costs that average $1.00 per hour.The competitor's water purification system sells for $149,000.Kingsford has not yet established a selling price for model PC-97. Required: From a value-based pricing standpoint what range of possible prices should Kingsford consider when setting a price for model PC-97?

Weitman Corporation manufactures numerous products, one of which is called Epsilon50. The company has provided the following data about this product: -Management is considering increasing the price of Epsilon50 by 9%,from $29.00 to $31.61.The company's marketing managers estimate that this price hike would decrease unit sales by 15%,from 130,000 units to 110,500 units.Assuming that the total traceable fixed expense does not change,what net operating income will product Epsilon50 earn at a price of $31.61 if this sales forecast is correct?

Turnhilm,Inc.is considering adding a small electric mower to its product line.Management believes that in order to be competitive,the mower cannot be priced above $139.The company requires a minimum return of 25% on its investments.Launching the new product would require an investment of $8,000,000.Sales are expected to be 40,000 units of the mower per year. Required: Compute the target cost of a mower.

Demand for a product is said to be elastic if a change in price has little effect on the number of units sold.

Herrell Corporation manufactures numerous products, one of which is called Delta11. The company has provided the following data about this product: -Assume that the total traceable fixed expense does not change.If Herrell increases the price of Delta11 to $30.45,what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $29.00? (Your answer should be rounded to the nearest 0.1%.)

In target costing,the cost of a product is the starting point and the selling price follows from the cost.