Exam 22: Pricing Products and Services

Lafave Corporation uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 79,000 units next year, the unit product cost of a particular product is $50.80. The company's selling and administrative expenses for this product are budgeted to be $1,896,000 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 15%. The markup on absorption cost for this product would be closest to:

Holding all other things constant, if the price elasticity of demand increases (i.e., becomes more negative), then the markup under absorption costing will:

Gasoline is a product whose demand is elastic.

If a company sells a product for less than its budgeted unit product cost under absorption costing, then the company will lose money.

The management of Nerby Corporation is considering introducing a new product--a compact lawn blower. At a selling price of $28 per unit, management projects sales of 40,000 units. The lawn blower would require an investment of $900,000. The desired return on investment is 20%. -The desired profit according to the target costing calculations is:

The management of Kozloff Corporation is considering introducing a new product--a compact barbecue. At a selling price of $74 per unit, management projects sales of 80,000 units. Launching the barbecue as a new product would require an investment of $800,000. The desired return on investment is 14%. The target cost per barbecue is closest to:

The following information is available on Bruder Inc.'s Product A: Number of units sold each year. 10,000 Selling price per unit \8 0 Unit product cost. \5 0 Investment in Product A. \4 00,000 Required return on investment. 15\% The company uses the absorption costing approach to cost-plus pricing described in the text. Based on these data, the total selling and administrative expenses each year are:

Blumstein Corporation would like to use target costing for a new product it is considering introducing. At a selling price of $22 per unit, management projects sales of 60,000 units. The new product would require an investment of $300,000. The desired return on investment is 11%. -The target cost per unit is closest to:

Perin Corporation would like to use target costing for a new product it is considering introducing. At a selling price of $25 per unit, management projects sales of 30,000 units. The new product would require an investment of $500,000. The desired return on investment is 11%. The target cost per unit is closest to:

Allen Corporation's vice president in charge of marketing believes that every 8% increase in the selling price of one of the company's products would lead to an 11% decrease in the product's total unit sales. The product's absorption costing unit product cost is $10.70. The variable production cost is $1.50 per unit and the variable selling and administrative cost is $4.40 per unit. -The product's profit-maximizing price according to the formula in the text is closest to:

Holding all other things constant, an increase in variable selling costs will affect:

Kirsch, Inc., manufactures 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 41,000 units per year. The company has invested $540,000 in this product and expects a return on investment of 13%. The selling price based on the absorption costing approach would be closest to:

Coan Company recently changed the selling price of one of its products. Data concerning sales for comparable periods before and after the price change are presented below. Selling Price Unit Sales \ 24.00 1,200 \ 26.00 950 The product's variable cost is $21.40 per unit. -The product's price elasticity of demand as defined in the text is closest to:

Nicklos Corporation's marketing manager believes that every 7% decrease in the selling price of one of the company's products would lead to a 10% increase in the product's total unit sales. The product's absorption costing unit product cost is $18.60. The variable production cost is $7.60 per unit and the variable selling and administrative cost is $4.90. Required: a. Compute the product's price elasticity of demand as defined in the text. b. Compute the product's profit-maximizing price according to the formula in the text.

Coan Company recently changed the selling price of one of its products. Data concerning sales for comparable periods before and after the price change are presented below. Selling Price Unit Sales \ 24.00 1,200 \ 26.00 950 The product's variable cost is $21.40 per unit. -The product's profit-maximizing price according to the formula in the text is closest to:

Hanvold Company recently changed the selling price of one of its products. Data concerning sales for comparable periods before and after the price change are presented below. Selling Price Unit Sales \ 30.00 1,700 \ 32.00 1,410 The product's price elasticity of demand as defined in the text is closest to:

Which of the following methods would probably be the most beneficial to a company that has little or no control over the price that it can charge for its product or service?

Delsey Company manufactures product A which has a selling price of $48 per unit. Unit costs associated with the manufacture and sale of product A follow (based on 30,000 units manufactured and sold each year): The company uses the absorption costing approach to cost-plus pricing described in the text. The percentage markup being used to determine the selling price for product A is closest to:

Mercer Company estimates that an investment of $800,000 would be necessary in order to produce and sell 40,000 units of Product A each year. Costs associated with the new product would be: Variable costs (per unit): Production \ 30 Selling and admintrative \ 5 Fixed costs (per year): Production \ 300,000 Selling and administrative \ 240,000 The company requires a 20% rate of return on the investment on all products. Required: a. Compute the markup that would be used under the absorption costing approach to cost-plus pricing as described in the text. b. Compute the selling price under the absorption costing approach to cost-plus pricing as described in the text.

Assume that the price elasticity of demand is less than -1 (for example, -1.5). As the absolute value of the price elasticity of demand increases, the profit-maximizing price decreases.