Exam 22: Pricing Products and Services

Dieckman Company 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 71,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 13%. Direct labor is a variable cost in this company. -The selling price based on the absorption costing approach is closest to:

Guzzetta Corporation would like to use target costing for a new product that is under consideration. At a selling price of $70 per unit, management projects sales of 40,000 units. The new product would require an investment of $700,000. The desired return on investment is 17%. Required: Determine the target cost per unit for the new product.

The management of Mendoza, Inc., is considering a new product that would have a selling price of $98 per unit and projected sales of 40,000 units. The new product would require an investment of $600,000. The desired return on investment is 10%. Required: Determine the target cost per unit for the new product.

Kupperson, Inc. is considering adding an inline roller skate to its product line. Management believes that in order to be competitive, the skate cannot be priced above $65 per pair. The company requires a minimum return of 25% on its investments. Launching the new product would require an investment of $4,000,000. Sales are expected to be 50,000 pairs of skates per year. Required: Compute the target cost of a pair of skates.

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

Boden Company's management believes that every 2% increase in the selling price of one of the company's products would lead to a 5% decrease in the product's total unit sales. The product's variable cost is $19.30 per unit. -The product's profit-maximizing price according to the formula in the text is closest to:

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

Boden Company's management believes that every 2% increase in the selling price of one of the company's products would lead to a 5% decrease in the product's total unit sales. The product's variable cost is $19.30 per unit. -The product's price elasticity of demand as defined in the text is closest to:

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

Jaber 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 52,000 units per year. The company has invested $200,000 in this product and expects a return on investment of 9%. The markup on absorption cost would be closest to:

Werry Company is about to introduce a new product. It is expected that the following costs would be incurred when 25,000 units are produced and sold in a year: Per Unit Total Variable production costs. \ 14 Fixed production costs. \ 6 \ 150,000 Variable selling and administrative costs. \ 4 Fixed selling and administrative costs \ 2 \ 50,000 Werry Company uses the absorption costing approach to cost-plus pricing as described in the text. -After introducing the product at a markup of 90%, the company finds that it has excess capacity. A foreign dealer has offered to purchase 4,000 units of the product at a special price of $32 per unit. This sale would not disturb regular business. If the special price is accepted on the 4,000 units, the effect on total profits for the year will be a:

Salt is an example of a product whose demand is price inelastic.

The management of Store 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 6,000 units of the new product annually. The new product would require an investment of $1,140,000 and has a required return on investment of 10%. -The absorption costing unit product cost is:

Gorry Company's management has found that every 7% increase in the selling price of one of the company's products leads to a 11% decrease in the product's total unit sales. The product's absorption costing unit product cost is $13.00. The variable production cost of the product is $4.00 per unit and the variable selling and administrative cost is $5.40 per unit. According to the formula in the text, the product's profit-maximizing price is closest to:

Pasta Corporation 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 \5 6.00 3,000 \6 1.00 2,590 The product's variable cost is $15.90 per unit. 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.

The absorption costing approach to cost-plus pricing provides assurance that the company's required rate of return will be realized even if unit sales are less than forecasted.

Mahboud, Inc., uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 64,000 units next year, the unit product cost of a particular product is $84.20. The company's selling and administrative expenses for this product are budgeted to be $1,292,800 in total for the year. The company has invested $560,000 in this product and expects a return on investment of 13%. The selling price for this product based on the absorption costing approach would be closest to:

Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of one unit of product Y: Number of units sold annually 20,000 Required investment \4 00,000 Unit product cost. \2 5 Selling and administrative expenses. \1 30,000 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:

Dieckman Company 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 71,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 13%. Direct labor is a variable cost in this company. -If every 10% increase in price leads to a 12% decrease in quantity sold, the profit-maximizing price is closest to:

Epperson Company's management believes that every 3% decrease in the selling price of one of the company's products leads to an 8% increase in the product's total unit sales. The product's price elasticity of demand as defined in the text is closest to: