Exam 22: Pricing Products and Services

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. -Assume that the company uses a markup of 90% in order to determine selling prices. The selling price under the absorption costing approach would be:

Cost-plus pricing is so named because all costs--production, selling, and administrative--are included in the cost base from which a target selling price is derived.

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 desired profit according to the target costing calculations is:

The management of Heimrich 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 5,000 units of the new product annually. The new product would require an investment of $420,000 and has a required return on investment of 20%. Required: a. Determine the unit product cost for the new product. b. Determine the markup percentage on absorption cost for the new product. c. Determine the target selling price for the new product using the absorption costing approach.

The price elasticity of demand can be estimated using the formula ln(1 + %change in selling price)/ln(1 + %change in quantity sold).

Finnie Company's management believes that every 5% increase in the selling price of one of the company's products results in a 13% decrease in the product's total unit sales. The variable production cost of this product is $23.10 per unit and the variable selling and administrative cost is $5.40 per unit. The product's profit-maximizing price according to the formula in the text is closest to:

A new product, an automated crepe maker, is being introduced at Laguna Corporation. At a selling price of $52 per unit, management projects sales of 90,000 units. Launching the crepe maker as a new product would require an investment of $200,000. The desired return on investment is 15%. The target cost per crepe maker is closest to: