Aldot Candy Corporation is implementing a target costing approach for its latest new product,the "Big Glob" candy bar.The following information relates to the Big Glob: Based on this information,what is Aldot's target selling price per bar for the Big Glob? $\begin{array}{lr} \text { Target cost per candy bar ................................ } & \$ 0.40 \\ \text { Expected annual sales (in units) of candy bars ...... } & 500,000 \\ \text { Required investment in additional assets .............. } & \$ 600,000 \\ \text { Desired return on investment ......................... } & 20 \% \end{array}$

A) $0.48 B) $0.50 C) $0.64 D) $0.70 A) $0.48 B) $0.50 C) $0.64 D) $0.70

Exam 15: Pricing Products and Services

Clulow 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. The product's variable cost is $10.50 per unit. Selling Price Unit Sales \ 34.00 7,800 \ 31.00 10,010 -The product's profit-maximizing price according to the formula in the text is closest to:

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Question 1

Correct Answer:

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B

Hanson 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. The product's price elasticity of demand as defined in the text is closest to: Selling Price Unit Sales \ 62.00 5,200 \ 63.00 5,000

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Question 2

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D

Ritchie Corporation manufactures a product that has the following costs: The company uses the absorption costing approach to cost-plus pricing as described in the text.The pricing calculations are based on budgeted production and sales of 37,000 units per year.The company has invested $160,000 in this product and expects a return on investment of 15%. Required: a.Compute the markup on absorption cost. b.Compute the selling price of the product using the absorption costing approach.

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Question 3

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$\begin{array}{lrr}&\text { Per Unit}& \text { Per Year }\\\text { Direct materials........................................ } & \$ 20.70 & \\\text { Direct labor ............................................ } & \$ 11.80 & \\\text { Variable manufacturing overhead .................... } & \$ 3.20 & \\\text { Fixed manufacturing overhead....................... } & & \$ 817,700 \\\text { Variable selling and administrative expenses....... } & \$ 4.10 & \\\text { Fixed selling and administrative expenses .......... }&&\$691,900\end{array}$ a.
Markup percentage on absorption cost = [(Required ROI × Investment)+ Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(15% × $160,000)+ ($4.10 × 37,000 + $691,900)] ÷ (37,000 × $57.80)
= [($24,000)+ ($843,600)] ÷ $2,138,600 = 40.57%
b.Absorption cost based selling price = (1 + Markup percentage on absorption cost)× Unit product cost
= (1 + 0.4057)× $57.80 = $81.25
$\begin{array}{llcc} \text {Direct materials.................................. } & \$20.70 \\ \text {Direct labor......................................... } &11.80\\ \text { Variable manufacturing overhead....... } &3.20\\ \text { Fixed manufacturing overhead........... } &22.10\\ \text { Unit product cost...............................} &\$57.80\\\end{array}$

Bluhm Corporation's management believes that every 2% increase in the selling price of one of the company's products would lead to a 4% decrease in the product's total unit sales.The product's variable cost is $17.50 per unit. -The product's price elasticity of demand as defined in the text is closest to:

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Question 4

In the absorption approach to cost-plus pricing,the anticipated markup in dollars is NOT equal to the anticipated profit.

(True/False)

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Question 5

Loyola International,Inc.is considering adding a portable CD player to its product line.Management believes that in order to be competitive,the CD player cannot be priced above $79.The company requires a minimum return of 20% on its investments.Launching the new product would require an investment of $20,000,000.Sales are expected to be 250,000 units of the CD player per year. Required: Compute the target cost of a CD player.

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Question 6

Aldot Candy Corporation is implementing a target costing approach for its latest new product,the "Big Glob" candy bar.The following information relates to the Big Glob: Based on this information,what is Aldot's target selling price per bar for the Big Glob? Target cost per candy bar ................................ \ 0.40 Expected annual sales (in units) of candy bars ...... 500,000 Required investment in additional assets .............. \ 600,000 Desired return on investment ......................... 20\%

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Question 7

Desalvo Corporation is introducing a new product whose direct materials cost is $41 per unit,direct labor cost is $20 per unit,variable manufacturing overhead is $5 per unit,and variable selling and administrative expense is $4 per unit.The annual fixed manufacturing overhead associated with the product is $120,000 and its annual fixed selling and administrative expense is $8,000.Management plans to produce and sell 8,000 units of the new product annually.The new product would require an investment of $2,192,000 and has a required return on investment of 10%.Management would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. 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 selling price for the new product using the absorption costing approach.

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Question 8

The management of Featherston,Inc. ,is considering a new product that would have a selling price of $77 per unit and projected sales of 50,000 units.The new product would require an investment of $100,000.The desired return on investment is 20%. Required: Determine the target cost per unit for the new product.

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Question 9

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

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Question 10

Timax Corporation,a manufacturer of moderate-priced time pieces,would like to introduce a new electronic watch.To compete effectively,the watch could not be priced at more than $50.The company requires a return on investment of 25% on all new products.The plan is to produce and sell 20,000 watches each year.This would require a $500,000 investment.The target cost per watch would be:

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Question 11

In target costing,effort is concentrated on effectively marketing the product to maximize its selling price.

(True/False)

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Question 12

Simmons Corporation estimated that the following costs and activity would be associated with Product T: If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 20% ROI,the selling price for Product T would be: Number of units sold annually ............................ 80,000 Required investment............................... \ 900,000 Unit product cost........................... \ 35 Selling and administrative expenses................... \ 600,000

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Question 13

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

(True/False)

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Question 14

Magner,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 34,000 units next year,the unit product cost of a particular product is $61.80.The company's selling and administrative expenses for this product are budgeted to be $809,200 in total for the year.The company has invested $400,000 in this product and expects a return on investment of 9%. The selling price for this product based on the absorption costing approach would be closest to:

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Question 15

Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum cost figure.

(True/False)

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Question 16

Okamoto Corporation's management believes that every 7% increase in the selling price of one of the company's products would lead to a 10% decrease in the product's total unit sales.The variable cost per unit of this product is $69.20. Required: a.Compute the product's price elasticity of demand as defined in the text to two decimal places. b.Compute the product's profit-maximizing price according to the formula in the text.

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Question 17

The management of Brockington Corporation is considering introducing a new product--a compact barbecue.At a selling price of $80 per unit,management projects sales of 70,000 units.Launching the barbecue as a new product would require an investment of $400,000.The desired return on investment is 15%.The target cost per barbecue is closest to:

(Multiple Choice)

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Question 18

The management of Rispoli Corporation is considering introducing a new product--a compact lawn blower.At a selling price of $38 per unit,management projects sales of 10,000 units.The lawn blower would require an investment of $700,000.The desired return on investment is 11%. -The target cost per lawn blower is closest to:

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Question 19

Holding all other things constant,an increase in the company's required return on investment (ROI)will affect:

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Question 20

In the absorption approach to cost-plus pricing,the anticipated markup in dollars is NOT equal to the anticipated profit.

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

In target costing,effort is concentrated on effectively marketing the product to maximize its selling price.

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

Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum cost figure.

Holding all other things constant,an increase in the company's required return on investment (ROI)will affect:

Absorption Costing and Variable Costing

Statement of Cash Flows

Further Classification of Labor Costs

Cost of Quality

Least-Squares Regression Computations

Absorption Costing and Variable Costing

Abc Action Analysis

Use Activity-Based Costing Technique to Compute Product Costs for External Reports

Fifo Method

Compute and Interpret the Fixed Overhead Variances

Journal Entries to Record Variances

Transfer Pricing

The Concept of Present Value

Income Taxes in Capital Budgeting Decisions

Profitability Analysis

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