Exam 15: Pricing Products and Services

Nguyen Corporation's marketing manager believes that every 8% increase in the selling price of one of the company's products would lead to a 15% decrease in the product's total unit sales.The product's absorption costing unit product cost is $19.40.The variable production cost is $5.40 per unit and the variable selling and administrative cost is $2.20. 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.

The management of Kizer 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 8,000 units of the new product annually.The new product would require an investment of $1,580,000 and has a required return on investment of 10%. Direct materials.................................................... Direct labor........................................................... Variable manufacturing overhead.......................... Fixed manufacturing overhead............................... Variable selling and administrative expenses.......... Fixed selling and administrative expenses.............. Per Unit Per Year \ 33 \ 15 \ 7 \ 160,000 \ 4 \ 56,000 -The markup percentage on absorption cost is closest to:

The following information is available on Browning Inc.'s Product A: 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: Number of units sold each year. ............................ 20,000 Selling price per unit ............................................ \ 96 Unit product cost.................................................. \ 60 Investment in Product A ...................................... \ 500,000 Required return on investment............................... 16\%

Merced Corporation estimates that an investment of $600,000 would be necessary to produce and sell 50,000 units of a new product each year.Other costs associated with the new product would be: The company requires a 15% return on the investment in all products.The company uses the absorption costing approach costing to pricing as described in the text. Variable costs (per unit): Materials, labor, and overhead........... \2 4 Selling and administrative.................. \4 Fixed costs per year: Manufacturing overhead..................... \3 50,000 Selling and administrative.................. \2 00,000 -The markup percentage on the new product would be closest to:

Pashicke 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 $17.10 per unit. 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.

Kircher,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 81,000 units per year. The company has invested $220,000 in this product and expects a return on investment of 15%. The selling price based on the absorption costing approach would be closest to: Direct materials.................................................... Direct labor........................................................... Variable manufacturing overhead.......................... Fixed manufacturing overhead............................... Variable selling and administrative expenses.......... Fixed selling and administrative expenses.............. Per Unit Per Year \2 4.90 \ 13.90 \ 2.10 \ 1,182,600 \2 .00 \ 1,166,400

Dickson 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 60,000 units per year. The company has invested $320,000 in this product and expects a return on investment of 15%. Direct labor is a variable cost in this company. Direct materials.................................................... Direct labor........................................................... Variable manufacturing overhead.......................... Fixed manufacturing overhead............................... Variable selling and administrative expenses.......... Fixed selling and administrative expenses.............. Per Unit Per Year \ 18.20 \ 22.30 \ 2.90 \ 1,296,000 \ 1.10 \ 1,104,000 -The selling price based on the absorption costing approach is closest to:

Pricing decisions are most difficult in those situations in which a company makes a product that is in competition with other,identical products for which a market already exists.

When using the absorption approach to cost-plus pricing described in the text:

The management of Kizer 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 8,000 units of the new product annually.The new product would require an investment of $1,580,000 and has a required return on investment of 10%. Direct materials.................................................... Direct labor........................................................... Variable manufacturing overhead.......................... Fixed manufacturing overhead............................... Variable selling and administrative expenses.......... Fixed selling and administrative expenses.............. Per Unit Per Year \ 33 \ 15 \ 7 \ 160,000 \ 4 \ 56,000 -The unit target selling price using the absorption costing approach is closest to:

Holding all other things constant,an increase in how sensitive customers are to price would affect:

Samples Corporation would like to use target costing for a new product it is considering introducing.At a selling price of $21 per unit,management projects sales of 20,000 units.The new product would require an investment of $400,000.The desired return on investment is 12%. -Charging clients based on the value-based pricing approach,a business consultant is working on the assumption that

Eakins Corporation has just developed a new product.At an expected sales level of 60,000 units per year,the company anticipates that the following costs will be incurred: Eakins Corporation uses the absorption costing approach to cost-plus pricing as described in the text. Per Unit Total Variable production costs ........................ \ 20 \ 1,200,000 Fixed production costs..................... \ 12 \ 720,000 Variable selling and administrative costs........ \ 6 \ 360,000 Fixed selling and administrative costs........... \ 8 \ 480,000 -Assume that after introducing the new product,the company finds that it has excess capacity.A foreign dealer has offered to purchase 2,000 units at a special price of $36 per unit.This sale would not disturb regular business.If the special price is accepted on the 2,000 units,the company's overall net income for the year should:

Pedrotti Corporation would like to use target costing for a new product it is considering introducing.At a selling price of $28 per unit,management projects sales of 30,000 units.The new product would require an investment of $300,000.The desired return on investment is 17%.The target cost per unit is closest to:

If a product is price inelastic,then only a very large change in selling price will result in a substantial change in the volume of units sold.

Green Hornet Corporation is contemplating the introduction of a new product.The company has gathered the following information concerning the product: The company uses the absorption costing approach to cost-plus pricing as described in the text. Required: a.Compute the markup on absorption cost. b.Compute the selling price.

The markup over cost under the absorption costing approach would increase if selling and administrative expenses increase,holding everything else constant.

The price elasticity of demand is NOT used to determine the markup over cost when computing the profit-maximizing price.

The markup over cost under the absorption costing approach would increase if the required rate of return increases,holding everything else constant.

Merced Corporation estimates that an investment of $600,000 would be necessary to produce and sell 50,000 units of a new product each year.Other costs associated with the new product would be: The company requires a 15% return on the investment in all products.The company uses the absorption costing approach costing to pricing as described in the text. Variable costs (per unit): Materials, labor, and overhead........... \2 4 Selling and administrative.................. \4 Fixed costs per year: Manufacturing overhead..................... \3 50,000 Selling and administrative.................. \2 00,000 -The selling price would be closest to: