Exam 15: Pricing Products and Services

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%. -The target cost per unit is closest to:

Joeston 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 14,000 units per year.The company has invested $540,000 in this product and expects a return on investment of 10%.The markup on absorption cost 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 \ 14.70 \ 14.10 \ 3.70 \ 305,200 \ 3.00 \ 163,800

Alley 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 a 13% decrease in the product's total unit sales.The product's absorption costing unit product cost is $17.40.The variable production cost is $4.10 per unit and the variable selling and administrative cost is $4.80 per unit. -The product's price elasticity of demand as defined in the text is closest to:

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 absorption costing unit product cost is:

The Sloan Corporation must invest $120,000 to produce and market 16,000 units of Product X each year.The company uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products.Other cost information regarding Product X is as follows: If Sloan Corporation requires a 15% return on investment,then the markup percentage on absorption cost for Product X (rounded to the nearest percent)would be: Direct materials.................................................... Direct labor........................................................... Variable manufacturing overhead.......................... Fixed manufacturing overhead............................... Variable selling and administrative expenses.......... Fixed selling and administrative expenses.............. Per Unit Per Year \ 7 \ 5 \ 4 \ 80,000 \ 3 \ 72,000

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 -If every 10% increase in price leads to a 14% decrease in quantity sold,the profit-maximizing price is closest to:

The management of Archut 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 9,000 units of the new product annually.The new product would require an investment of $3,002,400 and has a required return on investment of 10%. 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. Direct materials.................................................... Direct labor........................................................... Variable manufacturing overhead.......................... Fixed manufacturing overhead............................... Variable selling and administrative expenses.......... Fixed selling and administrative expenses.............. Per Unit Per Year \ 35 \ 14 \ 9 \ 270,000 \ 1 \ 63,000

The price elasticity of demand is NOT used in the absorption costing approach to cost-plus pricing to determine the markup over cost.

The formula for target cost is: Target cost = Anticipated selling price + Desired profit

Minden Corporation estimates that the following costs and activity would be associated with the manufacture and sale of product A: If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 25% rate of return on investment (ROI),the required markup on absorption cost for Product A would be closest to: Number of units sold annually ............................ 80,000 Required investment............................... \ 400,000 Unit product cost........................... \ 30 Selling and administrative expenses................... \ 300,000

Qualls Corporation makes 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 48,000 units per year. The company has invested $360,000 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. c.Assume that every 10% increase in price leads to a 13% decrease in quantity sold.Assuming no change in cost structure and that direct labor is a variable cost,compute the profit-maximizing price.

The formula for target cost is:

Perwin Corporation estimates that an investment of $400,000 would be needed to produce and sell 30,000 units of Product B each year.At this level of activity,the unit product cost would be $25.Selling and administrative expenses would total $350,000 each year.The company uses the absorption costing approach to cost-plus pricing described in the text.If a 15% rate of return on investment is desired,then the required markup for Product B would be closest to:

Gillis Corporation's marketing manager believes that every 10% 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 $20.00.The variable production cost is $6.00 per unit and the variable selling and administrative cost is $3.00.The fixed selling and administrative expense averages $0.50 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.

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 profit-maximizing price according to the formula in the text is closest to:

If the formula for the markup percentage on absorption cost is used for setting prices,then the company's desired return on investment (ROI)will not usually be attained unless the assumed number of units sold is actually sold.

Holding all other things constant,an increase in variable selling costs will 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%. -The desired profit according to the target costing calculations is:

Alley 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 a 13% decrease in the product's total unit sales.The product's absorption costing unit product cost is $17.40.The variable production cost is $4.10 per unit and the variable selling and administrative cost is $4.80 per unit. -The product's profit-maximizing price according to the formula in the text is closest to:

Sawit Corporation,a manufacturer of woodworking tools,wants to introduce a new power screwdriver.To compete effectively,the screwdriver cannot be priced at more than $14.The company requires a 15% rate of return on investment on all new products.In order to produce and sell 80,000 screwdrivers each year,the company will need to make an investment of $800,000.The target cost per screwdriver would be: