Question 1

Qualls Corporation makes a product that has the following costs: $\begin{array}{lrr}
&\text { Per Unit } & \text { Per Year } \
\text {Direct materials }&\$ 17.30 & \
\text {Direct labor }&\$ 12.90 & \
\text {Variable manufacturing overhead }&\$ 4.20 \\text { Fixed manufacturing overhead. }&&\$916,800\\text { Variable selling and administrative expenses }&\$2.00\\text { Fixed selling and administrative expenses }&&\$907,200
\end{array}$ 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.

Accepted Answer

The answer of Qualls Corporation makes a product that has...

Question 2

The absorption costing unit product cost is:

Accepted Answer

A) $59 
B) $86 
C) $55 
D) $75

Question 3

The selling price based on the absorption costing approach is closest to:

Accepted Answer

A) $85.28 
B) $84.50 
C) $110.89 
D) $56.95

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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: $\begin{array}{lr}
\text { Target cost per candy bar}&\$ 0.40 \
\text { Expected annual sales (in units) of candy bars  }&500,000 \
\text {Required investment in additional assets }&\$ 600,000 \
\text { Desired return on investment}&20 \%
\end{array}$ Based on this information, what is Aldot's target selling price per bar for the Big Glob?

Accepted Answer

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

Question 6

The desired profit according to the target costing calculations is:

Accepted Answer

A) $420,000 
B) $50,400 
C) $48,000 
D) $372,000

Question 7

The product's profit-maximizing price according to the formula in the text is closest to:

Accepted Answer

A) $10.73 
B) $38.89 
C) $9.16 
D) $19.89

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

The unit target selling price using the absorption costing approach is closest to:

Accepted Answer

A) $105.75 
B) $83.33 
C) $121.50 
D) $86.00

Question 10

Lacy Corporation uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 86,000 units next year, the unit product cost of a particular product is $81.60. The company's selling and administrative expenses for this product are budgeted to be $1,247,000 in total for the year. The company has invested $360,000 in this product and expects a return on investment of 12%. The markup on absorption cost for this product would be closest to:

Accepted Answer

A) 12.0% 
B) 18.4% 
C) 29.8% 
D) 17.8%

Question 11

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

Accepted Answer

A) $84.50 
B) $124.25 
C) $120.90 
D) $117.91

Question 12

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.

Accepted Answer

The answer of Loyola International, Inc. is considering adding a...

Question 13

Management of Daubert Corporation is considering a new product, an outdoor speaker that would have a selling price of $43 per unit and projected sales of 60,000 units. Launching the new product would require an investment of $300,000. The desired return on investment is 13%.
Required:
Determine the target cost per unit for the outdoor speaker.

Accepted Answer

The answer of Management of Daubert Corporation is considering a...

Question 14

The target cost per lawn blower is closest to:

Accepted Answer

A) $33.63 
B) $30.30 
C) $38.00 
D) $42.18

Question 15

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:

Accepted Answer

A) 15% 
B) 49% 
C) 55% 
D) 58%

Question 16

Trepan Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product: $\begin{array}{lr}
\text {Number of units to be produced and sold each year  }&25,000 \
\text {Investment required by the company }&\$ 300,000 \
\text {Projected unit manufacturing cost. }&\$ 30 \
\text {Projected annual selling and administrative expenses. }&\$ 90,000 \
\text { Desired rate of return on investment.}&20 \%
\end{array}$ 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.
c. If the price computed in "b" above is charged, and costs turn out as projected, can the company be assured that no loss will be sustained on the new product? Explain.

Accepted Answer

The answer of Trepan Corporation is contemplating the introduction of...

Question 17

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:

Accepted Answer

A) decrease by $24,000 
B) increase by $20,000 
C) increase by $8,000 
D) increase by $32,000

Question 18

Which of the following items are included in calculating the markup percentage under the absorption approach to cost-plus pricing described in the text? $$\begin{array} { c c c c c c } 
&  { \text { Variable Cost } } &&{ \text { Fixed Cost } } && \text { Desired } \
& \text { Production } & \text { Selling } & \text { Production } & \text { Selling } & \text { Profit } \
\text { A) } & \text { Yes } & \text { No } & \text { Yes } & \text { No } & \text { Yes } \
\text { B) } & \text { No } & \text { Yes } & \text { No } & \text { Yes } & \text { Yes } \
\text { C) } & \text { No } & \text { No } & \text { Yes } & \text { Yes } & \text { Yes } \
\text { D) } & \text { No } & \text { Yes } & \text { No } & \text { Yes } & \text { No }
\end{array}$$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 19

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: $\begin{array}{lrr}
&\text { Per Unit } & \text { total } \
\text {Direct materials }&\$ 7 & \
\text {Direct labor }&\$ 5 & \
\text {Variable manufacturing overhead }&\$ 24 \\text { Fixed manufacturing overhead. }&&\$80,000\\text { Variable selling and administrative expenses }&\$3\\text { Fixed selling and administrative expenses }&&\$72,000
\end{array}$ 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:

Accepted Answer

A) 41% 
B) 16% 
C) 29% 
D) 22%

Question 20

The product's profit-maximizing price according to the formula in the text is closest to:

Accepted Answer

A) $15.31 
B) $16.67 
C) $20.79 
D) $13.86

Exam 1: Pricing Products and Services

The absorption costing unit product cost is:

The selling price based on the absorption costing approach is closest to:

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

The desired profit according to the target costing calculations is:

The product's profit-maximizing price according to the formula in the text is closest to:

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.

The unit target selling price using the absorption costing approach is closest to:

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

The target cost per lawn blower is closest to:

The product's profit-maximizing price according to the formula in the text is closest to: