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Exam 1: Pricing Products and Services

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Question 1

Multiple Choice

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Kircher, Inc., manufactures a product with the following costs: $\begin{array}{lrr}&\text { Per Unit } & \text { Per Year } \\\text {Direct materials }&\$ 24.90 & \\\text {Direct labor }&\$ 13.90 & \\\text {Variable manufacturing overhead }&\$ 2.10 \\\text { Fixed manufacturing overhead. }&&\$1,182,600\\\text { Variable selling and administrative expenses }&\$2.00\\\text { Fixed selling and administrative expenses }&&\$1,166,400\end{array}$ 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:

A) $71.90
B) $72.31
C) $53.29
D) $93.67

E) A) and B)
F) B) and D)

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B

Question 2

Multiple Choice

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Ingham 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. $\begin{array} { c c } \text { Selling Price } & \text { Unit Sales } \\\$ 74.00 & 4,300 \\\$ 68.00 & 5,090\end{array}$ The product's variable cost is $16.40 per unit. According to the formula in the text, the product's profit-maximizing price is closest to:

A) $35.82
B) $32.89
C) $35.23
D) $20.74

E) None of the above
F) B) and C)

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Question 3

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A new product, an automated crepe maker, is being introduced at Miyake Corporation. At a selling price of $73 per unit, management projects sales of 20,000 units. Launching the crepe maker as a new product would require an investment of $400,000. The desired return on investment is 17%. The target cost per crepe maker is closest to:

The formula for target cost is:

Finn Corporation's management believes that every 5% increase in the selling price of one of the company's products results in a 6% decrease in the product's total unit sales. The variable production cost of this product is $38.30 per unit and the variable selling and administrative cost is $1.00 per unit. The product's profit-maximizing price according to the formula in the text is closest to:

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

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

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.

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:

The desired profit according to the target costing calculations is:

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:

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

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.

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

Ritchie Corporation manufactures a product that has the following costs: $\begin{array}{lrr}&\text { Per Unit } & \text { Per Year } \\\text {Direct materials }&\$20.70 & \\\text {Direct labor }&\$ 11.80 & \\\text {Variable manufacturing overhead }&\$ 3.20\\\text { Fixed manufacturing overhead. }&&\$817,700\\\text { Variable selling and administrative expenses }&\$4.10\\\text { Fixed selling and administrative expenses }&&\$961,900\end{array}$ 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 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.

The target cost per unit is closest to:

Minden Corporation estimates that the following costs and activity would be associated with the manufacture and sale of product A: $\begin{array}{lr}\text { Number of units sold annually}&80,000 \\\text {Required investment. }&\$ 400,000 \\\text { Unit product cost.}&\$ 30 \\\text {Selling and administrative expenses }&\$ 300,000\end{array}$ 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:

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.

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.

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: $\begin{array}{lrr}&\text { Per Unit } & \text { Per Year } \\\text {Direct materials }&\$ 35 & \\\text {Direct labor }&\$ 14 & \\\text {Variable manufacturing overhead }&\$ 9\\\text { Fixed manufacturing overhead. }&&\$270,000\\\text { Variable selling and administrative expenses }&\$1\\\text { Fixed annual selling and administrative expenses }&&63,000\end{array}$ 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.