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Exam 17: Pricing Products and Services

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Question 1

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Raymond Company estimates that an investment of $800,000 would be necessary to produce and sell 40,000 units of Product S each year. Costs associated with the new product would be: The company requires a 20% return on the investment in all products. The company used the absorption costing approach to cost-plus pricing as described in the text. -The markup percentage needed on Product S in order to achieve the company's required return on investment would be:

A) 29%
B) 40%
C) 50%
D) 37%

E) A) and B)
F) A) and C)

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Question 2

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Eckhart Company uses the absorption costing approach to cost-plus pricing as described in the text to set prices for its products. Based on budgeted sales of 64,000 units next year, the unit product cost of a particular product is $13.60. The company's selling and administrative expenses for this product are budgeted to be $729,600 in total for the year. The company has invested $460,000 in this product and expects a return on investment of 11%. -The selling price based on the absorption costing approach for this product would be closest to:

A) $25.00
B) $25.79
C) $15.10
D) $47.41

E) A) and C)
F) A) and B)

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Question 3

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Diehl Company 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 52,000 units per year. The company has invested $420,000 in this product and expects a return on investment of 8%. Direct labor is a variable cost in this company. -If every 10% increase in price leads to an 11% decrease in quantity sold, the profit-maximizing price is closest to:

Bourret Corporation is introducing a new product whose direct materials cost is $42 per unit, direct labor cost is $16 per unit, variable manufacturing overhead is $9 per unit, and variable selling and administrative expense is $3 per unit. The annual fixed manufacturing overhead associated with the product is $84,000 and its annual fixed selling and administrative expense is $16,000. Management plans to produce and sell 4,000 units of the new product annually. The new product would require an investment of $1,022,400 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 target selling price for the new product using the absorption costing approach.

The optimal markup on variable cost:

Holding all other things constant, if the unit sales increase, then the markup under absorption costing will:

Harvey Company 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:

Firestack Company's management believes that every 5% increase in the selling price of one of the company's products results in a 13% decrease in the product's total unit sales. The variable production cost of this product is $37.50 per unit and the variable selling and administrative cost is $4.30 per unit. The product's profit-maximizing price according to the formula in the text is closest to:

All variable costs are included in the cost base used to set a selling price under the absorption approach to cost-plus pricing described in the text.

Coble Company 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 $15.70 per unit. -The product's profit-maximizing price according to the formula in the text is closest to:

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

Boatsman Company's management believes that every 4% decrease in the selling price of one of the company's products would lead to a 7% increase in the product's total unit sales. The product's variable cost is $14.20 per unit. -The product's profit-maximizing price according to the formula in the text is closest to:

The management of Matsuura 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 1,000 units of the new product annually. The new product would require an investment of $254,000 and has a required return on investment of 10%. -To the nearest whole percent, the markup percentage on absorption cost is:

The following information is available on 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 would be:

Altona Corporation's vice president in charge of marketing believes that every 3% increase in the selling price of one of the company's products would lead to a 5% decrease in the product's total unit sales. The product's absorption costing unit product cost is $13.50. The variable production cost is $7.80 per unit and the variable selling and administrative cost is $2.30 per unit. -The product's profit-maximizing price according to the formula in the text is closest to:

The management of Mozdzierz, Inc., is considering a new product that would have a selling price of $83 per unit and projected sales of 90,000 units. The new product would require an investment of $200,000. The desired return on investment is 15%. Required: Determine the target cost per unit for the new product.

Turnhilm, Inc. is considering adding a small electric mower to its product line. Management believes that in order to be competitive, the mower cannot be priced above $139. The company requires a minimum return of 25% on its investments. Launching the new product would require an investment of $8,000,000. Sales are expected to be 40,000 units of the mower per year. Required: Compute the target cost of a mower.

Altona Corporation's vice president in charge of marketing believes that every 3% increase in the selling price of one of the company's products would lead to a 5% decrease in the product's total unit sales. The product's absorption costing unit product cost is $13.50. The variable production cost is $7.80 per unit and the variable selling and administrative cost is $2.30 per unit. -The product's price elasticity of demand as defined in the text is closest to:

The management of Hettler 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 4,000 units of the new product annually. The new product would require an investment of $643,000 and has a required return on investment of 20%. 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 target selling price for the new product using the absorption costing approach.

The demand for products that are sold in discount stores is generally more elastic than the demand for products sold in upscale boutiques.