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Question TypeDifficultyLO1: Economists' approach to pricingLO2: Absorption costing approachLO3: Target costingOther topicsProfessional exam adapted

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AppA -45Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Appendix APricing Products and Services

True / False Questions1.If the unit sales for one product are more sensitive to price increases than another product, then its markup over variable cost should be less than for the other product if the company wants to maximize profit.TrueFalse

2.Price elasticity measures the degree to which consumers resent an increase in price.TrueFalse

3.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.TrueFalse

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

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

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

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

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

9.Under the absorption approach to costs-plus pricing described in the text, selling and administrative costs are included in the cost base when computing a selling price.TrueFalse

10.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.TrueFalse

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

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

13.The formula for target cost is:Target cost = Anticipated selling price + Desired profitTrueFalse

14.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.TrueFalse

15.Most of the opportunities to reduce the cost of a product come from designing the product so that it is simple to make, uses inexpensive parts, and is robust and reliable.TrueFalse

16.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.TrueFalse

Multiple Choice Questions17.Holding all other things constant, if the price elasticity of demand increases (i.e., becomes more negative), then the markup under the economists' approach to pricing will:

A.increase.

B.decrease.

C.remain the same.

D.The effect cannot be determined.

18.Holding all other things constant, an increase in fixed production costs will affect:

A.the markup under the absorption costing approach to cost-plus pricing.

B.the markup used to compute the profit-maximizing price.

C.both the markup under the absorption costing approach to cost-plus pricing and the markup used to compute profit-maximizing price.

D.neither the markup under the absorption costing approach to cost-plus pricing nor the markup used to compute profit-maximizing price.

19.Holding all other things constant, an increase in the company's required return on investment (ROI) will affect:

A.the selling price under the absorption costing approach to cost-plus pricing.

B.the profit-maximizing price.

C.both the selling price under the absorption costing approach to cost-plus pricing and the profit-maximizing price.

D.neither the selling price under the absorption costing approach to cost-plus pricing nor the profit-maximizing price.

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





21.Holding all other things constant, an increase in variable selling costs will affect:





22.Which of the following items are included in calculating the markup percentage under the absorption approach to cost-plus pricing described in the text?

A.Option A

B.Option B

C.Option C

D.Option D

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

A.all costs are included in the cost base.

B.the "plus" or markup figure contains fixed costs and desired profit.

C.the cost base is made up of the unit product cost.

D.only selling and administrative expenses are included in the cost base.

24.The formula for target cost is:

A.Target cost = Anticipated selling price - Desired profit.

B.Target cost = Unit cost + (Markup percentage Unit cost)

C.Target cost = Units sold Unit cost traceable to product

D.Target cost = (Desired return on assets employed + Selling and administrative expenses) (Units sold Unit product cost)

25.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.

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

26.Hanson 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 price elasticity of demand as defined in the text is closest to:

A.-1.71

B.-1.65

C.-1.85

D.-2.45

27.Warvel Corporation's management has found that every 5% increase in the selling price of one of the company's products leads to an 8% decrease in the product's total unit sales. The variable production cost of the product is $18.00 per unit and the variable selling and administrative cost is $12.00 per unit.According to the formula in the text, the product's profit-maximizing price is closest to:

A.$63.08

B.$72.31

C.$96.41

D.$58.67

28.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:

A.$43.62

B.$187.34

C.$41.55

D.$185.84

29.Gordy Corporation's management has found that every 3% increase in the selling price of one of the company's products leads to a 6% decrease in the product's total unit sales. The product's absorption costing unit product cost is $22.00. The variable production cost of the product is $6.80 per unit and the variable selling and administrative cost is $2.40 per unit.According to the formula in the text, the product's profit-maximizing price is closest to:

A.$17.77

B.$31.39

C.$17.61

D.$42.12

30.Erdahl Corporation's management believes that every 7% increase in the selling price of one of the company's products leads to a 11% decrease in the product's total unit sales. The product's price elasticity of demand as defined in the text is closest to:

A.-1.72

B.-1.84

C.-1.05

D.-2.05

31.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:

A.12%

B.15%

C.17%

D.25%

32.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:

A.15%

B.49%

C.55%

D.58%

33.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:

A.12.0%

B.18.4%

C.29.8%

D.17.8%

34.Surent Corporation has the following information available on Product K:

The company uses the absorption costing approach to cost-plus pricing described in the text and a 50% markup. Based on these data, the company's total selling and administrative expenses associated with Product K each year are:

A.$80,000

B.$200,000

C.$920,000

D.$800,000

35.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:

A.$86.66

B.$120.03

C.$67.36

D.$85.60

36.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:

A.27.1%

B.124.2%

C.34.2%

D.10.0%

37.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:

A.$71.90

B.$72.31

C.$53.29

D.$93.67

38.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:

A.41%

B.16%

C.29%

D.22%

39.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:

A.$720,000

B.$480,000

C.$640,000

D.$400,000

40.Simmons Corporation estimated that the following costs and activity would be associated with Product T:

If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 20% ROI, the selling price for Product T would be:

A.$37.25

B.$38.75

C.$42.00

D.$44.75

41.The management of Brockington Corporation is considering introducing a new product--a compact barbecue. At a selling price of $80 per unit, management projects sales of 70,000 units. Launching the barbecue as a new product would require an investment of $400,000. The desired return on investment is 15%. The target cost per barbecue is closest to:

A.$79.14

B.$92.00

C.$91.01

D.$80.00

42.Timax Corporation, a manufacturer of moderate-priced time pieces, would like to introduce a new electronic watch. To compete effectively, the watch could not be priced at more than $50. The company requires a return on investment of 25% on all new products. The plan is to produce and sell 20,000 watches each year. This would require a $500,000 investment. The target cost per watch would be:

A.$64.00

B.$25.00

C.$43.75

D.$39.00

43.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:

Based on this information, what is Aldot's target selling price per bar for the Big Glob?

A.$0.48

B.$0.50

C.$0.64

D.$0.70

44.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:

A.$32.76

B.$26.30

C.$28.00

D.$30.77

45.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:

A.$69.60

B.$85.41

C.$81.43

D.$73.00

46.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:

A.$15.50

B.$1.50

C.$14.00

D.$12.50

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.

47.The product's price elasticity of demand as defined in the text is closest to:

A.-1.75

B.-2.22

C.-2.06

D.-1.07

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

A.$259.84

B.$33.99

C.$40.89

D.$31.81

Clulow 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 $10.50 per unit.


A.-3.19

B.-2.02

C.-2.70

D.-4.13


A.$15.31

B.$16.67

C.$20.79

D.$13.86

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.


A.-2.13

B.-1.47

C.-1.57

D.-1.81


A.$10.73

B.$38.89

C.$9.16

D.$19.89

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.

53.The markup on absorption cost is closest to:

A.96.5%

B.15.0%

C.31.2%

D.30.0%

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

A.$85.28

B.$84.50

C.$110.89

D.$56.95

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

A.$84.50

B.$124.25

C.$120.90

D.$117.91

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.

56.The new product would require an investment of $1,200,000 on which the company would like to earn a return of 22 percent. The markup using the absorption costing approach would be:

A.93.8%

B.32.6%

C.71.3%

D.57.5%

57.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:

A.decrease by $24,000

B.increase by $20,000

C.increase by $8,000

D.increase by $32,000

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%.

58.The absorption costing unit product cost is:

A.$59

B.$86

C.$55

D.$75

59.The markup percentage on absorption cost is closest to:

A.25%

B.10%

C.15%

D.41%

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

A.$105.75

B.$83.33

C.$121.50

D.$86.00

Eckert Corporation 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 18,000 units next year, the unit product cost of a particular product is $60.40. The company's selling and administrative expenses for this product are budgeted to be $370,800 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 11%.

61.The markup on absorption cost for this product would be closest to:

A.45.1%

B.36.7%

C.11.0%

D.34.1%

62.The selling price based on the absorption costing approach for this product would be closest to:

A.$110.76

B.$81.00

C.$67.04

D.$82.59

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.

63.The markup percentage on the new product would be closest to:

A.15.0%

B.46.6%

C.31.6%

D.50.0%

64.The selling price would be closest to:

A.$28.71

B.$26.50

C.$22.00

D.$32.67

The management of Rispoli Corporation is considering introducing a new product--a compact lawn blower. At a selling price of $38 per unit, management projects sales of 10,000 units. The lawn blower would require an investment of $700,000. The desired return on investment is 11%.

65.The desired profit according to the target costing calculations is:

A.$380,000

B.$303,000

C.$41,800

D.$77,000

66.The target cost per lawn blower is closest to:

A.$33.63

B.$30.30

C.$38.00

D.$42.18

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%.


A.$420,000

B.$50,400

C.$48,000

D.$372,000

68.The target cost per unit is closest to:

A.$21.00

B.$18.60

C.$23.52

D.$20.83

Essay Questions69.Okamoto Corporation's management believes that every 7% increase in the selling price of one of the company's products would lead to a 10% decrease in the product's total unit sales. The variable cost per unit of this product is $69.20.

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.

70.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.


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.

71.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:


72.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:


73.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.

74.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.

75.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:


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.

76.Trepan Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product:


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.

77.Ritchie Corporation manufactures 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 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.

78.Desalvo Corporation is introducing a new product whose direct materials cost is $41 per unit, direct labor cost is $20 per unit, variable manufacturing overhead is $5 per unit, and variable selling and administrative expense is $4 per unit. The annual fixed manufacturing overhead associated with the product is $120,000 and its annual fixed selling and administrative expense is $8,000. Management plans to produce and sell 8,000 units of the new product annually. The new product would require an investment of $2,192,000 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 selling price for the new product using the absorption costing approach.

79.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.

80.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.

81.Hepler Corporation would like to use target costing for a new product that is under consideration. At a selling price of $76 per unit, management projects sales of 50,000 units. The new product would require an investment of $400,000. The desired return on investment is 12%.

Required:

Determine the target cost per unit for the new product.

82.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.

Appendix A Pricing Products and Services Answer Key

True / False Questions1.If the unit sales for one product are more sensitive to price increases than another product, then its markup over variable cost should be less than for the other product if the company wants to maximize profit.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.

2.Price elasticity measures the degree to which consumers resent an increase in price.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.

3.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.TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.

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

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.

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

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

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

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

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


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


9.Under the absorption approach to costs-plus pricing described in the text, selling and administrative costs are included in the cost base when computing a selling price.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: 2 MediumLearning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

10.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.TRUE


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

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: AppA-03 Compute the target cost for a new product or service.

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

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: 1 EasyLearning Objective: AppA-03 Compute the target cost for a new product or service.

13.The formula for target cost is:Target cost = Anticipated selling price + Desired profitFALSE


14.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.TRUE


15.Most of the opportunities to reduce the cost of a product come from designing the product so that it is simple to make, uses inexpensive parts, and is robust and reliable.TRUE


16.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.FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: Other topics

Multiple Choice Questions17.Holding all other things constant, if the price elasticity of demand increases (i.e., becomes more negative), then the markup under the economists' approach to pricing will:

A.increase.

B.decrease.

C.remain the same.

D.The effect cannot be determined.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 3 HardLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.

18.Holding all other things constant, an increase in fixed production costs will affect:





AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 3 HardLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

19.Holding all other things constant, an increase in the company's required return on investment (ROI) will affect:






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






21.Holding all other things constant, an increase in variable selling costs will affect:





AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: 2 MediumLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

22.Which of the following items are included in calculating the markup percentage under the absorption approach to cost-plus pricing described in the text?

A.Option A

B.Option B

C.Option C

D.Option D


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

A.all costs are included in the cost base.

B.the "plus" or markup figure contains fixed costs and desired profit.

C.the cost base is made up of the unit product cost.

D.only selling and administrative expenses are included in the cost base.


24.The formula for target cost is:

A.Target cost = Anticipated selling price - Desired profit.

B.Target cost = Unit cost + (Markup percentage Unit cost)

C.Target cost = Units sold Unit cost traceable to product

D.Target cost = (Desired return on assets employed + Selling and administrative expenses) (Units sold Unit product cost)


25.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.

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

% change in quantity sold = (5,090 - 4,300)/4,300 = +18.37%% change in price = ($11 - $12)/$12 = -8.11%d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (0.1837))/ln(1 + (-0.0811)) = -1.99Profit-maximizing markup on variable cost = -1/(1 + d)= -1/(1 + (-1.99)) = 1.01Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 1.01) $16.40 = $32.96 (the exact answer without rounding error is $32.89)

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 2 MediumLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.

26.Hanson 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 price elasticity of demand as defined in the text is closest to:

A.-1.71

B.-1.65

C.-1.85

D.-2.45

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (5,000 - 5,200)/5,200)/ln(1 + ($63 - $62)/$62) = -2.45


27.Warvel Corporation's management has found that every 5% increase in the selling price of one of the company's products leads to an 8% decrease in the product's total unit sales. The variable production cost of the product is $18.00 per unit and the variable selling and administrative cost is $12.00 per unit.According to the formula in the text, the product's profit-maximizing price is closest to:

A.$63.08

B.$72.31

C.$96.41

D.$58.67

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (-0.08))/ln(1 + 0.05) = -1.71Profit-maximizing markup on variable cost = -1/(1 + d)= -1/(1 + (-1.71)) = 1.41Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 1.41) ($18.00 + $12.00) = $72.30 (the answer is $72.31 without rounding error)


28.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:

A.$43.62

B.$187.34

C.$41.55

D.$185.84

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (-0.06))/ln(1 + 0.05) = -1.27Profit-maximizing markup on variable cost = -1/(1 + d)= -1/(1 + (-1.27)) = 3.70Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 3.70) ($38.30 + $1.00) = $184.71 (the exact answer without rounding error is $185.84)


29.Gordy Corporation's management has found that every 3% increase in the selling price of one of the company's products leads to a 6% decrease in the product's total unit sales. The product's absorption costing unit product cost is $22.00. The variable production cost of the product is $6.80 per unit and the variable selling and administrative cost is $2.40 per unit.According to the formula in the text, the product's profit-maximizing price is closest to:

A.$17.77

B.$31.39

C.$17.61

D.$42.12

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (-0.06))/ln(1 + 0.03) = -2.09Profit-maximizing markup on variable cost = -1/(1 + d)= -1/(1 + (-2.09)) = 0.92Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 0.92) ($6.80 + $2.40) = $17.66 (the exact answer without rounding error is $17.61)


30.Erdahl Corporation's management believes that every 7% increase in the selling price of one of the company's products leads to a 11% decrease in the product's total unit sales. The product's price elasticity of demand as defined in the text is closest to:

A.-1.72

B.-1.84

C.-1.05

D.-2.05

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (0.07))/ln(1 + (-0.11)) = -1.72

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 1 EasyLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.

31.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:

A.12%

B.15%

C.17%

D.25%

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(25% $400,000) + $300,000] ($30 per unit 80,000 units)= [($100,000) + $300,000] $2,400,000= $400,000 $2,400,000 = 17% (rounded)

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 1 EasyLearning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

32.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:

A.15%

B.49%

C.55%

D.58%

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(15% $400,000) + $350,000] ($25 per unit 30,000 units)= [($60,000) + $350,000] ($750,000)= $410,000 $750,000 = 0.55 (rounded)


33.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:

A.12.0%

B.18.4%

C.29.8%

D.17.8%

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(12% $360,000) + $1,247,000] ($81.60 per unit 86,000 units)= ($43,200 + $1,247,000) $7,017,600= $1,290,200 $7,017,600 = 18.4% (rounded)


34.Surent Corporation has the following information available on Product K:

The company uses the absorption costing approach to cost-plus pricing described in the text and a 50% markup. Based on these data, the company's total selling and administrative expenses associated with Product K each year are:

A.$80,000

B.$200,000

C.$920,000

D.$800,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)0.50 = [(20% $400,000) + Selling and administrative expenses] ($25 per unit 80,000 units)0.50 = [($80,000) + Selling and administrative expenses] ($2,000,000)($80,000) + Selling and administrative expenses = 0.50 $2,000,000$80,000 + Selling and administrative expenses = $1,000,000Selling and administrative expenses = $1,000,000 - $80,000 = $920,000

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 3 HardLearning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

35.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:

A.$86.66

B.$120.03

C.$67.36

D.$85.60

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(9% $400,000) + $809,200] ($61.80 per unit 34,000 units)= [$36,000 + $809,200] $2,101,200= $845,200 $2,101,200 = 40.22

Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost= (1 + 0.4022) $61.80 = $86.66

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 2 MediumLearning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

36.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:

A.27.1%

B.124.2%

C.34.2%

D.10.0%

Selling and administrative expenses = ($3.00 per unit 14,000 units) + $163,800 = $205,800

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(10% $540,000) + $205,800] ($54.30 per unit 14,000 units)= [$54,000 + $205,800] $760,200= $259,800 $760,200 = 34.2% (rounded)


37.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:

A.$71.90

B.$72.31

C.$53.29

D.$93.67

Selling and administrative expenses = $2.00 per unit 81,000 units + $1,166,400 = $1,328,400

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(15% $220,000) + $1,328,400] ($55.50 per unit 81,000 units)= [$33,000 + $1,328,400] $4,495,500= [$1,361,400] $4,495,500 = 30.28%

Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost= (1 + 0.3028) $55.50 = $72.31


38.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:

A.41%

B.16%

C.29%

D.22%

Selling and administrative expenses = ($3 per unit 16,000 units) + $72,000= $48,000 + $72,000 = $120,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(15% $120,000) + $120,000] ($21 per unit 16,000 units)= [$18,000 + $120,000] $336,000= $138,000 $336,000 = 41% (rounded)


39.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:

A.$720,000

B.$480,000

C.$640,000

D.$400,000

Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost$96 per unit = (1 + Markup percentage on absorption cost) $60 per unit(1 + Markup percentage on absorption cost) = $96 per unit $60 per unit(1 + Markup percentage on absorption cost) = 1.6Markup percentage on absorption cost = 0.6

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)0.6 = [(16% $500,000) + Selling and administrative expenses] ($60 per unit 20,000 units)0.6 = [($80,000) + Selling and administrative expenses] ($1,200,000)[($80,000) + Selling and administrative expenses] = 0.6 $1,200,000$80,000 + Selling and administrative expenses = $720,000Selling and administrative expenses = $720,000 - $80,000 = $640,000


40.Simmons Corporation estimated that the following costs and activity would be associated with Product T:

If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 20% ROI, the selling price for Product T would be:

A.$37.25

B.$38.75

C.$42.00

D.$44.75

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(20% $900,000) + $600,000] ($35 per unit 80,000 units)= [$180,000 + $600,000] ($2,800,000)= 0.2786Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost= (1 + 0.2786) $35 per unit = 1.2786 $35 per unit = $44.75 per unit


41.The management of Brockington Corporation is considering introducing a new product--a compact barbecue. At a selling price of $80 per unit, management projects sales of 70,000 units. Launching the barbecue as a new product would require an investment of $400,000. The desired return on investment is 15%. The target cost per barbecue is closest to:

A.$79.14

B.$92.00

C.$91.01

D.$80.00

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 1 EasyLearning Objective: AppA-03 Compute the target cost for a new product or service.

42.Timax Corporation, a manufacturer of moderate-priced time pieces, would like to introduce a new electronic watch. To compete effectively, the watch could not be priced at more than $50. The company requires a return on investment of 25% on all new products. The plan is to produce and sell 20,000 watches each year. This would require a $500,000 investment. The target cost per watch would be:

A.$64.00

B.$25.00

C.$43.75

D.$39.00


43.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:

Based on this information, what is Aldot's target selling price per bar for the Big Glob?

A.$0.48

B.$0.50

C.$0.64

D.$0.70

$0.40 per unit = (500,000X - $120,000) 500,000 units(500,000X - $120,000) = $0.40 per unit 500,000 units500,000X - $120,000 = $200,000500,000X = $200,000 + $120,000500,000X = $320,000X = $320,000 500,000X = $0.64

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 3 HardLearning Objective: AppA-03 Compute the target cost for a new product or service.

44.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:

A.$32.76

B.$26.30

C.$28.00

D.$30.77


45.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:

A.$69.60

B.$85.41

C.$81.43

D.$73.00


46.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:

A.$15.50

B.$1.50

C.$14.00

D.$12.50


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.


A.-1.75

B.-2.22

C.-2.06

D.-1.07

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (-0.04))/ln(1 + (+0.02)) = -2.06



A.$259.84

B.$33.99

C.$40.89

D.$31.81


Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-2.06)) = 0.94

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 0.94) $17.50 = $33.95 (the exact answer, without rounding error, is $33.99)


Clulow 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.



A.-3.19

B.-2.02

C.-2.70

D.-4.13

% change in price = ($31 - $34)/$34 = -8.82%% change in quantity sold = (10,010 - 7,800)/7,800 = 28.33%

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (+0.2083))/ln(1 + (-0.0882)) = -2.70



A.$15.31

B.$16.67

C.$20.79

D.$13.86

% change in price = ($31 - $34)/$34 = -8.82%% change in quantity sold = (10,010 - 7,800)/7,800 = 28.33%

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (+0.2083))/ln(1 + (-0.0882)) = -2.70


Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 0.59) $10.50 = $16.70 (the exact answer, without rounding error, is $16.67)


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.


A.-2.13

B.-1.47

C.-1.57

D.-1.81




A.$10.73

B.$38.89

C.$9.16

D.$19.89



Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 1.23) ($4.10 + $4.80) = $19.85 (the exact answer, without rounding error, is $19.89)


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.

53.The markup on absorption cost is closest to:

A.96.5%

B.15.0%

C.31.2%

D.30.0%

Selling and administrative expenses = ($1.10 per unit 60,000 units) + $1,104,000 = $1,170,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(15% $320,000) + $1,170,000] ($65.00 per unit 60,000 units)= [($48,000) + $1,170,000] ($3,900,000)= [$1,218,000] $3,900,000 = 31.2%


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

A.$85.28

B.$84.50

C.$110.89

D.$56.95

Selling and administrative expenses = $1.10 per unit 60,000 units + $1,104,000 = $1,170,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(15% $320,000) + $1,170,000] ($65.00 per unit 60,000 units)= [($48,000) + $1,170,000] ($3,900,000)= [$1,218,000] $3,900,000 = 31.2%

Absorption cost based selling price = (1 + 0.312) $65.00 = $85.28


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

A.$84.50

B.$124.25

C.$120.90

D.$117.91



Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 1.72) ($44.50) = $121.04 (the exact answer, without rounding error, is $120.90)


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.

56.The new product would require an investment of $1,200,000 on which the company would like to earn a return of 22 percent. The markup using the absorption costing approach would be:

A.93.8%

B.32.6%

C.71.3%

D.57.5%

Selling and administrative expenses = ($6 per unit 60,000 units) + $480,000 = $840,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(22% $1,200,000) + $840,000] ($32 per unit 60,000 units)= [($264,000) + $840,000] ($1,920,000)= [$1,104,000] $1,920,000 = 57.5%


57.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:

A.decrease by $24,000

B.increase by $20,000

C.increase by $8,000

D.increase by $32,000


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:


58.The absorption costing unit product cost is:

A.$59

B.$86

C.$55

D.$75


59.The markup percentage on absorption cost is closest to:

A.25%

B.10%

C.15%

D.41%

Selling and administrative expenses = $4 per unit 8,000 units + $56,000 = $88,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(10% $1,580,000) + $88,000] ($75 per unit 8,000 units)= [($158,000) + $88,000] ($600,000)= [$246,000] $600,000 = 41%


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

A.$105.75

B.$83.33

C.$121.50

D.$86.00

Selling and administrative expenses = $4 per unit 8,000 units + $56,000 = $88,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(10% $1,580,000) + $88,000] ($75 per unit 8,000 units)= [($158,000) + $88,000] ($600,000)= [$246,000] $600,000 = 41%

Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost= (1 + 0.41) $75 = $105.75


Eckert Corporation 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 18,000 units next year, the unit product cost of a particular product is $60.40. The company's selling and administrative expenses for this product are budgeted to be $370,800 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 11%.

61.The markup on absorption cost for this product would be closest to:

A.45.1%

B.36.7%

C.11.0%

D.34.1%

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(11% $260,000) + $370,800] ($60.40 18,000 units)= [($28,600) + $370,800] ($1,087,200)= [$399,400] $1,087,200 = 36.7% (rounded)


62.The selling price based on the absorption costing approach for this product would be closest to:

A.$110.76

B.$81.00

C.$67.04

D.$82.59

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(11% $260,000) + $370,800] ($60.40 18,000 units)= [($28,600) + $370,800] ($1,087,200)= [$399,400] $1,087,200 = 36.7% (rounded)

Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost= (1 + 1.367) $60.40 = $82.59 (rounded)


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.

63.The markup percentage on the new product would be closest to:

A.15.0%

B.46.6%

C.31.6%

D.50.0%


Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(15% $600,000) + $400,000] ($31.00 per unit 50,000 units)= [($90,000) + $400,000] ($1,550,000)= [$490,000] $1,550,000 = 31.6% (rounded)


64.The selling price would be closest to:

A.$28.71

B.$26.50

C.$22.00

D.$32.67


Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(15% $600,000) + $400,000] ($31.00 per unit 50,000 units)= [($90,000) + $400,000] ($1,550,000)= [$490,000] $1,550,000 = 31.6% (rounded)

Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost= (1 + 0.316) $31.00 = $48.80 (rounded)


The management of Rispoli Corporation is considering introducing a new product--a compact lawn blower. At a selling price of $38 per unit, management projects sales of 10,000 units. The lawn blower would require an investment of $700,000. The desired return on investment is 11%.


A.$380,000

B.$303,000

C.$41,800

D.$77,000

Desired profit = 11% $700,000 = $77,000


66.The target cost per lawn blower is closest to:

A.$33.63

B.$30.30

C.$38.00

D.$42.18

Target cost = Anticipated selling price - Desired profit= $38.00 per unit - ($77,000 10,000 units)= $38.00 per unit - $7.70 per unit = $30.30 per unit


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%.


A.$420,000

B.$50,400

C.$48,000

D.$372,000

Desired profit = 12% $400,000 = $48,000


68.The target cost per unit is closest to:

A.$21.00

B.$18.60

C.$23.52

D.$20.83

Target cost = Anticipated selling price - Desired profit= $21.00 per unit - ($48,000 20,000 units)= $21.00 per unit - $2.40 per unit = $18.60 per unit


Essay Questions69.Okamoto Corporation's management believes that every 7% increase in the selling price of one of the company's products would lead to a 10% decrease in the product's total unit sales. The variable cost per unit of this product is $69.20.

Required:


a. d= ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (-10%))/ln(1 + 7%) = -1.56

b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.56)) = 1.79Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 1.79) $69.20 = (2.79) $69.20 = $193.07 (The answer without rounding error is $193.38.)


70.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.


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.

a. % change in quantity = (7,840 - 7,300) 7,300 = 7.40%% change in price = ($44 - $46) $46 = -4.35%

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + 7.40%)/ln(1 + (-4.35%)) = -1.61

b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.61)) = 1.64Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 1.64) $17.10 = (2.64) $17.10 = $45.14 (The answer without rounding error is $45.34.)


71.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:



b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.71)) = 1.41Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 1.41) ($6.00 +$3.00) = (2.41) $9.00 = $21.69 (The answer without rounding error is $21.76.)

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 3 HardLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.

72.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:



b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-2.11)) = 0.90Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 0.90) ($2.20 +$5.40) = (1.90) $7.60 = $14.44


73.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.

a.

Selling and administrative expenses = ($2.00 48,000) + $907,200 = $1,003,200

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(15% $360,000) + $1,003,200] (48,000 $53.50)= [($54,000) + $1,003,200] $2,568,000= 41.17%

b. Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost= (1 + 0.4117) $53.50 = $75.53

c. d = ln(1 + % change in quantity sold)/ln(1 + % change in price)= ln(1 + (-13%))/ln(1 + 10%) = -1.46

Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.46)) = 2.17Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit= (1 + 2.17) $36.40 = (3.17) $36.40 = $115.33

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: 2 MediumLearning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost.Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

74.Green Hornet Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product:


Required:

a. Compute the markup on absorption cost.b. Compute the selling price.

a. Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales)= [(Required ROI Investment) + Selling and administrative expenses] [Unit product cost Unit sales]= [(20% $400,000) + $100,000] [$30 16,000]= $180,000 $480,000 = 37.5%

b.


75.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 re

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