Deck 1: Pricing Products and Services

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

A

Question 4

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.

Question 5

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

Question 6

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.

Question 7

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.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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.

Question 14

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

Question 15

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.

Question 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.

Question 17

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.

Question 18

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.

Question 19

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.

Question 20

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

Question 21

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:

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

Question 22

Surent Corporation has the following information available on Product K: $\begin{array}{lr}\text {Number of units sold each year. }&80,000\\\text {Unit product cost. }&\$25\\\text {Investment in Product K }&\$400,000\\\text {Required return on investment }&20\%\\\end{array}$
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

Question 23

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)

Question 24

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

Question 25

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

Question 26

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.

Question 27

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. $$\begin{array} { c c } \text { Selling Price } & \text { Unit Sales } \\\$ 62.00 & 5,200 \\\$ 63.00 & 5,000\end{array}$$ 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

Question 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

Question 29

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

Question 30

Holding all other things constant, an increase in variable selling costs 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.

Question 31

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%

Question 32

Simmons Corporation estimated that the following costs and activity would be associated with Product T: $\begin{array}{lr}\text {Number of units sold annually }&80,000 \\\text {Required investment. }&\$ 900,000 \\\text {Unit product cost. }&\$ 35 \\\text {Total selling and administrative expenses }&\$ 600,000\end{array}$ 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

Question 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%

Question 34

Joeston Corporation makes a product with the following costs: $\begin{array}{lrr}&\text { Per Unit } & \text { Per Year } \\\text {Direct materials }&\$ 14.70 & \\\text {Direct labor }&\$ 14.10 & \\\text {Variable manufacturing overhead }&\$ 3.70 \\\text { Fixed manufacturing overhead. }&&\$305,200\\\text { Variable selling and administrative expenses }&\$3.00\\\text { Fixed selling and administrative expenses }&&\$163,800\end{array}$ 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 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%

Question 35

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

Question 36

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:

A)12%
B)15%
C)17%
D)25%

Question 37

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

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

Question 38

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:

A)$720,000
B)$480,000
C)$640,000
D)$400,000

Question 39

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

Question 40

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

Question 41

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

Question 42

The markup on absorption cost is closest to:

A)96.5%
B)15.0%
C)31.2%
D)30.0%

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

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

Question 44

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

Question 45

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%

Question 46

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

A)-2.13
B)-1.47
C)-1.57
D)-1.81

Question 47

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

Question 48

The markup percentage on absorption cost is closest to:

A)25%
B)10%
C)15%
D)41%

Question 49

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

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

Question 50

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

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

Question 51

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

Question 52

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

A)-3.19
B)-2.02
C)-2.70
D)-4.13

Question 53

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

Question 54

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

Question 55

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

Question 56

The absorption costing unit product cost is:

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

Question 57

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

Question 58

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

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

Question 59

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

Question 60

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

Question 61

Trepan 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.
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.

Question 62

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.

Question 63

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

A)45.1%
B)36.7%
C)11.0%
D)34.1%

Question 64

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.

Question 65

Gillis Corporation's marketing manager believes that every 10% increase in the selling price of one of the company's products would lead to a 15% decrease in the product's total unit sales. The product's absorption costing unit product cost is $20.00. The variable production cost is $6.00 per unit and the variable selling and administrative cost is $3.00. The fixed selling and administrative expense averages $0.50 per unit.
Required:
a. Compute the product's price elasticity of demand as defined in the text to two decimal places.
b. Compute the product's profit-maximizing price according to the formula in the text.

Question 66

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. The product's variable cost is $17.10 per unit.
Required:
a Compute the product's price elasticity of demand as defined in the text to two decimal places.
b. Compute the product's profit-maximizing price according to the formula in the text.

Question 67

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.

Question 68

The desired profit according to the target costing calculations is:

A)$380,000
B)$303,000
C)$41,800
D)$77,000

Question 69

The management of Archut Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product: Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $3,002,400 and has a required return on investment of 10%.
Required:
a. Determine the unit product cost for the new product.
b. Determine the markup percentage on absorption cost for the new product.
c. Determine the selling price for the new product using the absorption costing approach.

Question 70

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.

Question 71

The selling price would be closest to:

A)$28.71
B)$26.50
C)$22.00
D)$32.67

Question 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:
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.

Question 73

The target cost per unit is closest to:

A)$21.00
B)$18.60
C)$23.52
D)$20.83

Question 74

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

Question 75

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.

Question 76

The desired profit according to the target costing calculations is:

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

Question 77

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.

Question 78

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

A)15.0%
B)46.6%
C)31.6%
D)50.0%

Question 79

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.

Question 80

The target cost per lawn blower is closest to:

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