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Exam 30: Pricing Products and Services

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Question 1

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Lafave 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 79,000 units next year,the unit product cost of a particular product is $50.80.The company's selling and administrative expenses for this product are budgeted to be $1,896,000 in total for the year.The company has invested $260,000 in this product and expects a return on investment of 15%. The markup on absorption cost for this product would be closest to:

A) 62.2%
B) 15.0%
C) 47.2%
D) 48.2%

E) C) and D)
F) B) and C)

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Question 2

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The management of Nerby Corporation is considering introducing a new product--a compact lawn blower. At a selling price of $28 per unit, management projects sales of 40,000 units. The lawn blower would require an investment of $900,000. The desired return on investment is 20%. -The desired profit according to the target costing calculations is:

A) $1,120,000
B) $224,000
C) $940,000
D) $180,000

E) None of the above
F) A) and D)

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Question 3

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Demand for a product is said to be inelastic if a change in price has little effect on the number of units sold.

Pasta 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 $15.90 per unit. Required: a Compute the product's price elasticity of demand as defined in the text. b.Compute the product's profit-maximizing price according to the formula in the text.

Hanvold Company recently changed the selling price of one of its products.Data concerning sales for comparable periods before and after the price change are presented below. The product's price elasticity of demand as defined in the text is closest to:

In the absorption approach to cost-plus pricing,which costs below are included in the cost base?

Demand for a product is said to be inelastic if a change in price has a substantial effect on the number of units sold.

Kupperson,Inc.is considering adding an inline roller skate to its product line.Management believes that in order to be competitive,the skate cannot be priced above $65 per pair.The company requires a minimum return of 25% on its investments.Launching the new product would require an investment of $4,000,000.Sales are expected to be 50,000 pairs of skates per year. Required: Compute the target cost of a pair of skates.

Delsey Company manufactures product A which has a selling price of $48 per unit.Unit costs associated with the manufacture and sale of product A follow (based on 30,000 units manufactured and sold each year) : The company uses the absorption costing approach to cost-plus pricing described in the text.The percentage markup being used to determine the selling price for product A is closest to:

The price elasticity of demand can be estimated using the formula ln(1 + % change in selling price)/ln(1 + % change in quantity sold).

Boden Company's management believes that every 2% increase in the selling price of one of the company's products would lead to a 5% decrease in the product's total unit sales. The product's variable cost is $19.30 per unit. -The product's price elasticity of demand as defined in the text is closest to:

Holding all other things constant,an increase in fixed selling costs will affect:

Allen 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 an 11% decrease in the product's total unit sales. The product's absorption costing unit product cost is $10.70. The variable production cost is $1.50 per unit and the variable selling and administrative cost is $4.40 per unit. -The product's price elasticity of demand as defined in the text is closest to:

Target costing is primarily used when developing a new product.

Mercer Company estimates that an investment of $800,000 would be necessary in order to produce and sell 40,000 units of Product A each year.Costs associated with the new product would be: The company requires a 20% rate of return on the investment on all products. Required: a.Compute the markup that would be used under the absorption costing approach to cost-plus pricing as described in the text. b.Compute the selling price under the absorption costing approach to cost-plus pricing as described in the text.

Inkeo Company recently changed the selling price of one of its products.Data concerning sales for comparable periods before and after the price change are presented below. The product's variable cost is $12.70 per unit. According to the formula in the text,the product's profit-maximizing price is closest to:

The management of Heimrich 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 5,000 units of the new product annually.The new product would require an investment of $420,000 and has a required return on investment of 20%. Required: a.Determine the unit product cost for the new product. b.Determine the markup percentage on absorption cost for the new product. c.Determine the target selling price for the new product using the absorption costing approach.

Gorry Company's management has found 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 absorption costing unit product cost is $13.00.The variable production cost of the product is $4.00 per unit and the variable selling and administrative cost is $5.40 per unit. According to the formula in the text,the product's profit-maximizing price is closest to:

Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of one unit of product Y: If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 15% rate of return on investment (ROI) ,the required markup on absorption cost for product Y would be:

Okano Company's management believes that every 5% increase in the selling price of one of the company's products would lead to a 7% decrease in the product's total unit sales.The variable cost per unit of this product is $47.00. Required: a.Compute the product's price elasticity of demand as defined in the text. b.Compute the product's profit-maximizing price according to the formula in the text.