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Appendix A Pricing Products and Services

True / False Questions

1. 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 maximie pro!t.

Appendix A Pricing Products and Services


1. 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 maximie pro!t. "rue

#alse

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

#alse

%. 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. "rue

#alse

&. "he price elasticity of demand is '(" used to determine the markup over cost when computing the pro!t)maximiing price. "rue

#alse

*. "he price elasticity of demand is '(" used in the absorption costing approach to cost)plus pricing to determine the markup over cost. "rue

#alse

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

#alse

. "he markup over cost under the absorption costing approach would increase if the re-uired rate of return increases, holding everything else constant. "rue

#alse

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. In the absorption approach to cost)plus pricing, the anticipated markup in dollars is '(" e-ual to the anticipated pro!t. "rue

#alse

/. 0nder 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. "rue

#alse

1. If the formula for the markup percentage on absorption cost is used for setting prices, then the company2s desired return on investment 34(I5 will not usually be attained unless the assumed number of units sold is actually sold. "rue

#alse

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

#alse

1$. In target costing, e6ort is concentrated on e6ectively marketing the product to maximie its selling price. "rue

#alse

1%. "he formula for target cost is7 "arget cost 8 Anticipated selling price 9 :esired pro!t "rue

#alse

1&. "arget costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be pro!tably made for that maximum cost !gure. "rue

#alse

1*. ;ost 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. "rue

#alse

1+. Pricing decisions are most di
#alse

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Multiple Choice Questions

1. =olding all other things constant, if the price elasticity of demand increases 3i.e., becomes more negative5, then the markup under the economists2 approach to pricing will7

A. >. ?. :.

increase. decrease. remain the same. "he e6ect cannot be determined.

1. =olding all other things constant, an increase in !xed production costs will a6ect7

A. the markup under the absorption costing approach to cost)plus pricing. >. the markup used to compute the pro!t)maximiing price. ?. both the markup under the absorption costing approach to cost)plus pricing and the markup used to compute pro!t)maximiing price. :. neither the markup under the absorption costing approach to cost)plus pricing nor the markup used to compute pro!t)maximiing price. 1/. =olding all other things constant, an increase in the company2s re-uired return on investment 34(I5 will a6ect7

A. the selling price under the absorption costing approach to cost)plus pricing. >. the pro!t)maximiing price. ?. both the selling price under the absorption costing approach to cost)plus pricing and the pro!t)maximiing price. :. neither the selling price under the absorption costing approach to cost)plus pricing nor the pro!t)maximiing price. $. =olding all other things constant, an increase in how sensitive customers are to price would a6ect7

A. the markup under the absorption costing approach to cost)plus pricing. >. the markup used to compute the pro!t)maximiing price. ?. both the markup under the absorption costing approach to cost)plus pricing and the markup used to compute pro!t)maximiing price. :. neither the markup under the absorption costing approach to cost)plus pricing nor the markup used to compute pro!t)maximiing price.

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$1. =olding all other things constant, an increase in variable selling costs will a6ect7

A. the selling price under the absorption costing approach to cost)plus pricing. >. the pro!t)maximiing price. ?. both the selling price under the absorption costing approach to cost)plus pricing and the pro!t)maximiing price. :. neither the selling price under the absorption costing approach to cost)plus pricing nor the pro!t)maximiing price. $$. @hich of the following items are included in calculating the markup percentage under the absorption approach to cost)plus pricing described in the text

A. >. ?. :.

(ption A (ption > (ption ? (ption :

$%. @hen using the absorption approach to cost)plus pricing described in the text7

A. all costs are included in the cost base. >. the BplusB or markup !gure contains !xed costs and desired pro!t. ?. the cost base is made up of the unit product cost. :. only selling and administrative expenses are included in the cost base. $&. "he formula for target cost is7

A. "arget cost 8 Anticipated selling price ) :esired pro!t. >. "arget cost 8 0nit cost 9 3;arkup percentage C 0nit cost5 ?. "arget cost 8 0nits sold C 0nit cost traceable to product :. "arget cost 8 3:esired return on assets employed 9 Selling and administrative expenses5 D 30nits sold C 0nit product cost5

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$*. Ingham ?orporation recently changed the selling price of one of its products. :ata concerning sales for comparable periods before and after the price change are presented below.

"he product2s variable cost is E1+.& per unit. According to the formula in the text, the product2s pro!t)maximiing price is closest to7

A. >. ?. :.

E%*.$ E%$./ E%*.$% E$.&

$+. =anson ?orporation recently changed the selling price of one of its products. :ata concerning sales for comparable periods before and after the price change are presented below.

"he product2s price elasticity of demand as de!ned in the text is closest to7

A. >. ?. :.

)1.1 )1.+* )1.* )$.&*

$. @arvel ?orporation2s management has found that every *F increase in the selling price of one of the company2s products leads to an F decrease in the product2s total unit sales. "he variable production cost of the product is E1. per unit and the variable selling and administrative cost is E1$. per unit. According to the formula in the text, the product2s pro!t)maximiing price is closest to7

A. >. ?. :.

E+%. E$.%1 E/+.&1 E*.+

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$. #inn ?orporation2s management believes that every *F increase in the selling price of one of the company2s products results in a +F decrease in the product2s total unit sales. "he variable production cost of this product is E%.% per unit and the variable selling and administrative cost is E1. per unit. "he product2s pro!t)maximiing price according to the formula in the text is closest to7

A. >. ?. :.

E&%.+$ E1.%& E&1.** E1*.&

$/. Gordy ?orporation2s management has found that every %F increase in the selling price of one of the company2s products leads to a +F decrease in the product2s total unit sales. "he product2s absorption costing unit product cost is E$$.. "he variable production cost of the product is E+. per unit and the variable selling and administrative cost is E$.& per unit. According to the formula in the text, the product2s pro!t)maximiing price is closest to7

A. >. ?. :.

E1. E%1.%/ E1.+1 E&$.1$

%. Hrdahl ?orporation2s management believes that every F increase in the selling price of one of the company2s products leads to a 11F decrease in the product2s total unit sales. "he product2s price elasticity of demand as de!ned in the text is closest to7

A. >. ?. :.

)1.$ )1.& )1.* )$.*


%1. ;inden ?orporation estimates that the following costs and activity would be associated with the manufacture and sale of product A7

If the company uses the absorption costing approach to cost)plus pricing described in the text and desires a $*F rate of return on investment 34(I5, the re-uired markup on absorption cost for Product A would be closest to7

A. >. ?. :.

1$F 1*F 1F $*F

%$. Perwin ?orporation estimates that an investment of E&, would be needed to produce and sell %, units of Product > each year. At this level of activity, the unit product cost would be E$*. Selling and administrative expenses would total E%*, each year. "he company uses the absorption costing approach to cost)plus pricing described in the text. If a 1*F rate of return on investment is desired, then the re-uired markup for Product > would be closest to7

A. >. ?. :.

1*F &/F **F *F

%%. acy ?orporation uses the absorption costing approach to cost)plus pricing described in the text to set prices for its products. >ased on budgeted sales of +, units next year, the unit product cost of a particular product is E1.+. "he company2s selling and administrative expenses for this product are budgeted to be E1,$&, in total for the year. "he company has invested E%+, in this product and expects a return on investment of 1$F. "he markup on absorption cost for this product would be closest to7

A. >. ?. :.

1$.F 1.&F $/.F 1.F


%&. Surent ?orporation has the following information available on Product J7

"he company uses the absorption costing approach to cost)plus pricing described in the text and a *F markup. >ased on these data, the company2s total selling and administrative expenses associated with Product J each year are7

A. >. ?. :.

E, E$, E/$, E,

%*. ;agner, Inc., uses the absorption costing approach to cost)plus pricing described in the text to set prices for its products. >ased on budgeted sales of %&, units next year, the unit product cost of a particular product is E+1.. "he company2s selling and administrative expenses for this product are budgeted to be E/,$ in total for the year. "he company has invested E&, in this product and expects a return on investment of /F. "he selling price for this product based on the absorption costing approach would be closest to7

A. >. ?. :.

E+.++ E1$.% E+.%+ E*.+


%+. Koeston ?orporation makes a product with the following costs7

"he company uses the absorption costing approach to cost)plus pricing described in the text. "he pricing calculations are based on budgeted production and sales of 1&, units per year. "he company has invested E*&, in this product and expects a return on investment of 1F. "he markup on absorption cost would be closest to7

A. >. ?. :.

$.1F 1$&.$F %&.$F 1.F

%. Jircher, Inc., manufactures a product with the following costs7

"he company uses the absorption costing approach to cost)plus pricing described in the text. "he pricing calculations are based on budgeted production and sales of 1, units per year. "he company has invested E$$, in this product and expects a return on investment of 1*F. "he selling price based on the absorption costing approach would be closest to7

A. >. ?. :.

E1./ E$.%1 E*%.$/ E/%.+

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%. "he Sloan ?orporation must invest E1$, to produce and market 1+, units of Product L each year. "he company uses the absorption costing approach to cost)plus pricing described in the text to set prices for its products. (ther cost information regarding Product L is as follows7

If Sloan ?orporation re-uires a 1*F return on investment, then the markup percentage on absorption cost for Product L 3rounded to the nearest percent5 would be7

A. >. ?. :.

&1F 1+F $/F $$F

%/. "he following information is available on >rowning Inc.2s Product A7

"he company uses the absorption costing approach to cost)plus pricing described in the text. >ased on these data, the total selling and administrative expenses each year are7

A. >. ?. :.

E$, E&, E+&, E&,

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&. Simmons ?orporation estimated that the following costs and activity would be associated with Product "7

If the company uses the absorption costing approach to cost)plus pricing described in the text and desires a $F 4(I, the selling price for Product " would be7

A. >. ?. :.

E%.$* E%.* E&$. E&&.*

&1. "he management of >rockington ?orporation is considering introducing a new product))a compact barbecue. At a selling price of E per unit, management proMects sales of , units. aunching the barbecue as a new product would re-uire an investment of E&,. "he desired return on investment is 1*F. "he target cost per barbecue is closest to7

A. >. ?. :.

E/.1& E/$. E/1.1 E.

&$. "imax ?orporation, a manufacturer of moderate)priced time pieces, would like to introduce a new electronic watch. "o compete e6ectively, the watch could not be priced at more than E*. "he company re-uires a return on investment of $*F on all new products. "he plan is to produce and sell $, watches each year. "his would re-uire a E*, investment. "he target cost per watch would be7

A. >. ?. :.

E+&. E$*. E&%.* E%/.


&%. Aldot ?andy ?orporation is implementing a target costing approach for its latest new product, the B>ig GlobB candy bar. "he following information relates to the >ig Glob7

>ased on this information, what is Aldot2s target selling price per bar for the >ig Glob

A. >. ?. :.

E.& E.* E.+& E.

&&. Pedrotti ?orporation would like to use target costing for a new product it is considering introducing. At a selling price of E$ per unit, management proMects sales of %, units. "he new product would re-uire an investment of E%,. "he desired return on investment is 1F. "he target cost per unit is closest to7

A. >. ?. :.

E%$.+ E$+.% E$. E%.

&*. A new product, an automated crepe maker, is being introduced at ;iyake ?orporation. At a selling price of E% per unit, management proMects sales of $, units. aunching the crepe maker as a new product would re-uire an investment of E&,. "he desired return on investment is 1F. "he target cost per crepe maker is closest to7

A. >. ?. :.

E+/.+ E*.&1 E1.&% E%.

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&+. Sawit ?orporation, a manufacturer of woodworking tools, wants to introduce a new power screwdriver. "o compete e6ectively, the screwdriver cannot be priced at more than E1&. "he company re-uires a 1*F rate of return on investment on all new products. In order to produce and sell , screwdrivers each year, the company will need to make an investment of E,. "he target cost per screwdriver would be7

A. >. ?. :.

E1*.* E1.* E1&. E1$.*

>luhm ?orporation2s management believes that every $F increase in the selling price of one of the company2s products would lead to a &F decrease in the product2s total unit sales. "he product2s variable cost is E1.* per unit. &. "he product2s price elasticity of demand as de!ned in the text is closest to7

A. >. ?. :.

)1.* )$.$$ )$.+ )1.

&. "he product2s pro!t)maximiing price according to the formula in the text is closest to7

A. >. ?. :.

E$*/.& E%%.// E&./ E%1.1

?lulow ?orporation recently changed the selling price of one of its products. :ata concerning sales for comparable periods before and after the price change are presented below.

"he product2s variable cost is E1.* per unit.

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&/. "he product2s price elasticity of demand as de!ned in the text is closest to7

A. >. ?. :.

)%.1/ )$.$ )$. )&.1%

*. "he product2s pro!t)maximiing price according to the formula in the text is closest to7

A. >. ?. :.

E1*.%1 E1+.+ E$./ E1%.+

Alley ?orporation2s vice president in charge of marketing believes that every F increase in the selling price of one of the company2s products would lead to a 1%F decrease in the product2s total unit sales. "he product2s absorption costing unit product cost is E1.&. "he variable production cost is E&.1 per unit and the variable selling and administrative cost is E&. per unit. *1. "he product2s price elasticity of demand as de!ned in the text is closest to7

A. >. ?. :.

)$.1% )1.& )1.* )1.1

*$. "he product2s pro!t)maximiing price according to the formula in the text is closest to7

A. >. ?. :.

E1.% E%./ E/.1+ E1/./

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:ickson ?orporation makes a product with the following costs7

"he company uses the absorption costing approach to cost)plus pricing described in the text. "he pricing calculations are based on budgeted production and sales of +, units per year. "he company has invested E%$, in this product and expects a return on investment of 1*F. :irect labor is a variable cost in this company. *%. "he markup on absorption cost is closest to7

A. >. ?. :.

/+.*F 1*.F %1.$F %.F

*&. "he selling price based on the absorption costing approach is closest to7

A. >. ?. :.

E*.$ E&.* E11./ E*+./*

**. If every 1F increase in price leads to a 1&F decrease in -uantity sold, the pro!t) maximiing price is closest to7

A. >. ?. :.

E&.* E1$&.$* E1$./ E11./1

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Hakins ?orporation has Must developed a new product. At an expected sales level of +, units per year, the company anticipates that the following costs will be incurred7

Hakins ?orporation uses the absorption costing approach to cost)plus pricing as described in the text. *+. "he new product would re-uire an investment of E1,$, on which the company would like to earn a return of $$ percent. "he markup using the absorption costing approach would be7

A. >. ?. :.

/%.F %$.+F 1.%F *.*F

*. Assume that after introducing the new product, the company !nds that it has excess capacity. A foreign dealer has o6ered to purchase $, units at a special price of E%+ per unit. "his sale would not disturb regular business. If the special price is accepted on the $, units, the company2s overall net income for the year should7

A. >. ?. :.

decrease by E$&, increase by E$, increase by E, increase by E%$,


"he management of Jier ?orporation would like to set the selling price on a new product using the absorption costing approach to cost)plus pricing. "he company2s accounting department has supplied the following estimates for the new product7

;anagement plans to produce and sell , units of the new product annually. "he new product would re-uire an investment of E1,*, and has a re-uired return on investment of 1F. *. "he absorption costing unit product cost is7

A. >. ?. :.

E*/ E+ E** E*

*/. "he markup percentage on absorption cost is closest to7

A. >. ?. :.

$*F 1F 1*F &1F

+. "he unit target selling price using the absorption costing approach is closest to7

A. >. ?. :.

E1*.* E%.%% E1$1.* E+.

Hckert ?orporation uses the absorption costing approach to cost)plus pricing as described in the text to set prices for its products. >ased on budgeted sales of 1, units next year, the unit product cost of a particular product is E+.&. "he company2s selling and administrative expenses for this product are budgeted to be E%, in total for the year. "he company has invested E$+, in this product and expects a return on investment of 11F.


+1. "he markup on absorption cost for this product would be closest to7

A. >. ?. :.

&*.1F %+.F 11.F %&.1F

+$. "he selling price based on the absorption costing approach for this product would be closest to7

A. >. ?. :.

E11.+ E1. E+.& E$.*/

;erced ?orporation estimates that an investment of E+, would be necessary to produce and sell *, units of a new product each year. (ther costs associated with the new product would be7

"he company re-uires a 1*F return on the investment in all products. "he company uses the absorption costing approach costing to pricing as described in the text. +%. "he markup percentage on the new product would be closest to7

A. >. ?. :.

1*.F &+.+F %1.+F *.F

+&. "he selling price would be closest to7

A. >. ?. :.

E$.1 E$+.* E$$. E%$.+


"he management of 4ispoli ?orporation is considering introducing a new product))a compact lawn blower. At a selling price of E% per unit, management proMects sales of 1, units. "he lawn blower would re-uire an investment of E,. "he desired return on investment is 11F. +*. "he desired pro!t according to the target costing calculations is7

A. >. ?. :.

E%, E%%, E&1, E,

++. "he target cost per lawn blower is closest to7

A. >. ?. :.

E%%.+% E%.% E%. E&$.1

Samples ?orporation would like to use target costing for a new product it is considering introducing. At a selling price of E$1 per unit, management proMects sales of $, units. "he new product would re-uire an investment of E&,. "he desired return on investment is 1$F. +. "he desired pro!t according to the target costing calculations is7

A. >. ?. :.

E&$, E*,& E&, E%$,

+. "he target cost per unit is closest to7

A. >. ?. :.

E$1. E1.+ E$%.*$ E$.%

Essay Questions

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+/. (kamoto ?orporation2s management believes that every F increase in the selling price of one of the company2s products would lead to a 1F decrease in the product2s total unit sales. "he variable cost per unit of this product is E+/.$. Required: a. ?ompute the product2s price elasticity of demand as de!ned in the text to two decimal places. b. ?ompute the product2s pro!t)maximiing price according to the formula in the text.

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. Pashicke ?orporation recently changed the selling price of one of its products. :ata concerning sales for comparable periods before and after the price change are presented below.

"he product2s variable cost is E1.1 per unit. Required: a ?ompute the product2s price elasticity of demand as de!ned in the text to two decimal places. b. ?ompute the product2s pro!t)maximiing price according to the formula in the text.


1. Gillis ?orporation2s marketing manager believes that every 1F increase in the selling price of one of the company2s products would lead to a 1*F decrease in the product2s total unit sales. "he product2s absorption costing unit product cost is E$.. "he variable production cost is E+. per unit and the variable selling and administrative cost is E%.. "he !xed selling and administrative expense averages E.* per unit. Required: a. ?ompute the product2s price elasticity of demand as de!ned in the text to two decimal places. b. ?ompute the product2s pro!t)maximiing price according to the formula in the text.

$. 'guyen ?orporation2s marketing manager believes that every F increase in the selling price of one of the company2s products would lead to a 1*F decrease in the product2s total unit sales. "he product2s absorption costing unit product cost is E1/.&. "he variable production cost is E*.& per unit and the variable selling and administrative cost is E$.$. Required: a. ?ompute the product2s price elasticity of demand as de!ned in the text to two decimal places. b. ?ompute the product2s pro!t)maximiing price according to the formula in the text.


%. Nualls ?orporation makes a product that has the following costs7

"he company uses the absorption costing approach to cost)plus pricing as described in the text. "he pricing calculations are based on budgeted production and sales of &, units per year. "he company has invested E%+, in this product and expects a return on investment of 1*F. Required: a. ?ompute the markup on absorption cost. b. ?ompute the selling price of the product using the absorption costing approach. c. Assume that every 1F increase in price leads to a 1%F decrease in -uantity sold. Assuming no change in cost structure and that direct labor is a variable cost, compute the pro!t)maximiing price.


&. Green =ornet ?orporation is contemplating the introduction of a new product. "he company has gathered the following information concerning the product7

"he company uses the absorption costing approach to cost)plus pricing as described in the text. Required: a. ?ompute the markup on absorption cost. b. ?ompute the selling price.


*. "he management of Archut ?orporation would like to set the selling price on a new product using the absorption costing approach to cost)plus pricing. "he company2s accounting department has supplied the following estimates for the new product7

;anagement plans to produce and sell /, units of the new product annually. "he new product would re-uire an investment of E%,$,& and has a re-uired return on investment of 1F. Required: a. :etermine the unit product cost for the new product. b. :etermine the markup percentage on absorption cost for the new product. c. :etermine the selling price for the new product using the absorption costing approach.


+. "repan ?orporation is contemplating the introduction of a new product. "he company has gathered the following information concerning the product7

"he company uses the absorption costing approach to cost)plus pricing as described in the text. Required: a. ?ompute the markup on absorption cost. b. ?ompute the selling price. c. If the price computed in BbB above is charged, and costs turn out as proMected, can the company be assured that no loss will be sustained on the new product Hxplain.

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. 4itchie ?orporation manufactures a product that has the following costs7

"he company uses the absorption costing approach to cost)plus pricing as described in the text. "he pricing calculations are based on budgeted production and sales of %, units per year. "he company has invested E1+, in this product and expects a return on investment of 1*F. Required: a. ?ompute the markup on absorption cost. b. ?ompute the selling price of the product using the absorption costing approach.


. :esalvo ?orporation is introducing a new product whose direct materials cost is E&1 per unit, direct labor cost is E$ per unit, variable manufacturing overhead is E* per unit, and variable selling and administrative expense is E& per unit. "he annual !xed manufacturing overhead associated with the product is E1$, and its annual !xed selling and administrative expense is E,. ;anagement plans to produce and sell , units of the new product annually. "he new product would re-uire an investment of E$,1/$, and has a re-uired return on investment of 1F. ;anagement would like to set the selling price on a new product using the absorption costing approach to cost)plus pricing. Required: a. :etermine the unit product cost for the new product. b. :etermine the markup percentage on absorption cost for the new product. c. :etermine the selling price for the new product using the absorption costing approach.

/. "he management of #eatherston, Inc., is considering a new product that would have a selling price of E per unit and proMected sales of *, units. "he new product would re-uire an investment of E1,. "he desired return on investment is $F. Required: :etermine the target cost per unit for the new product.


. oyola International, Inc. is considering adding a portable ?: player to its product line. ;anagement believes that in order to be competitive, the ?: player cannot be priced above E/. "he company re-uires a minimum return of $F on its investments. aunching the new product would re-uire an investment of E$,,. Sales are expected to be $*, units of the ?: player per year. Required: ?ompute the target cost of a ?: player.

1. =epler ?orporation would like to use target costing for a new product that is under consideration. At a selling price of E+ per unit, management proMects sales of *, units. "he new product would re-uire an investment of E&,. "he desired return on investment is 1$F. Required: :etermine the target cost per unit for the new product.

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$. ;anagement of :aubert ?orporation is considering a new product, an outdoor speaker that would have a selling price of E&% per unit and proMected sales of +, units. aunching the new product would re-uire an investment of E%,. "he desired return on investment is 1%F. Required: :etermine the target cost per unit for the outdoor speaker.

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Appendix A Pricing Products and Services Answer Jey


1.

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 maximie pro!t. TRUE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

$.

Price elasticity measures the degree to which consumers resent an increase in price. FALSE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remem'er !i"cult#: , 2as# %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

%.

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: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1


&.

"he price elasticity of demand is '(" used to determine the markup over cost when computing the pro!t)maximiing price. FALSE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remem'er !i"cult#: , 2as# %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

*.

"he price elasticity of demand is '(" used in the absorption costing approach to cost)plus pricing to determine the markup over cost. TRUE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1 %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

+.

"he markup over cost under the absorption costing approach would increase if selling and administrative expenses increase, holding everything else constant. TRUE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

.

"he markup over cost under the absorption costing approach would increase if the re-uired rate of return increases, holding everything else constant. TRUE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

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.

In the absorption approach to cost)plus pricing, the anticipated markup in dollars is '(" e-ual to the anticipated pro!t. TRUE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

/.

0nder 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: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remem'er !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

1.

If the formula for the markup percentage on absorption cost is used for setting prices, then the company2s desired return on investment 34(I5 will not usually be attained unless the assumed number of units sold is actually sold. TRUE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

11.

In target costing, the selling price is the starting point and the cost follows from the selling price. TRUE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+3 Com)ute the target cost 0or a ne4 )rouct or service1

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1$.

In target costing, e6ort is concentrated on e6ectively marketing the product to maximie its selling price. FALSE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remem'er !i"cult#: , 2as# %earning &'(ective: A))A*+3 Com)ute the target cost 0or a ne4 )rouct or service1

1%.

"he formula for target cost is7 "arget cost 8 Anticipated selling price 9 :esired pro!t FALSE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remem'er !i"cult#: , 2as# %earning &'(ective: A))A*+3 Com)ute the target cost 0or a ne4 )rouct or service1

1&.

"arget costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be pro!tably made for that maximum cost !gure. TRUE AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remem'er !i"cult#: , 2as# %earning &'(ective: A))A*+3 Com)ute the target cost 0or a ne4 )rouct or service1

1*.

;ost 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 AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remem'er !i"cult#: , 2as# %earning &'(ective: A))A*+3 Com)ute the target cost 0or a ne4 )rouct or service1

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1+.

Pricing decisions are most di
Multiple Choice Questions

1.

=olding all other things constant, if the price elasticity of demand increases 3i.e., becomes more negative5, then the markup under the economists2 approach to pricing will7

A. B ?. :.

increase. decrease. remain the same. "he e6ect cannot be determined.

AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: 3 5ar %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

1.

=olding all other things constant, an increase in !xed production costs will a6ect7

A the markup under the absorption costing approach to cost)plus pricing. >. the markup used to compute the pro!t)maximiing price. ?. both the markup under the absorption costing approach to cost)plus pricing and the markup used to compute pro!t)maximiing price. :. neither the markup under the absorption costing approach to cost)plus pricing nor the markup used to compute pro!t)maximiing price. AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: 3 5ar %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice AppA -$) Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

elasticit# o0 eman an varia'le cost1 %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

1/.

=olding all other things constant, an increase in the company2s re-uired return on investment 34(I5 will a6ect7

A the selling price under the absorption costing approach to cost)plus pricing. >. the pro!t)maximiing price. ?. both the selling price under the absorption costing approach to cost)plus pricing and the pro!t)maximiing price. :. neither the selling price under the absorption costing approach to cost)plus pricing nor the pro!t)maximiing price. AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: 3 5ar %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1 %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

$.

=olding all other things constant, an increase in how sensitive customers are to price would a6ect7

A. the markup under the absorption costing approach to cost)plus pricing. B the markup used to compute the pro!t)maximiing price. ?. both the markup under the absorption costing approach to cost)plus pricing and the markup used to compute pro!t)maximiing price. :. neither the markup under the absorption costing approach to cost)plus pricing nor the markup used to compute pro!t)maximiing price. AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: 3 5ar %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1 %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

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$1.

=olding all other things constant, an increase in variable selling costs will a6ect7

A. the selling price under the absorption costing approach to cost)plus pricing. >. the pro!t)maximiing price. C both the selling price under the absorption costing approach to cost)plus pricing and the pro!t)maximiing price. :. neither the selling price under the absorption costing approach to cost)plus pricing nor the pro!t)maximiing price. AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1 %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

$$.

@hich of the following items are included in calculating the markup percentage under the absorption approach to cost)plus pricing described in the text

A. B ?. :.

(ption A (ption > (ption ? (ption :

AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

$%.

@hen using the absorption approach to cost)plus pricing described in the text7

A. all costs are included in the cost base. >. the BplusB or markup !gure contains !xed costs and desired pro!t. C the cost base is made up of the unit product cost. :. only selling and administrative expenses are included in the cost base. AACSB: Refective Thinking AppA -%1 Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Unerstan !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

$&.

"he formula for target cost is7

A "arget cost 8 Anticipated selling price ) :esired pro!t. >. "arget cost 8 0nit cost 9 3;arkup percentage C 0nit cost5 ?. "arget cost 8 0nits sold C 0nit cost traceable to product :. "arget cost 8 3:esired return on assets employed 9 Selling and administrative expenses5 D 30nits sold C 0nit product cost5 AACSB: Refective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remem'er !i"cult#: , 2as# %earning &'(ective: A))A*+3 Com)ute the target cost 0or a ne4 )rouct or service1


$*.

Ingham ?orporation recently changed the selling price of one of its products. :ata concerning sales for comparable periods before and after the price change are presented below.

"he product2s variable cost is E1+.& per unit. According to the formula in the text, the product2s pro!t)maximiing price is closest to7

A. B ?. :.

E%*.$ E%$./ E%*.$% E$.&

F change in -uantity sold 8 3*,/ ) &,%5O&,% 8 91.%F F change in price 8 3E11 ) E1$5OE1$ 8 ).11F d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3.1%55Oln31 9 3).1155 8 )1.// Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)1.//55 8 1.1 Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 1.15 C E1+.& 8 E%$./+ 3the exact answer without rounding error is E%$./5

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

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$+.

=anson ?orporation recently changed the selling price of one of its products. :ata concerning sales for comparable periods before and after the price change are presented below.


A. >. ?. !

)1.1 )1.+* )1.* )$.&*

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3*, ) *,$5O*,$5Oln31 9 3E+% ) E+$5OE+$5 8 )$.&*


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$.

@arvel ?orporation2s management has found that every *F increase in the selling price of one of the company2s products leads to an F decrease in the product2s total unit sales. "he variable production cost of the product is E1. per unit and the variable selling and administrative cost is E1$. per unit. According to the formula in the text, the product2s pro!t)maximiing price is closest to7

A. B ?. :.

E+%. E$.%1 E/+.&1 E*.+

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3).55Oln31 9 .*5 8 )1.1 Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)1.155 8 1.&1 Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 1.&15 C 3E1. 9 E1$.5 8 E$.% 3the answer is E$.%1 without rounding error5



$.

#inn ?orpo ?orporati ration2s on2s manag managemen ementt believe believes s that that every every *F increase increase in the selling selling price of one of the company2s products results in a +F decrease in the product2s total unit sales. "he variable production production cost of this product is E%.% per unit and the variable selling and administrative cost is E1. per unit. "he product2s product2s pro!t)maximiing pro!t)maximiing price price according according to the formula formula in the text text is closest closest to7

A. A. >. >. ?. ?. ! !

E&%.+$ E1.%& E&1.** E1*.&

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3).+55Oln31 9 .*5 8 )1.$ Profit)maximiing Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)1.$55 8 %. Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 %.5 C 3E%.% 9 E1.5 8 E1&.1 3the exact answer without rounding error is E1*.&5

AACSB: Anal#tic Anal#tic AICPA BB: Critical Thinking Thinking AICPA AICPA FN: Measurement Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

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$/.

Gordy Gordy ?orpora ?orporation2s tion2s managemen managementt has found that every every %F increase increase in the the selling selling price of one of the company2s products leads to a +F decrease in the product2s total unit sales. "he product2s absorption costing unit product cost is E$$.. "he variable production production cost of the product is E+. per unit and the variable selling and administrative cost is E$.& per unit. According to the formula in the text, the product2s pro!t)maximiing price is closest to7

A. A. >. >. C C :. :.

E1. E%1.%/ E1.+1 E&$.1$

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3).+55Oln31 9 .%5 8 )$./ Profit)maximiing Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)$./55 8 ./$ Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 ./$5 C 3E+. 9 E$.&5 8 E1.++ 3the exact answer without rounding error error is E1.+15

AACSB: Anal#tic Anal#tic AICPA BB: Critical Thinking Thinking AICPA AICPA FN: Measurement Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

%.

Hrdahl Hrdahl ?orpor ?orporation ation2s 2s manage management ment believes believes that every every F increase increase in the the sellin selling g price of one of the company2s products leads to a 11F decrease in the product2s total unit sales. "he product2s price elasticity elasticity of demand as de!ned in the text is closest to7

A A >. >. ?. ?. :. :.

)1.$ )1.& )1.* )$.*

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3.55Oln31 9 3).1155 8 )1.$

AACSB: Anal#tic Anal#tic AICPA BB: Critical Thinking Thinking AICPA AICPA FN: Measurement Measurement Blooms: A))l# AppA -%' Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

!i"cult#: , 2as# %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

%1.

;inden ;inden ?orpor ?orporation ation estimate estimates s that that the the followi following ng costs costs and activity activity would would be associated with the manufacture and sale of product A7

If the company uses the absorption costing approach to cost)plus pricing described in the text and desires a $*F rate of return on investment 34(I5, the re-uired markup on absorption cost for Product A would be closest to7

A. >. C :.

1$F 1*F 1F $*F

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R3$*F C E&,5 9 E%, D 3E% per unit C , units5 8 R3E1,5 9 E%, D E$,&, 8 E&, D E$,&, 8 1F 3rounded5

AACSB: Anal#tic Anal#tic AICPA BB: Critical Thinking Thinking AICPA AICPA FN: Measurement Measurement Blooms: A))l# !i"cult#: , 2as# %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

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%$.

Perwin ?orporation estimates that an investment of E&, would be needed to produce and sell %, units of Product > each year. At this level of activity, the unit product cost would be E$*. Selling and administrative expenses would total E%*, each year. "he company uses the absorption costing approach to cost) plus pricing described in the text. If a 1*F rate of return on investment is desired, then the re-uired markup for Product > would be closest to7

A. >. C :.

1*F &/F **F *F

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31*F C E&,5 9 E%*, D 3E$* per unit C %, units5 8 R3E+,5 9 E%*, D 3E*,5 8 E&1, D E*, 8 .** 3rounded5

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: , 2as# %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

%%.

acy ?orporation uses the absorption costing approach to cost)plus pricing described in the text to set prices for its products. >ased on budgeted sales of +, units next year, the unit product cost of a particular product is E1.+. "he company2s selling and administrative expenses for this product are budgeted to be E1,$&, in total for the year. "he company has invested E%+, in this product and expects a return on investment of 1$F. "he markup on absorption cost for this product would be closest to7

A. B ?. :.

1$.F 1.&F $/.F 1.F

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31$F C E%+,5 9 E1,$&, D 3E1.+ per unit C +, units5 8 3E&%,$ 9 E1,$&,5 D E,1,+ 8 E1,$/,$ D E,1,+ 8 1.&F 3rounded5

AACSB: Anal#tic AICPA BB: Critical Thinking AppA -%) Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

AICPA FN: Measurement Blooms: A))l# !i"cult#: , 2as# %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

%&.

Surent ?orporation has the following information available on Product J7

"he company uses the absorption costing approach to cost)plus pricing described in the text and a *F markup. >ased on these data, the company2s total selling and administrative expenses associated with Product J each year are7

A. >. C :.

E, E$, E/$, E,

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 .* 8 R3$F C E&,5 9 Selling and administrative expenses D 3E$* per unit C , units5 .* 8 R3E,5 9 Selling and administrative expenses D 3E$,,5 3E,5 9 Selling and administrative expenses 8 .* C E$,, E, 9 Selling and administrative expenses 8 E1,, Selling and administrative expenses 8 E1,, ) E, 8 E/$,

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: 3 5ar %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1


%*.

;agner, Inc., uses the absorption costing approach to cost)plus pricing described in the text to set prices for its products. >ased on budgeted sales of %&, units next year, the unit product cost of a particular product is E+1.. "he company2s selling and administrative expenses for this product are budgeted to be E/,$ in total for the year. "he company has invested E&, in this product and expects a return on investment of /F. "he selling price for this product based on the absorption costing approach would be closest to7

A >. ?. :.

E+.++ E1$.% E+.%+ E*.+

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R3/F C E&,5 9 E/,$ D 3E+1. per unit C %&, units5 8 RE%+, 9 E/,$ D E$,11,$ 8 E&*,$ D E$,11,$ 8 &.$$ Absorption cost based selling price 8 31 9 ;arkup percentage on absorption cost5 C 0nit product cost 8 31 9 .&$$5 C E+1. 8 E+.++

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1


%+.

Koeston ?orporation makes a product with the following costs7

"he company uses the absorption costing approach to cost)plus pricing described in the text. "he pricing calculations are based on budgeted production and sales of 1&, units per year. "he company has invested E*&, in this product and expects a return on investment of 1F. "he markup on absorption cost would be closest to7

A. >. C :.

$.1F 1$&.$F %&.$F 1.F

Selling and administrative expenses 8 3E%. per unit C 1&, units5 9 E1+%, 8 E$*,

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31F C E*&,5 9 E$*, D 3E*&.% per unit C 1&, units5 8 RE*&, 9 E$*, D E+,$ 8 E$*/, D E+,$ 8 %&.$F 3rounded5



%.

Jircher, Inc., manufactures a product with the following costs7

"he company uses the absorption costing approach to cost)plus pricing described in the text. "he pricing calculations are based on budgeted production and sales of 1, units per year. "he company has invested E$$, in this product and expects a return on investment of 1*F. "he selling price based on the absorption costing approach would be closest to7

A. B ?. :.

E1./ E$.%1 E*%.$/ E/%.+

Selling and administrative expenses 8 E$. per unit C 1, units 9 E1,1++,& 8 E1,%$,& ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31*F C E$$,5 9 E1,%$,& D 3E**.* per unit C 1, units5 8 RE%%, 9 E1,%$,& D E&,&/*,* 8 RE1,%+1,& D E&,&/*,* 8 %.$F Absorption cost based selling price 8 31 9 ;arkup percentage on absorption cost5 C 0nit product cost 8 31 9 .%$5 C E**.* 8 E$.%1

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: $ Meium AppA -5$ Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

%earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

%.

"he Sloan ?orporation must invest E1$, to produce and market 1+, units of Product L each year. "he company uses the absorption costing approach to cost)plus pricing described in the text to set prices for its products. (ther cost information regarding Product L is as follows7

If Sloan ?orporation re-uires a 1*F return on investment, then the markup percentage on absorption cost for Product L 3rounded to the nearest percent5 would be7

A >. ?. :.

&1F 1+F $/F $$F

Selling and administrative expenses 8 3E% per unit C 1+, units5 9 E$, 8 E&, 9 E$, 8 E1$, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31*F C E1$,5 9 E1$, D 3E$1 per unit C 1+, units5 8 RE1, 9 E1$, D E%%+, 8 E1%, D E%%+, 8 &1F 3rounded5

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1 AppA -5% Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

%/.

"he following information is available on >rowning Inc.2s Product A7

"he company uses the absorption costing approach to cost)plus pricing described in the text. >ased on these data, the total selling and administrative expenses each year are7

A. >. C :.

E$, E&, E+&, E&,

Absorption cost based selling price 8 31 9 ;arkup percentage on absorption cost5 C 0nit product cost E/+ per unit 8 31 9 ;arkup percentage on absorption cost5 C E+ per unit 31 9 ;arkup percentage on absorption cost5 8 E/+ per unit D E+ per unit 31 9 ;arkup percentage on absorption cost5 8 1.+ ;arkup percentage on absorption cost 8 .+ ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 .+ 8 R31+F C E*,5 9 Selling and administrative expenses D 3E+ per unit C $, units5 .+ 8 R3E,5 9 Selling and administrative expenses D 3E1,$,5 R3E,5 9 Selling and administrative expenses 8 .+ C E1,$, E, 9 Selling and administrative expenses 8 E$, Selling and administrative expenses 8 E$, ) E, 8 E+&,



&.

Simmons ?orporation estimated that the following costs and activity would be associated with Product "7

If the company uses the absorption costing approach to cost)plus pricing described in the text and desires a $F 4(I, the selling price for Product " would be7

A. >. ?. !

E%.$* E%.* E&$. E&&.*

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R3$F C E/,5 9 E+, D 3E%* per unit C , units5 8 RE1, 9 E+, D 3E$,,5 8 .$+ Absorption cost based selling price 8 31 9 ;arkup percentage on absorption cost5 C 0nit product cost 8 31 9 .$+5 C E%* per unit 8 1.$+ C E%* per unit 8 E&&.* per unit



&1.

"he management of >rockington ?orporation is considering introducing a new product))a compact barbecue. At a selling price of E per unit, management proMects sales of , units. aunching the barbecue as a new product would re-uire an investment of E&,. "he desired return on investment is 1*F. "he target cost per barbecue is closest to7

A >. ?. :.

E/.1& E/$. E/1.1 E.

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: , 2as# %earning &'(ective: A))A*+3 Com)ute the target cost 0or a ne4 )rouct or service1

&$.

"imax ?orporation, a manufacturer of moderate)priced time pieces, would like to introduce a new electronic watch. "o compete e6ectively, the watch could not be priced at more than E*. "he company re-uires a return on investment of $*F on all new products. "he plan is to produce and sell $, watches each year. "his would re-uire a E*, investment. "he target cost per watch would be7

A. >. C :.

E+&. E$*. E&%.* E%/.



&%.

Aldot ?andy ?orporation is implementing a target costing approach for its latest new product, the B>ig GlobB candy bar. "he following information relates to the >ig Glob7

>ased on this information, what is Aldot2s target selling price per bar for the >ig Glob

A. >. C :.

E.& E.* E.+& E.

E.& per unit 8 3*,L ) E1$,5 D *, units 3*,L ) E1$,5 8 E.& per unit C *, units *,L ) E1$, 8 E$, *,L 8 E$, 9 E1$, *,L 8 E%$, L 8 E%$, D *, L 8 E.+&

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: 3 5ar %earning &'(ective: A))A*+3 Com)ute the target cost 0or a ne4 )rouct or service1


&&.

Pedrotti ?orporation would like to use target costing for a new product it is considering introducing. At a selling price of E$ per unit, management proMects sales of %, units. "he new product would re-uire an investment of E%,. "he desired return on investment is 1F. "he target cost per unit is closest to7

A. B ?. :.

E%$.+ E$+.% E$. E%.


&*.

A new product, an automated crepe maker, is being introduced at ;iyake ?orporation. At a selling price of E% per unit, management proMects sales of $, units. aunching the crepe maker as a new product would re-uire an investment of E&,. "he desired return on investment is 1F. "he target cost per crepe maker is closest to7

A >. ?. :.

E+/.+ E*.&1 E1.&% E%.



&+.

Sawit ?orporation, a manufacturer of woodworking tools, wants to introduce a new power screwdriver. "o compete e6ectively, the screwdriver cannot be priced at more than E1&. "he company re-uires a 1*F rate of return on investment on all new products. In order to produce and sell , screwdrivers each year, the company will need to make an investment of E,. "he target cost per screwdriver would be7

A. >. ?. !

E1*.* E1.* E1&. E1$.*


>luhm ?orporation2s management believes that every $F increase in the selling price of one of the company2s products would lead to a &F decrease in the product2s total unit sales. "he product2s variable cost is E1.* per unit. &.


A. >. C :.

)1.* )$.$$ )$.+ )1.

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3).&55Oln31 9 39.$55 8 )$.+

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: , 2as# %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

AppA -&0 Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

&.

"he product2s pro!t)maximiing price according to the formula in the text is closest to7

A. B ?. :.

E$*/.& E%%.// E&./ E%1.1

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3).&55Oln31 9 39.$55 8 )$.+ Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)$.+55 8 ./& Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 ./&5 C E1.* 8 E%%./* 3the exact answer, without rounding error, is E%%.//5


?lulow ?orporation recently changed the selling price of one of its products. :ata concerning sales for comparable periods before and after the price change are presented below.

"he product2s variable cost is E1.* per unit.


&/.


A. >. C :.

)%.1/ )$.$ )$. )&.1%

F change in price 8 3E%1 ) E%&5OE%& 8 ).$F F change in -uantity sold 8 31,1 ) ,5O, 8 $.%%F d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 39.$%55Oln31 9 3).$55 8 )$.


*.


A. B ?. :.

E1*.%1 E1+.+ E$./ E1%.+

F change in price 8 3E%1 ) E%&5OE%& 8 ).$F F change in -uantity sold 8 31,1 ) ,5O, 8 $.%%F d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 39.$%55Oln31 9 3).$55 8 )$. Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)$.55 8 .*/ Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 .*/5 C E1.* 8 E1+. 3the exact answer, without rounding error, is E1+.+5

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: , 2as# AppA -&2 Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

%earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

Alley ?orporation2s vice president in charge of marketing believes that every F increase in the selling price of one of the company2s products would lead to a 1%F decrease in the product2s total unit sales. "he product2s absorption costing unit product cost is E1.&. "he variable production cost is E&.1 per unit and the variable selling and administrative cost is E&. per unit. *1.


A. >. ?. !

)$.1% )1.& )1.* )1.1

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3).1%55Oln31 9 39.55 8 )1.1


*$.


A. >. ?. !

E1.% E%./ E/.1+ E1/./

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3).1%55Oln31 9 39.55 8 )1.1 Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)1.155 8 1.$% Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 1.$%5 C 3E&.1 9 E&.5 8 E1/.* 3the exact answer, without rounding error, is E1/./5

AACSB: Anal#tic AICPA BB: Critical Thinking AppA -&$ Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

AICPA FN: Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

:ickson ?orporation makes a product with the following costs7

"he company uses the absorption costing approach to cost)plus pricing described in the text. "he pricing calculations are based on budgeted production and sales of +, units per year. "he company has invested E%$, in this product and expects a return on investment of 1*F. :irect labor is a variable cost in this company. *%.

"he markup on absorption cost is closest to7

A. >. C :.

/+.*F 1*.F %1.$F %.F

Selling and administrative expenses 8 3E1.1 per unit C +, units5 9 E1,1&, 8 E1,1, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31*F C E%$,5 9 E1,1, D 3E+*. per unit C +, units5 8 R3E&,5 9 E1,1, D 3E%,/,5 8 RE1,$1, D E%,/, 8 %1.$F

AACSB: Anal#tic AICPA BB: Critical Thinking AppA -&% Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

AICPA FN: Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

*&.

"he selling price based on the absorption costing approach is closest to7

A >. ?. :.

E*.$ E&.* E11./ E*+./*

Selling and administrative expenses 8 E1.1 per unit C +, units 9 E1,1&, 8 E1,1, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31*F C E%$,5 9 E1,1, D 3E+*. per unit C +, units5 8 R3E&,5 9 E1,1, D 3E%,/,5 8 RE1,$1, D E%,/, 8 %1.$F Absorption cost based selling price 8 31 9 .%1$5 C E+*. 8 E*.$



**.

If every 1F increase in price leads to a 1&F decrease in -uantity sold, the pro!t) maximiing price is closest to7

A. >. C :.

E&.* E1$&.$* E1$./ E11./1

d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3).1&55Oln31 9 39.155 8 )1.* Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)1.*55 8 1.$

Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 1.$5 C 3E&&.*5 8 E1$1.& 3the exact answer, without rounding error, is E1$./5


Hakins ?orporation has Must developed a new product. At an expected sales level of +, units per year, the company anticipates that the following costs will be incurred7

Hakins ?orporation uses the absorption costing approach to cost)plus pricing as described in the text. AppA -&& Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

*+.

"he new product would re-uire an investment of E1,$, on which the company would like to earn a return of $$ percent. "he markup using the absorption costing approach would be7

A. >. ?. !

/%.F %$.+F 1.%F *.*F

Selling and administrative expenses 8 3E+ per unit C +, units5 9 E&, 8 E&, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R3$$F C E1,$,5 9 E&, D 3E%$ per unit C +, units5 8 R3E$+&,5 9 E&, D 3E1,/$,5 8 RE1,1&, D E1,/$, 8 *.*F


AppA -&' Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

*.

Assume that after introducing the new product, the company !nds that it has excess capacity. A foreign dealer has o6ered to purchase $, units at a special price of E%+ per unit. "his sale would not disturb regular business. If the special price is accepted on the $, units, the company2s overall net income for the year should7

A. B ?. :.

decrease by E$&, increase by E$, increase by E, increase by E%$,


"he management of Jier ?orporation would like to set the selling price on a new product using the absorption costing approach to cost)plus pricing. "he company2s accounting department has supplied the following estimates for the new product7

;anagement plans to produce and sell , units of the new product annually. "he new product would re-uire an investment of E1,*, and has a re-uired return on investment of 1F.

AppA -&( Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

*.

"he absorption costing unit product cost is7

A. >. ?. !

E*/ E+ E** E*


*/.

"he markup percentage on absorption cost is closest to7

A. >. ?. !

$*F 1F 1*F &1F

Selling and administrative expenses 8 E& per unit C , units 9 E*+, 8 E, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31F C E1,*,5 9 E, D 3E* per unit C , units5 8 R3E1*,5 9 E, D 3E+,5 8 RE$&+, D E+, 8 &1F

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# AppA -&) Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

!i"cult#: , 2as# %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

+.

"he unit target selling price using the absorption costing approach is closest to7

A >. ?. :.

E1*.* E%.%% E1$1.* E+.

Selling and administrative expenses 8 E& per unit C , units 9 E*+, 8 E, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31F C E1,*,5 9 E, D 3E* per unit C , units5 8 R3E1*,5 9 E, D 3E+,5 8 RE$&+, D E+, 8 &1F Absorption cost based selling price 8 31 9 ;arkup percentage on absorption cost5 C 0nit product cost 8 31 9 .&15 C E* 8 E1*.*


Hckert ?orporation uses the absorption costing approach to cost)plus pricing as described in the text to set prices for its products. >ased on budgeted sales of 1, units next year, the unit product cost of a particular product is E+.&. "he company2s selling and administrative expenses for this product are budgeted to be E%, in total for the year. "he company has invested E$+, in this product and expects a return on investment of 11F.

AppA -'0 Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

+1.

"he mark markup up on abso absorpt rption ion cost cost for for this this produ product ct would would be be closes closestt to7

A. A. B B ?. ?. :. :.

&*.1F %+.F 11.F %&.1F

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R311F C E$+,5 9 E%, D 3E+.& C 1, units5 8 R3E$,+5 9 E%, D 3E1,,$5 8 RE%//,& D E1,,$ 8 %+.F 3rounded5


+$.

"he selli selling ng price price based based on the the absorpt absorption ion costin costing g approa approach ch for for this this product product would would be closest to7

A. A. >. >. ?. ?. ! !

E11.+ E1. E+.& E$.*/

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R311F C E$+,5 9 E%, D 3E+.& C 1, units5 8 R3E$,+5 9 E%, D 3E1,,$5 8 RE%//,& D E1,,$ 8 %+.F 3rounded5 Absorption cost based selling price 8 31 9 ;arkup percentage percentage on absorption cost5 C 0nit product cost 8 31 9 1.%+5 C E+.& 8 E$.*/ 3rounded5



;erced ?orporation ?orporation estimates that an investment of E+, would be necessary to produce and sell *, units of a new product each year. (ther costs associated with the new product would be7

"he company re-uires re-uires a 1*F return return on the investment in all products. products. "he company uses the absorption costing approach costing to pricing as described in the text. +%.

"he mark markup up perc percent entage age on the the new new produ product ct would would be be close closest st to7 to7

A. A. >. >. C C :. :.

1*.F &+.+F %1.+F *.F

Selling and administrative administrative expenses 8 3E& per unit C *, units5 9 E$, 8 E&, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31*F C E+,5 9 E&, D 3E%1. per unit C *, units5 8 R3E/,5 9 E&, D 3E1,**,5 8 RE&/, D E1,**, 8 %1.+F 3rounded5

AACSB: Anal#tic Anal#tic AICPA BB: Critical Thinking Thinking AICPA AICPA FN: Measurement Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1


+&. +&.

"he "he sell sellin ing g pric price e woul would d be be clos closes estt to7 to7

A A >. >. ?. ?. :. :.

E$.1 E$+.* E$$. E%$.+

Selling and administrative administrative expenses 8 3E& per unit C *, units5 9 E$, 8 E&, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31*F C E+,5 9 E&, D 3E%1. per unit C *, units5 8 R3E/,5 9 E&, D 3E1,**,5 8 RE&/, D E1,**, 8 %1.+F 3rounded5 Absorption cost based selling price 8 31 9 ;arkup percentage percentage on absorption cost5 C 0nit product cost 8 31 9 .%1+5 C E%1. 8 E&. 3rounded5

AACSB: Anal#tic Anal#tic AICPA BB: Critical Thinking Thinking AICPA AICPA FN: Measurement Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1

"he management management of 4ispoli ?orporation is considering introducing a new product)) product)) a compact lawn blower. At a selling price of E% per unit, management proMects sales of 1, units. "he lawn blower would re-uire an investment of E,. "he desired desired return return on investment investment is 11F.

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+*.

"he desired pro!t according to the target costing calculations is7

A. >. ?. !

E%, E%%, E&1, E,

:esired pro!t 8 11F C E, 8 E,


++.

"he target cost per lawn blower is closest to7

A. B ?. :.

E%%.+% E%.% E%. E&$.1

"arget cost 8 Anticipated selling price ) :esired pro!t 8 E%. per unit ) 3E, D 1, units5 8 E%. per unit ) E. per unit 8 E%.% per unit


Samples ?orporation would like to use target costing for a new product it is considering introducing. At a selling price of E$1 per unit, management proMects sales of $, units. "he new product would re-uire an investment of E&,. "he desired return on investment is 1$F.

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+.

"he desired pro!t according to the target costing calculations is7

A. >. C :.

E&$, E*,& E&, E%$,

:esired pro!t 8 1$F C E&, 8 E&,


+.

"he target cost per unit is closest to7

A. B ?. :.

E$1. E1.+ E$%.*$ E$.%

"arget cost 8 Anticipated selling price ) :esired pro!t 8 E$1. per unit ) 3E&, D $, units5 8 E$1. per unit ) E$.& per unit 8 E1.+ per unit


Essay Questions


+/.

(kamoto ?orporation2s management believes that every F increase in the selling price of one of the company2s products would lead to a 1F decrease in the product2s total unit sales. "he variable cost per unit of this product is E+/.$. Required: a. ?ompute the product2s price elasticity of demand as de!ned in the text to two decimal places. b. ?ompute the product2s pro!t)maximiing price according to the formula in the text.

a. d8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3)1F55Oln31 9 F5 8 )1.*+ b. Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)1.*+55 8 1./ Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 1./5 C E+/.$ 8 3$./5 C E+/.$ 8 E1/%. 3"he answer without rounding error is E1/%.%.5


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.

Pashicke ?orporation recently changed the selling price of one of its products. :ata concerning sales for comparable periods before and after the price change are presented below.

"he product2s variable cost is E1.1 per unit. Required: a ?ompute the product2s price elasticity of demand as de!ned in the text to two decimal places. b. ?ompute the product2s pro!t)maximiing price according to the formula in the text.

a. F change in -uantity 8 3,& ) ,%5 D ,% 8 .&F F change in price 8 3E&& ) E&+5 D E&+ 8 )&.%*F d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 .&F5Oln31 9 3)&.%*F55 8 )1.+1 b. Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)1.+155 8 1.+& Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 1.+&5 C E1.1 8 3$.+&5 C E1.1 8 E&*.1& 3"he answer without rounding error is E&*.%&.5


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1.

Gillis ?orporation2s marketing manager believes that every 1F increase in the selling price of one of the company2s products would lead to a 1*F decrease in the product2s total unit sales. "he product2s absorption costing unit product cost is E$.. "he variable production cost is E+. per unit and the variable selling and administrative cost is E%.. "he !xed selling and administrative expense averages E.* per unit. Required: a. ?ompute the product2s price elasticity of demand as de!ned in the text to two decimal places. b. ?ompute the product2s pro!t)maximiing price according to the formula in the text.

a. d8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3)1*F55Oln31 9 1F5 8 )1.1 b. Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)1.155 8 1.&1 Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 1.&15 C 3E+. 9E%.5 8 3$.&15 C E/. 8 E$1.+/ 3"he answer without rounding error is E$1.+.5

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: 3 5ar %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1

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$.

'guyen ?orporation2s marketing manager believes that every F increase in the selling price of one of the company2s products would lead to a 1*F decrease in the product2s total unit sales. "he product2s absorption costing unit product cost is E1/.&. "he variable production cost is E*.& per unit and the variable selling and administrative cost is E$.$. Required: a. ?ompute the product2s price elasticity of demand as de!ned in the text to two decimal places. b. ?ompute the product2s pro!t)maximiing price according to the formula in the text.

a. d8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3)1*F55Oln31 9 F5 8 )$.11 b. Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)$.1155 8 ./ Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 ./5 C 3E$.$ 9E*.&5 8 31./5 C E.+ 8 E1&.&&


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%.

Nualls ?orporation makes a product that has the following costs7

"he company uses the absorption costing approach to cost)plus pricing as described in the text. "he pricing calculations are based on budgeted production and sales of &, units per year. "he company has invested E%+, in this product and expects a return on investment of 1*F. Required: a. ?ompute the markup on absorption cost. b. ?ompute the selling price of the product using the absorption costing approach. c. Assume that every 1F increase in price leads to a 1%F decrease in -uantity sold. Assuming no change in cost structure and that direct labor is a variable cost, compute the pro!t)maximiing price.

a.

Selling and administrative expenses 8 3E$. C &,5 9 E/,$ 8 E1,%,$ ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31*F C E%+,5 9 E1,%,$ D 3&, C E*%.*5 8 R3E*&,5 9 E1,%,$ D E$,*+, 8 &1.1F b. Absorption cost based selling price 8 31 9 ;arkup percentage on absorption cost5 C 0nit product cost AppA -(1 Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

8 31 9 .&115 C E*%.* 8 E*.*% c. d 8 ln31 9 F change in -uantity sold5Oln31 9 F change in price5 8 ln31 9 3)1%F55Oln31 9 1F5 8 )1.&+ Profit)maximiing markup on variable cost 8 )1O31 9  d5 8 )1O31 9 3)1.&+55 8 $.1 Pro!t)maximiing price 8 31 9 Pro!t)maximiing markup on variable cost5 C Qariable cost per unit 8 31 9 $.15 C E%+.& 8 3%.15 C E%+.& 8 E11*.%%

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+, Com)ute the )ro-t*ma.imi/ing )rice o0 a )rouct or service using the )rice elasticit# o0 eman an varia'le cost1 %earning &'(ective: A))A*+$ Com)ute the selling )rice o0 a )rouct using the a'sor)tion costing a))roach1


&.

Green =ornet ?orporation is contemplating the introduction of a new product. "he company has gathered the following information concerning the product7

"he company uses the absorption costing approach to cost)plus pricing as described in the text. Required: a. ?ompute the markup on absorption cost. b. ?ompute the selling price.

a. ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D R0nit product cost C 0nit sales 8 R3$F C E&,5 9 E1, D RE% C 1+, 8 E1, D E&, 8 %.*F b.


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*.

"he management of Archut ?orporation would like to set the selling price on a new product using the absorption costing approach to cost)plus pricing. "he company2s accounting department has supplied the following estimates for the new product7

;anagement plans to produce and sell /, units of the new product annually. "he new product would re-uire an investment of E%,$,& and has a re-uired return on investment of 1F. Required: a. :etermine the unit product cost for the new product. b. :etermine the markup percentage on absorption cost for the new product. c. :etermine the selling price for the new product using the absorption costing approach.

a. "he unit product cost is7

b. Selling and administrative expenses 8 3E1. C /,5 9 E+%, 8 E$, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D R0nit product cost C 0nits sales 8 R31F C E%,$,&5 9 3E$,5 D R/, C E 8 RE%,$& 9 E$, D RE/$, 8 E%$,$& D E/$, 8 &F c. "he selling price is determined as follows7



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+.

"repan ?orporation is contemplating the introduction of a new product. "he company has gathered the following information concerning the product7

"he company uses the absorption costing approach to cost)plus pricing as described in the text. Required: a. ?ompute the markup on absorption cost. b. ?ompute the selling price. c. If the price computed in BbB above is charged, and costs turn out as proMected, can the company be assured that no loss will be sustained on the new product Hxplain.

a. ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D R0nit product cost C 0nit sales 8 R3$F C E%,5 9 E/, D RE% C $*, 8 E1*, D E*, 8 $F b.

c. 'o, sales volume may be less than the $*, units proMected annually, resulting in inade-uate contribution margin to cover !xed costs, and a conse-uent loss for the company on the product.


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.

4itchie ?orporation manufactures a product that has the following costs7

"he company uses the absorption costing approach to cost)plus pricing as described in the text. "he pricing calculations are based on budgeted production and sales of %, units per year. "he company has invested E1+, in this product and expects a return on investment of 1*F. Required: a. ?ompute the markup on absorption cost. b. ?ompute the selling price of the product using the absorption costing approach.

a.

;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D 30nit product cost C 0nit sales5 8 R31*F C E1+,5 9 3E&.1 C %, 9 E+/1,/5 D 3%, C E*.5 8 R3E$&,5 9 3E&%,+5 D E$,1%,+ 8 &.*F b. Absorption cost based selling price 8 31 9 ;arkup percentage on absorption cost5 C 0nit product cost 8 31 9 .&*5 C E*. 8 E1.$*


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.

:esalvo ?orporation is introducing a new product whose direct materials cost is E&1 per unit, direct labor cost is E$ per unit, variable manufacturing overhead is E* per unit, and variable selling and administrative expense is E& per unit. "he annual !xed manufacturing overhead associated with the product is E1$, and its annual !xed selling and administrative expense is E,. ;anagement plans to produce and sell , units of the new product annually. "he new product would re-uire an investment of E$,1/$, and has a re-uired return on investment of 1F. ;anagement would like to set the selling price on a new product using the absorption costing approach to cost)plus pricing. Required: a. :etermine the unit product cost for the new product. b. :etermine the markup percentage on absorption cost for the new product. c. :etermine the selling price for the new product using the absorption costing approach.

a. "he unit product cost is7

b. Selling and administrative expenses 8 3E&. C ,5 9 E, 8 E&, ;arkup percentage on absorption cost 8 R34e-uired 4(I C Investment5 9 Selling and administrative expenses D R0nit product cost C 0nits sales 8 R31F C E$,1/$,5 9 3E&,5 D RE1 C , 8 RE$1/,$ 9 E&, D RE+&, 8 E$*/,$ D E+&, 8 &F c. Absorption cost based selling price 8 31 9 ;arkup percentage on absorption cost5 C 0nit product cost 8 31 9 .&5 C E1 8 E11%.&


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/.

"he management of #eatherston, Inc., is considering a new product that would have a selling price of E per unit and proMected sales of *, units. "he new product would re-uire an investment of E1,. "he desired return on investment is $F. Required: :etermine the target cost per unit for the new product.

"arget cost per unit 3E%,%, D *, units5 8 E+.+ per unit


.

oyola International, Inc. is considering adding a portable ?: player to its product line. ;anagement believes that in order to be competitive, the ?: player cannot be priced above E/. "he company re-uires a minimum return of $F on its investments. aunching the new product would re-uire an investment of E$,,. Sales are expected to be $*, units of the ?: player per year. Required: ?ompute the target cost of a ?: player.

"arget cost per unit 8 E1*,*, D $*, units 8 E+% per unit

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: $ Meium %earning &'(ective: A))A*+3 Com)ute the target cost 0or a ne4 )rouct or service1 AppA -)0 Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

1.

=epler ?orporation would like to use target costing for a new product that is under consideration. At a selling price of E+ per unit, management proMects sales of *, units. "he new product would re-uire an investment of E&,. "he desired return on investment is 1$F. Required: :etermine the target cost per unit for the new product.

"arget cost per unit 3E%,*$, D *, units5 8 E*.& per unit


$.

;anagement of :aubert ?orporation is considering a new product, an outdoor speaker that would have a selling price of E&% per unit and proMected sales of +, units. aunching the new product would re-uire an investment of E%,. "he desired return on investment is 1%F. Required: :etermine the target cost per unit for the outdoor speaker.

"arget cost per unit 3E$,*&1, D +, units5 8 E&$.%* per unit

AACSB: Anal#tic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: A))l# !i"cult#: , 2as# AppA -)1 Copyright © 2015 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written c onsent o# McGraw-Hill Education.

AppA

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