Question 1

Magic Fun has total fixed costs of $4,000,000 and total variable cost of $2,000,000 during a month when it sold 200,000 units.What price will Magic Fun charge if it uses cost-plus pricing and a markup of 20%?

Accepted Answer

First, we need to calculate the total cost per unit: 
Total cost = fixed cost + (variable cost per unit x number of units) 
Total cost = $4,000,000 + ($2,000,000/200,000) 
Total cost = $14 
Then, we need to add the markup percentage of 20% to the total cost per unit: 
Selling price = total cost per unit + (markup percentage x total cost per unit) 
Selling price = $14 + (0.20 x $14) 
Selling price = $16.80 
Therefore, Magic Fun should charge $36.00 (rounded to the nearest cent) per unit using cost-plus pricing and a markup of 20%.

Question 2

What is the basic premise of target costing?

Accepted Answer

Target costing is a method of determining the cost at which a product must be manufactured in order to make a desired profit. The basic premise of target costing is that a product should be designed to meet customer needs at a price customers are willing to pay that allows the company to make a reasonable profit. This means that the cost of the product must be managed throughout the design and development process to ensure that it stays within the target cost.

Question 3

DT Company uses cost-plus pricing and has $30 per unit in variable costs and $800,000 per year in fixed costs.Demand is estimated to be 200,000 units annually.What is the price if a markup of 30% on total cost is used to determine the price?

Accepted Answer

First, let's calculate the total cost per unit:
Total Cost = Variable Cost + (Fixed Cost ÷ Units Produced)
Total Cost = $30 + ($800,000 ÷ 200,000)
Total Cost = $34 per unit

Next, let's apply the 30% markup on total cost:
Price = Total Cost × (1 + Markup Percentage)
Price = $34 × (1 + 0.30)
Price = $44.20 per unit

Therefore, the best choice is C, as it is the only option that matches the calculated price with the 30% markup.

Question 4

Garden Corporation uses cost-plus pricing with a 30% mark-up.The company is currently selling 12,000 units at $21.45 per unit.Each unit has a variable cost of $11.50.In addition, the company incurs $60,000 in fixed costs annually.If demand falls to 10,000 units, how much will the company have to charge per unit in order to earn the same annual profit?

Accepted Answer

First, let's find out how much profit the company is currently earning at 12,000 units:

Revenue = 12,000 units x $21.45 per unit = $257,400
Total variable cost = 12,000 units x $11.50 per unit = $138,000
Total cost = Total variable cost + Fixed cost = $198,000 ($138,000 + $60,000)
Profit = Revenue - Total cost = $257,400 - $198,000 = $59,400

Now, let's find out how much revenue the company would need to earn with 10,000 units in order to earn the same profit:

Profit = Revenue - Total cost
$59,400 = R - ($11.50 x 10,000 + $60,000)
$59,400 = R - $175,000
R = $234,400 (revenue needed to earn the same profit with 10,000 units)

Finally, let's use cost-plus pricing to find out how much the company would have to charge per unit:

Unit cost = Variable cost + (Fixed cost / units sold) 
Unit cost = $11.50 + ($60,000 / 10,000) = $17.50 per unit
Mark-up percentage = 30%
Mark-up amount = $17.50 x 0.30 = $5.25
Selling price = Unit cost + Mark-up amount = $17.50 + $5.25 = $22.75 per unit

Therefore, the company would have to charge $22.75 per unit in order to earn the same annual profit with 10,000 units. Answer: D

Question 5

A company uses cost-plus pricing and has a total cost of $40.00 per unit at a volume of 120,000 units.The variable cost per unit is $25.00.What will the price be if the company expects a volume of 110,000 units and uses a markup of 50%?

Accepted Answer

First, calculate the cost per unit:
Fixed cost per unit = Total fixed cost / volume = $40.00 / 120,000 = $0.33
Variable cost per unit = $25.00
Total cost per unit = $0.33 + $25.00 = $25.33

Then, calculate the price using cost-plus pricing:
Markup = 50% of cost = 50% x $25.33 = $12.67
Price = Cost + Markup = $25.33 + $12.67 = $38.00

Finally, adjust the price based on the expected volume:
Price adjustment = (Actual volume - Expected volume) / Expected volume = (120,000 - 110,000) / 110,000 = 0.0909
Adjusted price = Price x (1 + Price adjustment) = $38.00 x (1 + 0.0909) = $41.36

Therefore, the best choice is B.

Question 6

A company has $8.00 per unit in variable costs and $4.00 per unit in fixed costs at a volume of 50,000 units.If the company marks up total cost by 60%, what price should be charged if 60,000 units are expected to be sold?

Accepted Answer

First, calculate the total cost for 50,000 units: Variable costs = $8.00 * 50,000 = $400,000. Fixed costs = $4.00 * 50,000 = $200,000. Total cost = $400,000 + $200,000 = $600,000. When 60,000 units are expected to be sold, fixed costs per unit decrease because they are spread over more units. New fixed cost per unit = $200,000 / 60,000 = $3.33. Total cost per unit at 60,000 units = $8.00 (variable cost) + $3.33 (new fixed cost) = $11.33. Marking up the total cost by 60%: $11.33 * 1.60 = $18.13.

Question 7

The chief engineer at Wilson Electronics has proposed the production of a digipad to be sold at a 30 percent markup on full cost.Management estimates that the fixed costs per year will be $150,000 and the variable cost of the digipad will be $28 per unit.If Wilson sells 30,000 digipads, what is the full cost of each unit?

Accepted Answer

The full cost per unit is calculated by adding the variable cost per unit to the allocated fixed cost per unit. The fixed cost per year is $150,000, and with an estimated sale of 30,000 digipads, the fixed cost per unit is $150,000 / 30,000 = $5. The variable cost per unit is $28. Therefore, the full cost per unit is $28 + $5 = $33.

Question 8

Which of the following is not a valid criticism of cost-plus pricing?

Accepted Answer

Cost-plus pricing does not depend on technical expertise in determining a cost; rather, it involves adding a standard markup to the cost of the product.

Question 9

Harp Widgets determined each deluxe widget it produces has a unit variable cost of $15.00, with total fixed costs of $600,000 for the period.Harp expects to sell 60,000 deluxe widgets and has applied a markup percentage of 35%.What contribution margin will Harp earn from the sale of each deluxe widget?

Accepted Answer

To calculate the contribution margin, we need to subtract the unit variable cost from the selling price (which includes the markup).

Selling price = unit variable cost + markup
Selling price = $15.00 + 35% of $15.00
Selling price = $15.00 + $5.25 
Selling price = $20.25

Contribution margin = selling price - unit variable cost
Contribution margin = $20.25 - $15.00
Contribution margin = $5.25

Therefore, Harp will earn a contribution margin of $5.25 from the sale of each deluxe widget.

Question 10

Which of the following lists the steps in the target costing process in the proper order?

Accepted Answer

The correct sequence in the target costing process begins with understanding customer needs and wants, then determining the desired profit margin, followed by finding the target cost (which is the price point at which the product must be produced to achieve the desired profit margin), and finally designing the product to meet this cost constraint.

Question 11

Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity.The company is currently selling 40,000 units at $19.60 per unit.Each unit has a variable cost of $9.In addition, the company incurs $200,000 in fixed costs annually.If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge?

Accepted Answer

First, we need to calculate the current total cost per unit:
Variable cost + (fixed cost ÷ units sold) = $9 + ($200,000 ÷ 40,000) = $14 per unit 
Next, we need to calculate the current total profit per unit:
Sale price - total cost = $19.60 - $14 = $5.60 per unit 
Now, we can use the target profit to calculate the new sale price:
Target profit per unit = 40% x $14 = $5.60 
New total cost per unit = $14 + $5.60 = $19.60 
New sale price = cost plus 40% mark-up = $19.60 x 1.4 = $27.44 
However, at this price, demand may fall even further. Therefore, we need to find a price point that balances the desired profit margin with the expected demand. A reasonable assumption is that demand is linear with price, so we can use the following formula to find the new price:
New sale price - current sale price = (new demand - current demand) x (current profit per unit) 
Solving for the new sale price, we get:
New sale price = current sale price + [(new demand - current demand) x (current profit per unit)] / (new demand / current demand)
Plugging in the numbers, we get:
New sale price = $19.60 + [(32,000 - 40,000) x $5.60] / (32,000 / 40,000) = $21.35 
Therefore, the company should charge $21.35 per unit to maintain a 40% return with 32,000 units sold. The correct answer is B.

Question 12

Cain Manufacturing produces 40,000 clocks at a total cost of $908,000.Total fixed costs are $408,000.If Cain increases production by 20% and uses a 50% markup, how much will the selling price per unit be?

Accepted Answer

The answer of Cain Manufacturing produces 40,000 clocks at a...

Question 13

Ragtown Grill uses cost-plus pricing with a 40% mark-up.The company is currently selling 20,000 units annually, but has a capacity of 30,000 units.Each unit has a variable cost of $15.In addition, the company incurs $60,000 in fixed costs annually.For how much is the company selling each unit?

Accepted Answer

Cost per unit = $15 + ($60,000 / 20,000) = $21Selling price = $21 * 1.4 = $29.40

Question 14

A company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units.If the company uses cost-plus pricing, which of the following should the company use to determine the price?

Accepted Answer

Cost-plus pricing is a pricing method where a company adds a markup to its unit cost to determine its selling price. In this case, the company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units. 
So, the total unit cost is $6.50 + $2.20 = $8.70 per unit. 
Therefore, the company should use a unit cost of $8.70 per unit only at a volume of 40,000 units to determine the price using cost-plus pricing. This is because the fixed costs are relevant only within the relevant range, which is 40,000 units in this case. If the volume level changes, the fixed costs would also change, and so the unit cost would also change. Thus, option A is the best choice.

Question 15

A manufacturing company produces and sells 50,000 units of a single product.Total product costs are $8 per unit.If total sales are $550,000, what markup percentage is the company using?

Accepted Answer

The cost per unit is $8, so total cost is 50,000 units * $8 = $400,000. The sales are $550,000, so the markup is ($550,000 - $400,000) / $400,000 = 37.5%.

Question 16

The chief engineer at Wilson Electronics has proposed the production of a digipad to be sold at a 30 percent markup.Management estimates that the fixed costs per year will be $150,000 and the variable cost of the digipad will be $28 per unit.If Wilson sells 30,000 digipads, how much is the selling price of each digipad?

Accepted Answer

The selling price per digipad can be calculated by first determining the cost price per unit, which includes the variable cost of $28. Adding a 30% markup to the cost price gives the selling price: $28 + ($28 * 0.30) = $28 + $8.40 = $36.40. However, the fixed costs and the number of units sold are not directly relevant to calculating the selling price per unit in this context, indicating a mistake in my initial calculation. The correct selling price, considering a 30% markup on the $28 cost, is indeed $36.40, but due to a misunderstanding in my explanation, the correct choice based on the calculation provided should have been $36.40, aligning with a 30% markup on the variable cost. However, given the options and the context provided, there seems to be a discrepancy in the calculation or the options presented.

Question 17

A manufacturing company produces and sells 40,000 buckets.At this level of activity, variable costs total $80,000 and fixed costs total $120,000.If each bucket is sold for $8, what markup percentage is the company using?

Accepted Answer

The cost per bucket is ($80,000 variable + $120,000 fixed) / 40,000 buckets = $5. The selling price is $8, so the markup is ($8 - $5) / $5 = 60%.

Question 18

Segundo Office Tech uses cost-plus pricing and produces 100,000 calculators at a total cost of $3.5 million.Total fixed costs are $1.5 million.If the company increases production by 20% and uses a 30% markup, how much will the price per unit be?

Accepted Answer

Total variable cost = Total cost - Total fixed cost = $3.5 million - $1.5 million = $2 million
Variable cost per unit = Total variable cost / Number of units produced = $2 million / 100,000 = $20
If production increases by 20%, the number of units produced will be 120,000.
The markup price per unit = $20 x 30% = $6
The price per unit = Variable cost per unit + Markup price per unit = $20 + $6 = $26
The new price per unit after the 20% increase in production = $26 x 0.8 (to account for the 20% increase) = $20.80
Adding the 30% markup on this new price gives:
New price per unit = $20.80 + ($20.80 x 0.30) = $27.04
Rounding this to the nearest cent gives a price per unit of $27.03, which is closest to option B, $42.25.

Question 19

The target costing process for a new product

Accepted Answer

The target costing process for a new product starts with identifying the features that customers want and the price they are willing to pay. The company then works to design and produce the product within that cost constraint.

Question 20

SawTown Tools uses cost-plus pricing with a 30% mark-up.The company is currently selling 80,000 units at $65 per unit.Each unit has a variable cost of $47.In addition, the company incurs $240,000 in fixed costs annually.If demand falls to 40,000 units and the company wants to continue to charge the same price per unit, what markup percentage is the company using?

Accepted Answer

The markup percentage is calculated based on the cost per unit. The cost per unit includes both variable and fixed costs. At 40,000 units, the fixed cost per unit is $240,000 / 40,000 = $6. The total cost per unit is $47 (variable) + $6 (fixed) = $53. The markup is ($65 - $53) / $53 = 22.6%.

Quiz 8: Pricing Decisions