Dickson Corporation makes a product with the following costs: The company uses the absorption costing approach to cost-plus pricing described in the text.The pricing calculations are based on budgeted production and sales of 60, 000 units per year. The company has invested $320, 000 in this product and expects a return on investment of 15%.
Direct labor is a variable cost in this company.
If every 10% increase in price leads to a 14% decrease in quantity sold, the profit-maximizing price is closest to:
A)$84.50
B)$124.25
C)$120.90
D)$117.91

Question

Dickson Corporation makes a product with the following costs:  The company uses the absorption costing approach to cost-plus pricing described in the text.The pricing calculations are based on budgeted production and sales of 60, 000 units per year. The company has invested $320, 000 in this product and expects a return on investment of 15%.
Direct labor is a variable cost in this company.
If every 10% increase in price leads to a 14% decrease in quantity sold, the profit-maximizing price is closest to:
A)$84.50 
B)$124.25 
C)$120.90 
D)$117.91

Quizplus · Accepted Answer

ε_d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.14))/ln(1 + (+0.10))= -1.58 Profit-maximizing markup on variable cost = -1/(1 + ε_d)= -1/(1 + (-1.58))= 1.72 11eaa0c8_966c_6169_9cb2_936fd824f1e3_TB2487_00 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)× Variable cost per unit = (1 + 1.72)× ($44.50)= $121.04 (the exact answer, without rounding error, is $120.90)

Dickson Corporation Makes a Product with the Following Costs