Dieckman Company 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 71,000 units per year.
The company has invested $360,000 in this product and expects a return on investment of 13%.
Direct labor is a variable cost in this company.

-If every 10% increase in price leads to a 12% decrease in quantity sold,the profit-maximizing price is closest to:
A)$56.40
B)$130.10
C)$144.16
D)$134.03

Question

Dieckman Company 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 71,000 units per year.
The company has invested $360,000 in this product and expects a return on investment of 13%.
Direct labor is a variable cost in this company.

-If every 10% increase in price leads to a 12% decrease in quantity sold,the profit-maximizing price is closest to:
A)$56.40 
B)$130.10 
C)$144.16 
D)$134.03

Quizplus · Accepted Answer

F1F1F1S1F1F1F10_d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.12))/ln(1 + (+0.10))= -1.34 Profit-maximizing markup on variable cost = -1/(1 + F1F1F1S1F1F1F10_d)= -1/(1 + (-1.34))= 2.94 11eaa48f_7c10_41de_9e4a_e74c5da2ac05_TB2485_00 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)F1F1F1S1F1F1F10 Variable cost per unit = (1 + 2.94)F1F1F1S1F1F1F10 ($34.10)= $134.35 (the exact answer,without rounding error,is $134.03)

Dieckman Company Makes a Product with the Following Costs