Diehl 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 52,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 8%.
Direct labor is a variable cost in this company.
-If every 10% increase in price leads to an 11% decrease in quantity sold, the profit-maximizing price is closest to:
A) $234.46
B) $214.69
C) $256.45
D) $78.50

Question

Diehl 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 52,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 8%.
Direct labor is a variable cost in this company.
-If every 10% increase in price leads to an 11% decrease in quantity sold, the profit-maximizing price is closest to:
A) $234.46 
B) $214.69 
C) $256.45 
D) $78.50

Quizplus · Accepted Answer

The correct answer is A.The profit-maximizing price is the price that maximizes the profit function. The profit function is given by:```π = p * q - c```where:* π is profit* p is price* q is quantity sold* c is costWe are given that every 10% increase in price leads to an 11% decrease in quantity sold. This means that the demand curve is linear and has a slope of -11/10. We can use this information to find the profit-maximizing price.The profit-maximizing price is the price that sets the marginal revenue equal to the marginal cost. The marginal revenue is the change in revenue divided by the change in quantity sold. The marginal cost is the change in cost divided by the change in quantity sold.In this case, the marginal revenue is given by:```MR = p - (11/10) * p = (9/10) * p```The marginal cost is given by:```MC = c```Setting the marginal revenue equal to the marginal cost, we get:```(9/10) * p = c```Solving for p, we get:```p = (10/9) * c```This is the profit-maximizing price.

Diehl Company Makes a Product with the Following Costs