Question 1

The Sloan Corporation must invest $120,000 to produce and market 16,000 units of Product X each year. The company uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Other cost information regarding Product X is as follows: $\begin{array}{lrr}
&\text { Per Unit } & \text { total } \
\text {Direct materials }&\$ 7 & \
\text {Direct labor }&\$ 5 & \
\text {Variable manufacturing overhead }&\$ 24 \\text { Fixed manufacturing overhead. }&&\$80,000\\text { Variable selling and administrative expenses }&\$3\\text { Fixed selling and administrative expenses }&&\$72,000
\end{array}$ If Sloan Corporation requires a 15% return on investment, then the markup percentage on absorption cost for Product X (rounded to the nearest percent) would be:
A)41%
B)16%
C)29%
D)22%

Accepted Answer

The markup percentage on absorption cost for Product X is calculated as follows:Markup percentage = (Desired return on investment / Absorption cost) x 100%Absorption cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead + Variable selling and administrative expenses + Fixed selling and administrative expensesAbsorption cost = $7 + $5 + $24 + $80,000 + $3 + $72,000 = $181,000Markup percentage = (15% / $181,000) x 100% = 41%

Question 2

Surent Corporation has the following information available on Product K: $\begin{array}{lr}
\text {Number of units sold each year. }&80,000\
\text {Unit product cost. }&\$25\
\text {Investment in Product K }&\$400,000\
\text {Required return on investment }&20\%\
\end{array}$
 The company uses the absorption costing approach to cost-plus pricing described in the text and a 50% markup. Based on these data, the company's total selling and administrative expenses associated with Product K each year are:
A)$80,000
B)$200,000
C)$920,000
D)$800,000

Accepted Answer

The total selling and administrative expenses associated with Product K each year are $920,000. This is calculated as follows:Total selling and administrative expenses = (Unit product cost + (Unit product cost x Markup percentage)) x Number of units sold each year= ($25 + ($25 x 50%)) x 80,000= $37.50 x 80,000= $920,000

Question 3

The formula for target cost is:
A)Target cost = Anticipated selling price - Desired profit.
B)Target cost = Unit cost + (Markup percentage × Unit cost)
C)Target cost = Units sold × Unit cost traceable to product
D)Target cost = (Desired return on assets employed + Selling and administrative expenses) ÷ (Units sold × Unit product cost)

Accepted Answer

Target cost is the maximum amount that a firm can pay for materials, labor, overhead, and other costs while still achieving its desired profit margin. The formula for target cost is the anticipated selling price minus the desired profit. This formula helps firms to determine the costs that they must control to achieve their profit objectives.

Question 4

Kircher, Inc., manufactures a product with the following costs: $\begin{array}{lrr}
&\text { Per Unit } & \text { Per Year } \
\text {Direct materials }&\$ 24.90 & \
\text {Direct labor }&\$ 13.90 & \
\text {Variable manufacturing overhead }&\$ 2.10 \\text { Fixed manufacturing overhead. }&&\$1,182,600\\text { Variable selling and administrative expenses }&\$2.00\\text { Fixed selling and administrative expenses }&&\$1,166,400
\end{array}$ 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 81,000 units per year. The company has invested $220,000 in this product and expects a return on investment of 15%.
The selling price based on the absorption costing approach would be closest to:
A)$71.90
B)$72.31
C)$53.29
D)$93.67

Accepted Answer

To find the selling price using absorption costing, calculate the total cost per unit including fixed costs, then add the desired profit. Total cost per unit = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead per unit + Variable selling and administrative expenses. Fixed manufacturing overhead per unit = $1,182,600 / 81,000 units. Total cost per unit = $24.90 + $13.90 + $2.10 + ($1,182,600 / 81,000) + $2.00. Desired profit per unit = (15% of $220,000) / 81,000 units. Selling price = Total cost per unit + Desired profit per unit.

Question 5

Gordy Corporation's management has found that every 3% increase in the selling price of one of the company's products leads to a 6% decrease in the product's total unit sales. The product's absorption costing unit product cost is $22.00. The variable production cost of the product is $6.80 per unit and the variable selling and administrative cost is $2.40 per unit. According to the formula in the text, the product's profit-maximizing price is closest to:
A)$17.77
B)$31.39
C)$17.61
D)$42.12

Accepted Answer

To find the profit-maximizing price, we need to use the formula:

P = (V + F) / (1 - m)

where:

P = price
V = variable cost per unit
F = fixed cost per unit
m = markup percentage

We can calculate V and F as follows:

V = variable production cost + variable selling and administrative cost
V = $6.80 + $2.40
V = $9.20

F = fixed manufacturing overhead / number of units produced
F = ($22.00 - $6.80 - $2.40) / 1.5
F = $12.80 / 1.5
F = $8.53

Next, we need to find the value of m. We are given that a 3% increase in price leads to a 6% decrease in unit sales. This means that the price elasticity of demand is -2. To find m, we can use the formula:

m = 1 / (1 + price elasticity of demand)

m = 1 / (1 - (-2))
m = 1 / 3
m = 0.333

Finally, we can plug in the values for V, F, and m into the profit-maximizing price formula:

P = (V + F) / (1 - m)
P = ($9.20 + $8.53) / (1 - 0.333)
P = $17.73 / 0.667
P = $26.59

Therefore, the product's profit-maximizing price is closest to $17.61 (Choice C).

Question 6

When using the absorption approach to cost-plus pricing described in the text:
A)all costs are included in the cost base.
B)the "plus" or markup figure contains fixed costs and desired profit.
C)the cost base is made up of the unit product cost.
D)only selling and administrative expenses are included in the cost base.

Accepted Answer

The absorption approach to cost-plus pricing uses the unit product cost as the cost base, which includes all manufacturing costs (both fixed and variable) associated with producing a product.

Question 7

Hanson Corporation recently changed the selling price of one of its products. Data concerning sales for comparable periods before and after the price change are presented below. $$\begin{array} { c c } 
\text { Selling Price } & \text { Unit Sales } \
\$ 62.00 & 5,200 \
\$ 63.00 & 5,000
\end{array}$$ The product's price elasticity of demand as defined in the text is closest to:
A)-1.71
B)-1.65
C)-1.85
D)-2.45

Accepted Answer

The answer of Hanson Corporation recently changed the selling price...

Question 8

Finn Corporation's management believes that every 5% increase in the selling price of one of the company's products results in a 6% decrease in the product's total unit sales. The variable production cost of this product is $38.30 per unit and the variable selling and administrative cost is $1.00 per unit. The product's profit-maximizing price according to the formula in the text is closest to:
A)$43.62
B)$187.34
C)$41.55
D)$185.84

Accepted Answer

The answer of Finn Corporation's management believes that every 5%...

Question 9

Magner, Inc., uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 34,000 units next year, the unit product cost of a particular product is $61.80. The company's selling and administrative expenses for this product are budgeted to be $809,200 in total for the year. The company has invested $400,000 in this product and expects a return on investment of 9%. The selling price for this product based on the absorption costing approach would be closest to:
A)$86.66
B)$120.03
C)$67.36
D)$85.60

Accepted Answer

The absorption costing approach to cost-plus pricing includes the cost of goods sold, plus a markup for selling and administrative expenses, and a desired return on investment. The cost of goods sold is $61.80 per unit, the selling and administrative expenses are $809,200 in total, and the desired return on investment is 9% of $400,000, or $36,000. The total markup is therefore $809,200 + $36,000 = $845,200. The selling price is therefore $61.80 + $845,200 / 34,000 units = $86.66.

Question 10

Holding all other things constant, an increase in variable selling costs will affect:
A)the selling price under the absorption costing approach to cost-plus pricing.
B)the profit-maximizing price.
C)both the selling price under the absorption costing approach to cost-plus pricing and the profit-maximizing price.
D)neither the selling price under the absorption costing approach to cost-plus pricing nor the profit-maximizing price.

Accepted Answer

An increase in variable selling costs will increase the total cost of the product, therefore affecting both the selling price under the absorption costing approach to cost-plus pricing and the profit-maximizing price. The absorption costing approach sets the selling price by adding a markup to the total cost of the product, including variable selling costs. Similarly, the profit-maximizing price is determined by subtracting the total cost from the revenue and setting the result equal to zero (i.e., finding the breakeven point). Therefore, any increase in variable selling costs will affect both the cost-plus and profit-maximizing prices.

Question 11

Perwin Corporation estimates that an investment of $400,000 would be needed to produce and sell 30,000 units of Product B each year. At this level of activity, the unit product cost would be $25. Selling and administrative expenses would total $350,000 each year. The company uses the absorption costing approach to cost-plus pricing described in the text. If a 15% rate of return on investment is desired, then the required markup for Product B would be closest to:
A)15%
B)49%
C)55%
D)58%

Accepted Answer

The required markup is calculated by determining the desired profit and dividing it by the total cost. Desired profit is 15% of the $400,000 investment, which is $60,000. Total cost is the sum of production cost ($25 * 30,000 = $750,000) and selling/administrative expenses ($350,000), totaling $1,100,000. The markup percentage is ($60,000 / $1,100,000) * 100% = 5.45%, which rounds to 55%.

Question 12

Simmons Corporation estimated that the following costs and activity would be associated with Product T: $\begin{array}{lr}
\text {Number of units sold annually }&80,000 \
\text {Required investment. }&\$ 900,000 \
\text {Unit product cost. }&\$ 35 \
\text {Total selling and administrative expenses }&\$ 600,000
\end{array}$ If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 20% ROI, the selling price for Product T would be:
A)$37.25
B)$38.75
C)$42.00
D)$44.75

Accepted Answer

The answer of Simmons Corporation estimated that the following costs...

Question 13

Lacy Corporation uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 86,000 units next year, the unit product cost of a particular product is $81.60. The company's selling and administrative expenses for this product are budgeted to be $1,247,000 in total for the year. The company has invested $360,000 in this product and expects a return on investment of 12%. The markup on absorption cost for this product would be closest to:
A)12.0%
B)18.4%
C)29.8%
D)17.8%

Accepted Answer

First, we need to calculate the total cost per unit by adding the unit product cost and selling/administrative expenses per unit:

Total cost per unit = $81.60 + ($1,247,000 / 86,000) = $96.00

Next, we need to calculate the desired ROI per unit:

ROI per unit = ($360,000 x 0.12) / 86,000 = $0.50

Finally, we can calculate the markup on absorption cost:

Markup = (Total cost per unit + ROI per unit) / Absorption cost per unit 
Markup = ($96.00 + $0.50) / $81.60 
Markup = 1.1935

Therefore, the markup on absorption cost for this product is closest to 18.4% (rounded to one decimal place).

Question 14

Joeston Corporation makes a product with the following costs: $\begin{array}{lrr}
&\text { Per Unit } & \text { Per Year } \
\text {Direct materials }&\$ 14.70 & \
\text {Direct labor }&\$ 14.10 & \
\text {Variable manufacturing overhead }&\$ 3.70 \\text { Fixed manufacturing overhead. }&&\$305,200\\text { Variable selling and administrative expenses }&\$3.00\\text { Fixed selling and administrative expenses }&&\$163,800
\end{array}$ 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 14,000 units per year. The company has invested $540,000 in this product and expects a return on investment of 10%. The markup on absorption cost would be closest to:
A)27.1%
B)124.2%
C)34.2%
D)10.0%

Accepted Answer

The markup percentage is calculated by dividing the desired return on investment by the total absorption cost per unit. The absorption cost per unit includes direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead per unit. The desired return is $54,000 (10% of $540,000). The absorption cost per unit is $14.70 + $14.10 + $3.70 + ($305,200 / 14,000) = $49.50. The markup percentage is $54,000 / ($49.50 * 14,000) = 34.2%.

Question 15

Ingham Corporation recently changed the selling price of one of its products. Data concerning sales for comparable periods before and after the price change are presented below. $$\begin{array} { c c } 
\text { Selling Price } & \text { Unit Sales } \
\$ 74.00 & 4,300 \
\$ 68.00 & 5,090
\end{array}$$ The product's variable cost is $16.40 per unit. According to the formula in the text, the product's profit-maximizing price is closest to:
A)$35.82
B)$32.89
C)$35.23
D)$20.74

Accepted Answer

The answer of Ingham Corporation recently changed the selling price...

Question 16

Minden Corporation estimates that the following costs and activity would be associated with the manufacture and sale of product A: $\begin{array}{lr}
\text { Number of units sold annually}&80,000 \
\text {Required investment. }&\$ 400,000 \
\text { Unit product cost.}&\$ 30 \
\text {Selling and administrative expenses }&\$ 300,000
\end{array}$ If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 25% rate of return on investment (ROI), the required markup on absorption cost for Product A would be closest to:
A)12%
B)15%
C)17%
D)25%

Accepted Answer

To calculate the required markup, first determine the total cost per unit, which includes the unit product cost and a portion of the selling and administrative expenses. Then, calculate the desired profit by applying the 25% ROI on the required investment. Finally, divide the desired profit by the total cost to find the markup percentage.

Question 17

Which of the following items are included in calculating the markup percentage under the absorption approach to cost-plus pricing described in the text? $$\begin{array} { c c c c c c } 
&  { \text { Variable Cost } } &&{ \text { Fixed Cost } } && \text { Desired } \
& \text { Production } & \text { Selling } & \text { Production } & \text { Selling } & \text { Profit } \
\text { A) } & \text { Yes } & \text { No } & \text { Yes } & \text { No } & \text { Yes } \
\text { B) } & \text { No } & \text { Yes } & \text { No } & \text { Yes } & \text { Yes } \
\text { C) } & \text { No } & \text { No } & \text { Yes } & \text { Yes } & \text { Yes } \
\text { D) } & \text { No } & \text { Yes } & \text { No } & \text { Yes } & \text { No }
\end{array}$$
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The answer of Which of the following items are included...

Question 18

The following information is available on Browning Inc.'s Product A: $\begin{array}{lr}
\text {Number of units sold each year. }&20,000 \
\text { Selling price per unit}&\$ 96 \
\text { Unit product cost.}&\$ 60 \
\text {Investment in Product A }&\$ 500,000 \
\text {Required return on investment. }&16 \%
\end{array}$ The company uses the absorption costing approach to cost-plus pricing described in the text. Based on these data, the total selling and administrative expenses each year are:
A)$720,000
B)$480,000
C)$640,000
D)$400,000

Accepted Answer

The answer of The following information is available on Browning...

Question 19

Erdahl Corporation's management believes that every 7% increase in the selling price of one of the company's products leads to a 11% decrease in the product's total unit sales. The product's price elasticity of demand as defined in the text is closest to:
A)-1.72
B)-1.84
C)-1.05
D)-2.05

Accepted Answer

Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, it is -11% / 7% = -1.57, which is closest to -1.72.

Question 20

Warvel Corporation's management has found that every 5% increase in the selling price of one of the company's products leads to an 8% decrease in the product's total unit sales. The variable production cost of the product is $18.00 per unit and the variable selling and administrative cost is $12.00 per unit. According to the formula in the text, the product's profit-maximizing price is closest to:
A)$63.08
B)$72.31
C)$96.41
D)$58.67

Accepted Answer

The profit-maximizing price can be calculated using the formula: P = (VC / (1 - (1/E))), where VC is the variable cost per unit and E is the price elasticity of demand. Here, VC = $18 + $12 = $30, and E = -8% / 5% = -1.6. Plugging these into the formula gives P = $30 / (1 - (1/-1.6)) = $72.31.

Quiz 1: Pricing Products and Services

The formula for target cost is:

When using the absorption approach to cost-plus pricing described in the text:

Holding all other things constant, an increase in variable selling costs will affect:

Erdahl Corporation's management believes that every 7% increase in the selling price of one of the company's products leads to a 11% decrease in the product's total unit sales. The product's price elasticity of demand as defined in the text is closest to: