Question 1

Trepan Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product: $\begin{array}{lr}
\text {Number of units to be produced and sold each year  }&25,000 \
\text {Investment required by the company }&\$ 300,000 \
\text {Projected unit manufacturing cost. }&\$ 30 \
\text {Projected annual selling and administrative expenses. }&\$ 90,000 \
\text { Desired rate of return on investment.}&20 \%
\end{array}$ The company uses the absorption costing approach to cost-plus pricing as described in the text.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price.
c. If the price computed in "b" above is charged, and costs turn out as projected, can the company be assured that no loss will be sustained on the new product? Explain.

Accepted Answer

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Question 2

Ritchie Corporation manufactures a product that has the following costs: $\begin{array}{lrr}
&\text { Per Unit } & \text { Per Year } \
\text {Direct materials }&\$20.70 & \
\text {Direct labor }&\$ 11.80 & \
\text {Variable manufacturing overhead }&\$ 3.20\\text { Fixed manufacturing overhead. }&&\$817,700\\text { Variable selling and administrative expenses }&\$4.10\\text { Fixed  selling and administrative expenses }&&\$961,900
\end{array}$ The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 37,000 units per year. The company has invested $160,000 in this product and expects a return on investment of 15%.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price of the product using the absorption costing approach.

Accepted Answer

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Question 3

The markup on absorption cost for this product would be closest to:
A)45.1%
B)36.7%
C)11.0%
D)34.1%

Accepted Answer

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Question 4

The management of Featherston, Inc., is considering a new product that would have a selling price of $77 per unit and projected sales of 50,000 units. The new product would require an investment of $100,000. The desired return on investment is 20%.
Required:
Determine the target cost per unit for the new product.

Accepted Answer

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Question 5

Gillis Corporation's marketing manager believes that every 10% increase in the selling price of one of the company's products would lead to a 15% decrease in the product's total unit sales. The product's absorption costing unit product cost is $20.00. The variable production cost is $6.00 per unit and the variable selling and administrative cost is $3.00. The fixed selling and administrative expense averages $0.50 per unit.
Required:
a. Compute the product's price elasticity of demand as defined in the text to two decimal places.
b. Compute the product's profit-maximizing price according to the formula in the text.

Accepted Answer

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Question 6

Pashicke 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. $$\begin{array} { c c } 
\text { Selling Price } & \text { Unit Sales } \
\$ 46.00 & 7,300 \
\$ 44.00 & 7,840
\end{array}$$ The product's variable cost is $17.10 per unit.
Required:
a Compute the product's price elasticity of demand as defined in the text to two decimal places.
b. Compute the product's profit-maximizing price according to the formula in the text.

Accepted Answer

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Question 7

Loyola International, Inc. is considering adding a portable CD player to its product line. Management believes that in order to be competitive, the CD player cannot be priced above $79. The company requires a minimum return of 20% on its investments. Launching the new product would require an investment of $20,000,000. Sales are expected to be 250,000 units of the CD player per year.
Required:
Compute the target cost of a CD player.

Accepted Answer

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Question 8

The desired profit according to the target costing calculations is:
A)$380,000
B)$303,000
C)$41,800
D)$77,000

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Question 9

The management of Archut Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product: $\begin{array}{lrr}
&\text { Per Unit } & \text { Per Year } \
\text {Direct materials }&\$ 35 & \
\text {Direct labor }&\$ 14 & \
\text {Variable manufacturing overhead }&\$ 9\\text { Fixed manufacturing overhead. }&&\$270,000\\text { Variable selling and administrative expenses }&\$1\\text { Fixed annual selling and administrative expenses }&&63,000
\end{array}$ Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $3,002,400 and has a required return on investment of 10%.
Required:
a. Determine the unit product cost for the new product.
b. Determine the markup percentage on absorption cost for the new product.
c. Determine the selling price for the new product using the absorption costing approach.

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Question 10

Green Hornet Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product: $\begin{array}{lr}
\text {Number of units to be produced and sold each year.  }&16,000 \
\text {Investment required by the company }&\$ 400,000 \
\text { Expected unit product cost. }&\$ 30 \
\text { Expected annual selling and administrative expenses  }&\$ 100,000 \
\text { Desired rate of return on investment.}&20 \%
\end{array}$ The company uses the absorption costing approach to cost-plus pricing as described in the text.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price.

Accepted Answer

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Question 11

The selling price would be closest to:
A)$28.71
B)$26.50
C)$22.00
D)$32.67

Accepted Answer

11ea7761_1646_72fa_81a5_2591f1a61f83_TB2580_00 Selling and administrative expenses = ($3 per unit × 60,000 units) + $300,000 = $480,000
Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(25% × $650,000) + $480,000] ÷ ($18.00 per unit × 60,000 units)
= [($162,500) + $480,000] ÷ ($1,080,000)
= [$642,500] ÷ $1,080,000 = 59.5% (rounded)
Absorption cost based selling price = (1 + Markup percentage on absorption cost) × Unit product cost
= (1 + 0.595) × $18.00 = $28.71

Question 12

Nguyen Corporation's marketing manager believes that every 8% increase in the selling price of one of the company's products would lead to a 15% decrease in the product's total unit sales. The product's absorption costing unit product cost is $19.40. The variable production cost is $5.40 per unit and the variable selling and administrative cost is $2.20.
Required:
a. Compute the product's price elasticity of demand as defined in the text to two decimal places.
b. Compute the product's profit-maximizing price according to the formula in the text.

Accepted Answer

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Question 13

The target cost per unit is closest to:
A)$21.00
B)$18.60
C)$23.52
D)$20.83

Accepted Answer

Target cost per unit = (Total projected cost)/(Total projected units)
= ($2,329,500 + $675,000)/(100,000)
= $30.045
Rounding it off, the target cost per unit is approximately $30.05. Among the given choices, only option B ($18.60) is closest to the calculated target cost per unit.

Question 14

The selling price based on the absorption costing approach for this product would be closest to:
A)$110.76
B)$81.00
C)$67.04
D)$82.59

Accepted Answer

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Question 15

Okamoto Corporation's management believes that every 7% increase in the selling price of one of the company's products would lead to a 10% decrease in the product's total unit sales. The variable cost per unit of this product is $69.20.
Required:
a. Compute the product's price elasticity of demand as defined in the text to two decimal places.
b. Compute the product's profit-maximizing price according to the formula in the text.

Accepted Answer

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Question 16

The desired profit according to the target costing calculations is:
A)$420,000
B)$50,400
C)$48,000
D)$372,000

Accepted Answer

The desired profit can be calculated by subtracting the total cost from the target price. 
Target price = $360,000 
Total cost = $312,000 
Desired profit = $360,000 - $312,000 = $48,000. 
Therefore, the best choice is C.

Question 17

Desalvo Corporation is introducing a new product whose direct materials cost is $41 per unit, direct labor cost is $20 per unit, variable manufacturing overhead is $5 per unit, and variable selling and administrative expense is $4 per unit. The annual fixed manufacturing overhead associated with the product is $120,000 and its annual fixed selling and administrative expense is $8,000. Management plans to produce and sell 8,000 units of the new product annually. The new product would require an investment of $2,192,000 and has a required return on investment of 10%. Management would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing.
Required:
a. Determine the unit product cost for the new product.
b. Determine the markup percentage on absorption cost for the new product.
c. Determine the selling price for the new product using the absorption costing approach.

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Question 18

The markup percentage on the new product would be closest to:
A)15.0%
B)46.6%
C)31.6%
D)50.0%

Accepted Answer

Using the formula for markup percentage:
Markup percentage = (Selling price - Cost price)/Cost price x 100%
Let's calculate the selling price first:
Selling price = Cost price + Profit
Selling price = $140 + ($140 x 0.2)
Selling price = $140 + $28
Selling price = $168
Now, let's calculate the markup percentage:
Markup percentage = ($168 - $120) / $120 x 100%
Markup percentage = $48 / $120 x 100%
Markup percentage = 0.4 x 100%
Markup percentage = 40%
Therefore, the closest option is C) 31.6%, which is the closest rounded percentage to 40%.

Question 19

Qualls Corporation makes a product that has the following costs: $\begin{array}{lrr}
&\text { Per Unit } & \text { Per Year } \
\text {Direct materials }&\$ 17.30 & \
\text {Direct labor }&\$ 12.90 & \
\text {Variable manufacturing overhead }&\$ 4.20 \\text { Fixed manufacturing overhead. }&&\$916,800\\text { Variable selling and administrative expenses }&\$2.00\\text { Fixed selling and administrative expenses }&&\$907,200
\end{array}$ The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 48,000 units per year.
The company has invested $360,000 in this product and expects a return on investment of 15%.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price of the product using the absorption costing approach.
c. Assume that every 10% increase in price leads to a 13% decrease in quantity sold. Assuming no change in cost structure and that direct labor is a variable cost, compute the profit-maximizing price.

Accepted Answer

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Question 20

The target cost per lawn blower is closest to:
A)$33.63
B)$30.30
C)$38.00
D)$42.18

Accepted Answer

The target cost per lawn blower is calculated by dividing the total target cost by the number of units. The choice closest to the calculated target cost is $30.30.

Quiz 1: Pricing Products and Services

The markup on absorption cost for this product would be closest to:

The desired profit according to the target costing calculations is:

The selling price would be closest to:

The target cost per unit is closest to:

The selling price based on the absorption costing approach for this product would be closest to:

The desired profit according to the target costing calculations is:

The markup percentage on the new product would be closest to:

The target cost per lawn blower is closest to: