Exam 1: Pricing Products and Services

Qualls Corporation makes a product that has the following costs: Per Unit Per Year Direct materials \ 17.30 Direct labor \ 12.90 Variable manufacturing overhead \ 4.20 Fixed manufacturing overhead. \9 16,800 Variable selling and administrative expenses \2 .00 Fixed selling and administrative expenses \9 07,200 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.

The absorption costing unit product cost is:

The selling price based on the absorption costing approach is closest to:

In the absorption approach to cost-plus pricing, the anticipated markup in dollars is NOT equal to the anticipated profit.

Aldot Candy Corporation is implementing a target costing approach for its latest new product, the "Big Glob" candy bar. The following information relates to the Big Glob: Target cost per candy bar \ 0.40 Expected annual sales (in units) of candy bars 500,000 Required investment in additional assets \ 600,000 Desired return on investment 20\% Based on this information, what is Aldot's target selling price per bar for the Big Glob?

The desired profit according to the target costing calculations is:

The product's profit-maximizing price according to the formula in the text is closest to:

Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum cost figure.

The unit target selling price using the absorption costing approach is closest to:

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:

If every 10% increase in price leads to a 14% decrease in quantity sold, the profit-maximizing price is closest to:

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.

Management of Daubert Corporation is considering a new product, an outdoor speaker that would have a selling price of $43 per unit and projected sales of 60,000 units. Launching the new product would require an investment of $300,000. The desired return on investment is 13%. Required: Determine the target cost per unit for the outdoor speaker.

The target cost per lawn blower is closest to:

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:

Trepan Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product: Number of units to be produced and sold each year 25,000 Investment required by the company \ 300,000 Projected unit manufacturing cost. \ 30 Projected annual selling and administrative expenses. \ 90,000 Desired rate of return on investment. 20\% 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.

Assume that after introducing the new product, the company finds that it has excess capacity. A foreign dealer has offered to purchase 2,000 units at a special price of $36 per unit. This sale would not disturb regular business. If the special price is accepted on the 2,000 units, the company's overall net income for the year should:

Which of the following items are included in calculating the markup percentage under the absorption approach to cost-plus pricing described in the text? Variable Cost Fixed Cost Desired Production Selling Production Selling Profit A) Yes No Yes No Yes B) No Yes No Yes Yes C) No No Yes Yes Yes D) No Yes No Yes No

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: Per Unit total Direct materials \ 7 Direct labor \ 5 Variable manufacturing overhead \ 24 Fixed manufacturing overhead. \8 0,000 Variable selling and administrative expenses \3 Fixed selling and administrative expenses \7 2,000 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:

The product's profit-maximizing price according to the formula in the text is closest to: