302 vues

Transféré par MohammadYaqoob

managerial accounting

- 323-EX2-05a
- Consumer Theory - Microeconomics
- MBABEUK_SB_15_2015 Economics
- 3ef0bdc7-5280-43ef-8bf2-61de3357cd90
- Appendix A
- Economics
- App A
- MICROECONOMIC
- Ch08 Pricing
- Demand and Cost Determinants of Price
- 102 EABD
- 7.Handout - Copy
- Pricing Strategies
- aasignment_elasticity of demand
- Hw 4
- upload
- Economics - Skills And Practice - Constantine Ziogas - Second Edition - Oxford 2012.pdf
- Plugin-marshall Lerner Pizza
- Practice Exam 1
- Important-Distribution 3 Load Metrics

Vous êtes sur la page 1sur 92

T/F

T/F

T/F

T/F

T/F

T/F

T/F

T/F

T/F

10

T/F

11

T/F

12

T/F

13

T/F

14

T/F

15

T/F

AppA -1

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Other topics

Question Type

16

T/F

17

Conceptual M/C

18

Conceptual M/C

19

Conceptual M/C

20

Conceptual M/C

21

Conceptual M/C

22

Conceptual M/C

23

Conceptual M/C

24

Conceptual M/C

25

26

27

28

29

30

31

32

33

34

35

36

37

AppA -2

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

38

39

40

41

42

43

44

45

46

AppA-Ref1

47-48

Multipart M/C

AppA-Ref2

49-50

Multipart M/C

AppA-Ref3

51-52

Multipart M/C

AppA-Ref4

53-55

Multipart M/C

AppA-Ref5

56-57

Multipart M/C

M-H

AppA-Ref6

58-60

Multipart M/C

AppA-Ref7

61-62

Multipart M/C

AppA-Ref8

63-64

Multipart M/C

AppA-Ref9

65-66

Multipart M/C

AppA-Ref10

67-68

Multipart M/C

69

Problem

70

Problem

71

Problem

AppA -3

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

72

Problem

73

Problem

74

Problem

75

Problem

76

Problem

77

Problem

78

Problem

79

Problem

80

Problem

81

Problem

82

Problem

AppA -4

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Appendix A

Pricing Products and Services

1. If the unit sales for one product are more sensitive to price increases than another

product, then its markup over variable cost should be less than for the other product

if the company wants to maximize profit.

True

False

2. Price elasticity measures the degree to which consumers resent an increase in price.

True

False

3. If a product is price inelastic, then only a very large change in selling price will result

in a substantial change in the volume of units sold.

True

False

4. The price elasticity of demand is NOT used to determine the markup over cost when

computing the profit-maximizing price.

True

False

5. The price elasticity of demand is NOT used in the absorption costing approach to

cost-plus pricing to determine the markup over cost.

True

False

6. The markup over cost under the absorption costing approach would increase if selling

and administrative expenses increase, holding everything else constant.

True

False

7. The markup over cost under the absorption costing approach would increase if the

required rate of return increases, holding everything else constant.

True

False

AppA -5

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

NOT equal to the anticipated profit.

True

False

9. Under the absorption approach to costs-plus pricing described in the text, selling and

administrative costs are included in the cost base when computing a selling price.

True

False

10. If the formula for the markup percentage on absorption cost is used for setting prices,

then the company's desired return on investment (ROI) will not usually be attained

unless the assumed number of units sold is actually sold.

True

False

11. In target costing, the selling price is the starting point and the cost follows from the

selling price.

True

False

maximize its selling price.

True

False

Target cost = Anticipated selling price + Desired profit

True

False

14. 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.

True

False

15. Most of the opportunities to reduce the cost of a product come from designing the

product so that it is simple to make, uses inexpensive parts, and is robust and

reliable.

True

False

16. Pricing decisions are most difficult in those situations in which a company makes a

product that is in competition with other, identical products for which a market

already exists.

True

False

AppA -6

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

17. Holding all other things constant, if the price elasticity of demand increases (i.e.,

becomes more negative), then the markup under the economists' approach to pricing

will:

A.

B.

C.

D.

increase.

decrease.

remain the same.

The effect cannot be determined.

18. Holding all other things constant, an increase in fixed production costs will affect:

B. the markup used to compute the profit-maximizing price.

C. both the markup under the absorption costing approach to cost-plus pricing and

the markup used to compute profit-maximizing price.

D. neither the markup under the absorption costing approach to cost-plus pricing nor

the markup used to compute profit-maximizing price.

19. Holding all other things constant, an increase in the company's required return on

investment (ROI) 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.

20. Holding all other things constant, an increase in how sensitive customers are to price

would affect:

B. the markup used to compute the profit-maximizing price.

C. both the markup under the absorption costing approach to cost-plus pricing and

the markup used to compute profit-maximizing price.

D. neither the markup under the absorption costing approach to cost-plus pricing nor

the markup used to compute profit-maximizing price.

AppA -7

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

21. 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.

22. Which of the following items are included in calculating the markup percentage under

the absorption approach to cost-plus pricing described in the text?

A.

B.

C.

D.

Option A

Option B

Option C

Option D

23. 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.

24. The formula for target cost is:

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)

AppA -8

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

25. 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.

According to the formula in the text, the product's profit-maximizing price is closest

to:

A.

B.

C.

D.

$35.82

$32.89

$35.23

$20.74

26. 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.

The product's price elasticity of demand as defined in the text is closest to:

A.

B.

C.

D.

-1.71

-1.65

-1.85

-2.45

27. 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.

B.

C.

D.

$63.08

$72.31

$96.41

$58.67

AppA -9

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

28. 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.

B.

C.

D.

$43.62

$187.34

$41.55

$185.84

29. 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.

B.

C.

D.

$17.77

$31.39

$17.61

$42.12

30. 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.

B.

C.

D.

-1.72

-1.84

-1.05

-2.05

AppA -10

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

31. Minden Corporation estimates that the following costs and activity would be

associated with the manufacture and sale of product A:

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.

B.

C.

D.

12%

15%

17%

25%

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.

B.

C.

D.

15%

49%

55%

58%

33. 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.

B.

C.

D.

12.0%

18.4%

29.8%

17.8%

AppA -11

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

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.

B.

C.

D.

$80,000

$200,000

$920,000

$800,000

35. 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.

B.

C.

D.

$86.66

$120.03

$67.36

$85.60

AppA -12

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

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.

B.

C.

D.

27.1%

124.2%

34.2%

10.0%

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.

B.

C.

D.

$71.90

$72.31

$53.29

$93.67

AppA -13

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

38. 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:

percentage on absorption cost for Product X (rounded to the nearest percent) would

be:

A.

B.

C.

D.

41%

16%

29%

22%

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.

B.

C.

D.

$720,000

$480,000

$640,000

$400,000

AppA -14

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

40. Simmons Corporation estimated that the following costs and activity would be

associated with Product T:

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.

B.

C.

D.

$37.25

$38.75

$42.00

$44.75

product--a compact barbecue. At a selling price of $80 per unit, management

projects sales of 70,000 units. Launching the barbecue as a new product would

require an investment of $400,000. The desired return on investment is 15%. The

target cost per barbecue is closest to:

A.

B.

C.

D.

$79.14

$92.00

$91.01

$80.00

introduce a new electronic watch. To compete effectively, the watch could not be

priced at more than $50. The company requires a return on investment of 25% on all

new products. The plan is to produce and sell 20,000 watches each year. This would

require a $500,000 investment. The target cost per watch would be:

A.

B.

C.

D.

$64.00

$25.00

$43.75

$39.00

AppA -15

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

43. 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:

Based on this information, what is Aldot's target selling price per bar for the Big

Glob?

A.

B.

C.

D.

$0.48

$0.50

$0.64

$0.70

44. Pedrotti Corporation would like to use target costing for a new product it is

considering introducing. At a selling price of $28 per unit, management projects sales

of 30,000 units. The new product would require an investment of $300,000. The

desired return on investment is 17%. The target cost per unit is closest to:

A.

B.

C.

D.

$32.76

$26.30

$28.00

$30.77

Corporation. At a selling price of $73 per unit, management projects sales of 20,000

units. Launching the crepe maker as a new product would require an investment of

$400,000. The desired return on investment is 17%. The target cost per crepe maker

is closest to:

A.

B.

C.

D.

$69.60

$85.41

$81.43

$73.00

AppA -16

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

power screwdriver. To compete effectively, the screwdriver cannot be priced at more

than $14. The company requires a 15% rate of return on investment on all new

products. In order to produce and sell 80,000 screwdrivers each year, the company

will need to make an investment of $800,000. The target cost per screwdriver would

be:

A.

B.

C.

D.

$15.50

$1.50

$14.00

$12.50

Bluhm Corporation's management believes that every 2% increase in the selling price

of one of the company's products would lead to a 4% decrease in the product's total

unit sales. The product's variable cost is $17.50 per unit.

47. The product's price elasticity of demand as defined in the text is closest to:

A.

B.

C.

D.

-1.75

-2.22

-2.06

-1.07

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

to:

A.

B.

C.

D.

$259.84

$33.99

$40.89

$31.81

Clulow 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.

AppA -17

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

49. The product's price elasticity of demand as defined in the text is closest to:

A.

B.

C.

D.

-3.19

-2.02

-2.70

-4.13

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

to:

A.

B.

C.

D.

$15.31

$16.67

$20.79

$13.86

increase in the selling price of one of the company's products would lead to a 13%

decrease in the product's total unit sales. The product's absorption costing unit

product cost is $17.40. The variable production cost is $4.10 per unit and the variable

selling and administrative cost is $4.80 per unit.

51. The product's price elasticity of demand as defined in the text is closest to:

A.

B.

C.

D.

-2.13

-1.47

-1.57

-1.81

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

to:

A.

B.

C.

D.

$10.73

$38.89

$9.16

$19.89

AppA -18

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

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

60,000 units per year.

The company has invested $320,000 in this product and expects a return on

investment of 15%.

Direct labor is a variable cost in this company.

53. The markup on absorption cost is closest to:

A.

B.

C.

D.

96.5%

15.0%

31.2%

30.0%

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

A.

B.

C.

D.

$85.28

$84.50

$110.89

$56.95

55. If every 10% increase in price leads to a 14% decrease in quantity sold, the profitmaximizing price is closest to:

A.

B.

C.

D.

$84.50

$124.25

$120.90

$117.91

AppA -19

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Eakins Corporation has just developed a new product. At an expected sales level of

60,000 units per year, the company anticipates that the following costs will be

incurred:

described in the text.

56. The new product would require an investment of $1,200,000 on which the company

would like to earn a return of 22 percent. The markup using the absorption costing

approach would be:

A.

B.

C.

D.

93.8%

32.6%

71.3%

57.5%

57. 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:

A.

B.

C.

D.

decrease by $24,000

increase by $20,000

increase by $8,000

increase by $32,000

AppA -20

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

The management of Kizer 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:

Management plans to produce and sell 8,000 units of the new product annually. The

new product would require an investment of $1,580,000 and has a required return on

investment of 10%.

58. The absorption costing unit product cost is:

A.

B.

C.

D.

$59

$86

$55

$75

A.

B.

C.

D.

25%

10%

15%

41%

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

A.

B.

C.

D.

$105.75

$83.33

$121.50

$86.00

described in the text to set prices for its products. Based on budgeted sales of 18,000

units next year, the unit product cost of a particular product is $60.40. The

company's selling and administrative expenses for this product are budgeted to be

$370,800 in total for the year. The company has invested $260,000 in this product

and expects a return on investment of 11%.

AppA -21

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

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

A.

B.

C.

D.

45.1%

36.7%

11.0%

34.1%

62. The selling price based on the absorption costing approach for this product would be

closest to:

A.

B.

C.

D.

$110.76

$81.00

$67.04

$82.59

produce and sell 50,000 units of a new product each year. Other costs associated

with the new product would be:

The company requires a 15% return on the investment in all products. The company

uses the absorption costing approach costing to pricing as described in the text.

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

A.

B.

C.

D.

15.0%

46.6%

31.6%

50.0%

A.

B.

C.

D.

$28.71

$26.50

$22.00

$32.67

AppA -22

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

compact lawn blower. At a selling price of $38 per unit, management projects sales of

10,000 units. The lawn blower would require an investment of $700,000. The desired

return on investment is 11%.

65. The desired profit according to the target costing calculations is:

A.

B.

C.

D.

$380,000

$303,000

$41,800

$77,000

A.

B.

C.

D.

$33.63

$30.30

$38.00

$42.18

Samples Corporation would like to use target costing for a new product it is

considering introducing. At a selling price of $21 per unit, management projects sales

of 20,000 units. The new product would require an investment of $400,000. The

desired return on investment is 12%.

67. The desired profit according to the target costing calculations is:

A.

B.

C.

D.

$420,000

$50,400

$48,000

$372,000

A.

B.

C.

D.

$21.00

$18.60

$23.52

$20.83

Essay Questions

AppA -23

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

69. 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.

AppA -24

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

70. 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.

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.

AppA -25

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

71. 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.

72. 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.

AppA -26

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

73. Qualls Corporation makes a product that has the following costs:

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.

AppA -27

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

74. Green Hornet Corporation is contemplating the introduction of a new product. The

company has gathered the following information concerning the product:

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.

AppA -28

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

75. 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:

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.

AppA -29

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

76. Trepan Corporation is contemplating the introduction of a new product. The company

has gathered the following information concerning the product:

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.

AppA -30

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

77. Ritchie Corporation manufactures a product that has the following costs:

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.

AppA -31

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

78. 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.

79. 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.

AppA -32

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

80. 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.

81. Hepler Corporation would like to use target costing for a new product that is under

consideration. At a selling price of $76 per unit, management projects sales of 50,000

units. The new product would require an investment of $400,000. The desired return

on investment is 12%.

Required:

Determine the target cost per unit for the new product.

AppA -33

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

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.

AppA -34

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

1.

If the unit sales for one product are more sensitive to price increases than another

product, then its markup over variable cost should be less than for the other

product if the company wants to maximize profit.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

2.

price.

FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

3.

If a product is price inelastic, then only a very large change in selling price will

result in a substantial change in the volume of units sold.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -35

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

4.

The price elasticity of demand is NOT used to determine the markup over cost

when computing the profit-maximizing price.

FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

5.

The price elasticity of demand is NOT used in the absorption costing approach to

cost-plus pricing to determine the markup over cost.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

6.

The markup over cost under the absorption costing approach would increase if

selling and administrative expenses increase, holding everything else constant.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

7.

The markup over cost under the absorption costing approach would increase if the

required rate of return increases, holding everything else constant.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -36

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

8.

NOT equal to the anticipated profit.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

9.

Under the absorption approach to costs-plus pricing described in the text, selling

and administrative costs are included in the cost base when computing a selling

price.

FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

10.

If the formula for the markup percentage on absorption cost is used for setting

prices, then the company's desired return on investment (ROI) will not usually be

attained unless the assumed number of units sold is actually sold.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

11.

In target costing, the selling price is the starting point and the cost follows from

the selling price.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-03 Compute the target cost for a new product or service.

AppA -37

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

12.

maximize its selling price.

FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

13.

Target cost = Anticipated selling price + Desired profit

FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

14.

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.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

15.

Most of the opportunities to reduce the cost of a product come from designing the

product so that it is simple to make, uses inexpensive parts, and is robust and

reliable.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

AppA -38

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

16.

Pricing decisions are most difficult in those situations in which a company makes a

product that is in competition with other, identical products for which a market

already exists.

FALSE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: Other topics

17.

Holding all other things constant, if the price elasticity of demand increases (i.e.,

becomes more negative), then the markup under the economists' approach to

pricing will:

A.

B.

C.

D.

increase.

decrease.

remain the same.

The effect cannot be determined.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

18.

Holding all other things constant, an increase in fixed production costs will affect:

B. the markup used to compute the profit-maximizing price.

C. both the markup under the absorption costing approach to cost-plus pricing and

the markup used to compute profit-maximizing price.

D. neither the markup under the absorption costing approach to cost-plus pricing

nor the markup used to compute profit-maximizing price.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

AppA -39

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

19.

Holding all other things constant, an increase in the company's required return on

investment (ROI) 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.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

20.

Holding all other things constant, an increase in how sensitive customers are to

price would affect:

B. the markup used to compute the profit-maximizing price.

C. both the markup under the absorption costing approach to cost-plus pricing and

the markup used to compute profit-maximizing price.

D. neither the markup under the absorption costing approach to cost-plus pricing

nor the markup used to compute profit-maximizing price.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 3 Hard

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -40

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

21.

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.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

22.

Which of the following items are included in calculating the markup percentage

under the absorption approach to cost-plus pricing described in the text?

A.

B.

C.

D.

Option A

Option B

Option C

Option D

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

23.

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.

AACSB: Reflective Thinking

AppA -41

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

24.

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)

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

AppA -42

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

25.

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.

According to the formula in the text, the product's profit-maximizing price is

closest to:

A.

B.

C.

D.

$35.82

$32.89

$35.23

$20.74

% change in price = ($11 - $12)/$12 = -8.11%

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)

= ln(1 + (0.1837))/ln(1 + (-0.0811)) = -1.99

Profit-maximizing markup on variable cost = -1/(1 + d)

= -1/(1 + (-1.99)) = 1.01

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 1.01) $16.40 = $32.96 (the exact answer without rounding error is

$32.89)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -43

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

26.

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.

The product's price elasticity of demand as defined in the text is closest to:

A.

B.

C.

D.

-1.71

-1.65

-1.85

-2.45

= ln(1 + (5,000 - 5,200)/5,200)/ln(1 + ($63 - $62)/$62) = -2.45

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -44

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

27.

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.

B.

C.

D.

$63.08

$72.31

$96.41

$58.67

= ln(1 + (-0.08))/ln(1 + 0.05) = -1.71

Profit-maximizing markup on variable cost = -1/(1 + d)

= -1/(1 + (-1.71)) = 1.41

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 1.41) ($18.00 + $12.00) = $72.30 (the answer is $72.31 without

rounding error)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -45

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

28.

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.

B.

C.

D.

$43.62

$187.34

$41.55

$185.84

= ln(1 + (-0.06))/ln(1 + 0.05) = -1.27

Profit-maximizing markup on variable cost = -1/(1 + d)

= -1/(1 + (-1.27)) = 3.70

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 3.70) ($38.30 + $1.00) = $184.71 (the exact answer without rounding

error is $185.84)

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -46

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

29.

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.

B.

C.

D.

$17.77

$31.39

$17.61

$42.12

= ln(1 + (-0.06))/ln(1 + 0.03) = -2.09

Profit-maximizing markup on variable cost = -1/(1 + d)

= -1/(1 + (-2.09)) = 0.92

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 0.92) ($6.80 + $2.40) = $17.66 (the exact answer without rounding error

is $17.61)

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

30.

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.

B.

C.

D.

-1.72

-1.84

-1.05

-2.05

= ln(1 + (0.07))/ln(1 + (-0.11)) = -1.72

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

AppA -47

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Difficulty: 1 Easy

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

31.

Minden Corporation estimates that the following costs and activity would be

associated with the manufacture and sale of product A:

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.

B.

C.

D.

12%

15%

17%

25%

and administrative expenses] (Unit product cost Unit sales)

= [(25% $400,000) + $300,000] ($30 per unit 80,000 units)

= [($100,000) + $300,000] $2,400,000

= $400,000 $2,400,000 = 17% (rounded)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -48

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

32.

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 costplus 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.

B.

C.

D.

15%

49%

55%

58%

and administrative expenses] (Unit product cost Unit sales)

= [(15% $400,000) + $350,000] ($25 per unit 30,000 units)

= [($60,000) + $350,000] ($750,000)

= $410,000 $750,000 = 0.55 (rounded)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

33.

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.

B.

C.

D.

12.0%

18.4%

29.8%

17.8%

and administrative expenses] (Unit product cost Unit sales)

= [(12% $360,000) + $1,247,000] ($81.60 per unit 86,000 units)

= ($43,200 + $1,247,000) $7,017,600

= $1,290,200 $7,017,600 = 18.4% (rounded)

AACSB: Analytic

AICPA BB: Critical Thinking

AppA -49

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

34.

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.

B.

C.

D.

$80,000

$200,000

$920,000

$800,000

and administrative expenses] (Unit product cost Unit sales)

0.50 = [(20% $400,000) + Selling and administrative expenses] ($25 per unit

80,000 units)

0.50 = [($80,000) + Selling and administrative expenses] ($2,000,000)

($80,000) + Selling and administrative expenses = 0.50 $2,000,000

$80,000 + Selling and administrative expenses = $1,000,000

Selling and administrative expenses = $1,000,000 - $80,000 = $920,000

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -50

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

35.

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.

B.

C.

D.

$86.66

$120.03

$67.36

$85.60

and administrative expenses] (Unit product cost Unit sales)

= [(9% $400,000) + $809,200] ($61.80 per unit 34,000 units)

= [$36,000 + $809,200] $2,101,200

= $845,200 $2,101,200 = 40.22

Absorption cost based selling price = (1 + Markup percentage on absorption cost)

Unit product cost

= (1 + 0.4022) $61.80 = $86.66

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -51

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

36.

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.

B.

C.

D.

27.1%

124.2%

34.2%

10.0%

Selling and administrative expenses = ($3.00 per unit 14,000 units) + $163,800

= $205,800

and administrative expenses] (Unit product cost Unit sales)

= [(10% $540,000) + $205,800] ($54.30 per unit 14,000 units)

= [$54,000 + $205,800] $760,200

= $259,800 $760,200 = 34.2% (rounded)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -52

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

37.

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.

B.

C.

D.

$71.90

$72.31

$53.29

$93.67

Selling and administrative expenses = $2.00 per unit 81,000 units + $1,166,400

= $1,328,400

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(15% $220,000) + $1,328,400] ($55.50 per unit 81,000 units)

= [$33,000 + $1,328,400] $4,495,500

= [$1,361,400] $4,495,500 = 30.28%

Absorption cost based selling price = (1 + Markup percentage on absorption cost)

Unit product cost

= (1 + 0.3028) $55.50 = $72.31

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

AppA -53

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

38.

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:

percentage on absorption cost for Product X (rounded to the nearest percent)

would be:

A.

B.

C.

D.

41%

16%

29%

22%

Selling and administrative expenses = ($3 per unit 16,000 units) + $72,000

= $48,000 + $72,000 = $120,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(15% $120,000) + $120,000] ($21 per unit 16,000 units)

= [$18,000 + $120,000] $336,000

= $138,000 $336,000 = 41% (rounded)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -54

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

39.

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.

B.

C.

D.

$720,000

$480,000

$640,000

$400,000

Unit product cost

$96 per unit = (1 + Markup percentage on absorption cost) $60 per unit

(1 + Markup percentage on absorption cost) = $96 per unit $60 per unit

(1 + Markup percentage on absorption cost) = 1.6

Markup percentage on absorption cost = 0.6

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

0.6 = [(16% $500,000) + Selling and administrative expenses] ($60 per unit

20,000 units)

0.6 = [($80,000) + Selling and administrative expenses] ($1,200,000)

[($80,000) + Selling and administrative expenses] = 0.6 $1,200,000

$80,000 + Selling and administrative expenses = $720,000

Selling and administrative expenses = $720,000 - $80,000 = $640,000

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -55

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

40.

Simmons Corporation estimated that the following costs and activity would be

associated with Product T:

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.

B.

C.

D.

$37.25

$38.75

$42.00

$44.75

and administrative expenses] (Unit product cost Unit sales)

= [(20% $900,000) + $600,000] ($35 per unit 80,000 units)

= [$180,000 + $600,000] ($2,800,000)

= 0.2786

Absorption cost based selling price = (1 + Markup percentage on absorption cost)

Unit product cost

= (1 + 0.2786) $35 per unit = 1.2786 $35 per unit = $44.75 per unit

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -56

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

41.

product--a compact barbecue. At a selling price of $80 per unit, management

projects sales of 70,000 units. Launching the barbecue as a new product would

require an investment of $400,000. The desired return on investment is 15%. The

target cost per barbecue is closest to:

A.

B.

C.

D.

$79.14

$92.00

$91.01

$80.00

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

42.

introduce a new electronic watch. To compete effectively, the watch could not be

priced at more than $50. The company requires a return on investment of 25% on

all new products. The plan is to produce and sell 20,000 watches each year. This

would require a $500,000 investment. The target cost per watch would be:

A.

B.

C.

D.

$64.00

$25.00

$43.75

$39.00

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

AppA -57

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

43.

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:

Based on this information, what is Aldot's target selling price per bar for the Big

Glob?

A.

B.

C.

D.

$0.48

$0.50

$0.64

$0.70

(500,000X - $120,000) = $0.40 per unit 500,000 units

500,000X - $120,000 = $200,000

500,000X = $200,000 + $120,000

500,000X = $320,000

X = $320,000 500,000

X = $0.64

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: AppA-03 Compute the target cost for a new product or service.

AppA -58

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

44.

Pedrotti Corporation would like to use target costing for a new product it is

considering introducing. At a selling price of $28 per unit, management projects

sales of 30,000 units. The new product would require an investment of $300,000.

The desired return on investment is 17%. The target cost per unit is closest to:

A.

B.

C.

D.

$32.76

$26.30

$28.00

$30.77

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

45.

Corporation. At a selling price of $73 per unit, management projects sales of

20,000 units. Launching the crepe maker as a new product would require an

investment of $400,000. The desired return on investment is 17%. The target cost

per crepe maker is closest to:

A.

B.

C.

D.

$69.60

$85.41

$81.43

$73.00

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

AppA -59

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

46.

power screwdriver. To compete effectively, the screwdriver cannot be priced at

more than $14. The company requires a 15% rate of return on investment on all

new products. In order to produce and sell 80,000 screwdrivers each year, the

company will need to make an investment of $800,000. The target cost per

screwdriver would be:

A.

B.

C.

D.

$15.50

$1.50

$14.00

$12.50

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

price of one of the company's products would lead to a 4% decrease in the

product's total unit sales. The product's variable cost is $17.50 per unit.

47.

The product's price elasticity of demand as defined in the text is closest to:

A.

B.

C.

D.

-1.75

-2.22

-2.06

-1.07

= ln(1 + (-0.04))/ln(1 + (+0.02)) = -2.06

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -60

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

48.

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

to:

A.

B.

C.

D.

$259.84

$33.99

$40.89

$31.81

= ln(1 + (-0.04))/ln(1 + (+0.02)) = -2.06

Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-2.06)) = 0.94

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 0.94) $17.50 = $33.95 (the exact answer, without rounding error, is

$33.99)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

Clulow 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.

AppA -61

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

49.

The product's price elasticity of demand as defined in the text is closest to:

A.

B.

C.

D.

-3.19

-2.02

-2.70

-4.13

% change in quantity sold = (10,010 - 7,800)/7,800 = 28.33%

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)

= ln(1 + (+0.2083))/ln(1 + (-0.0882)) = -2.70

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

50.

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

to:

A.

B.

C.

D.

$15.31

$16.67

$20.79

$13.86

% change in quantity sold = (10,010 - 7,800)/7,800 = 28.33%

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)

= ln(1 + (+0.2083))/ln(1 + (-0.0882)) = -2.70

Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-2.70)) = 0.59

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 0.59) $10.50 = $16.70 (the exact answer, without rounding error, is

$16.67)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

AppA -62

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

increase in the selling price of one of the company's products would lead to a 13%

decrease in the product's total unit sales. The product's absorption costing unit

product cost is $17.40. The variable production cost is $4.10 per unit and the

variable selling and administrative cost is $4.80 per unit.

51.

The product's price elasticity of demand as defined in the text is closest to:

A.

B.

C.

D.

-2.13

-1.47

-1.57

-1.81

= ln(1 + (-0.13))/ln(1 + (+0.08)) = -1.81

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

52.

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

to:

A.

B.

C.

D.

$10.73

$38.89

$9.16

$19.89

= ln(1 + (-0.13))/ln(1 + (+0.08)) = -1.81

Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.81)) = 1.23

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 1.23) ($4.10 + $4.80) = $19.85 (the exact answer, without rounding

error, is $19.89)

AACSB: Analytic

AICPA BB: Critical Thinking

AppA -63

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

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

60,000 units per year.

The company has invested $320,000 in this product and expects a return on

investment of 15%.

Direct labor is a variable cost in this company.

53.

A.

B.

C.

D.

96.5%

15.0%

31.2%

30.0%

$1,104,000 = $1,170,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(15% $320,000) + $1,170,000] ($65.00 per unit 60,000 units)

= [($48,000) + $1,170,000] ($3,900,000)

= [$1,218,000] $3,900,000 = 31.2%

AACSB: Analytic

AICPA BB: Critical Thinking

AppA -64

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

54.

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

A.

B.

C.

D.

$85.28

$84.50

$110.89

$56.95

Selling and administrative expenses = $1.10 per unit 60,000 units + $1,104,000

= $1,170,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(15% $320,000) + $1,170,000] ($65.00 per unit 60,000 units)

= [($48,000) + $1,170,000] ($3,900,000)

= [$1,218,000] $3,900,000 = 31.2%

Absorption cost based selling price = (1 + 0.312) $65.00 = $85.28

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -65

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

55.

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

A.

B.

C.

D.

$84.50

$124.25

$120.90

$117.91

= ln(1 + (-0.14))/ln(1 + (+0.10)) = -1.58

Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.58)) = 1.72

Variable cost per unit

= (1 + 1.72) ($44.50) = $121.04 (the exact answer, without rounding error, is

$120.90)

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

Eakins Corporation has just developed a new product. At an expected sales level of

60,000 units per year, the company anticipates that the following costs will be

incurred:

described in the text.

AppA -66

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

56.

company would like to earn a return of 22 percent. The markup using the

absorption costing approach would be:

A.

B.

C.

D.

93.8%

32.6%

71.3%

57.5%

Selling and administrative expenses = ($6 per unit 60,000 units) + $480,000 =

$840,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(22% $1,200,000) + $840,000] ($32 per unit 60,000 units)

= [($264,000) + $840,000] ($1,920,000)

= [$1,104,000] $1,920,000 = 57.5%

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -67

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

57.

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:

A.

B.

C.

D.

decrease by $24,000

increase by $20,000

increase by $8,000

increase by $32,000

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

The management of Kizer 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:

Management plans to produce and sell 8,000 units of the new product annually.

The new product would require an investment of $1,580,000 and has a required

return on investment of 10%.

AppA -68

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

58.

A.

B.

C.

D.

$59

$86

$55

$75

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

59.

A.

B.

C.

D.

25%

10%

15%

41%

$88,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(10% $1,580,000) + $88,000] ($75 per unit 8,000 units)

= [($158,000) + $88,000] ($600,000)

= [$246,000] $600,000 = 41%

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

AppA -69

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Difficulty: 1 Easy

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

60.

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

A.

B.

C.

D.

$105.75

$83.33

$121.50

$86.00

$88,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(10% $1,580,000) + $88,000] ($75 per unit 8,000 units)

= [($158,000) + $88,000] ($600,000)

= [$246,000] $600,000 = 41%

Absorption cost based selling price = (1 + Markup percentage on absorption cost)

Unit product cost

= (1 + 0.41) $75 = $105.75

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

described in the text to set prices for its products. Based on budgeted sales of

18,000 units next year, the unit product cost of a particular product is $60.40. The

company's selling and administrative expenses for this product are budgeted to be

$370,800 in total for the year. The company has invested $260,000 in this product

and expects a return on investment of 11%.

AppA -70

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

61.

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

A.

B.

C.

D.

45.1%

36.7%

11.0%

34.1%

and administrative expenses] (Unit product cost Unit sales)

= [(11% $260,000) + $370,800] ($60.40 18,000 units)

= [($28,600) + $370,800] ($1,087,200)

= [$399,400] $1,087,200 = 36.7% (rounded)

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

62.

The selling price based on the absorption costing approach for this product would

be closest to:

A.

B.

C.

D.

$110.76

$81.00

$67.04

$82.59

and administrative expenses] (Unit product cost Unit sales)

= [(11% $260,000) + $370,800] ($60.40 18,000 units)

= [($28,600) + $370,800] ($1,087,200)

= [$399,400] $1,087,200 = 36.7% (rounded)

Absorption cost based selling price = (1 + Markup percentage on absorption cost)

Unit product cost

= (1 + 1.367) $60.40 = $82.59 (rounded)

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -71

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

to produce and sell 50,000 units of a new product each year. Other costs

associated with the new product would be:

The company requires a 15% return on the investment in all products. The

company uses the absorption costing approach costing to pricing as described in

the text.

63.

A.

B.

C.

D.

15.0%

46.6%

31.6%

50.0%

Selling and administrative expenses = ($4 per unit 50,000 units) + $200,000 =

$400,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(15% $600,000) + $400,000] ($31.00 per unit 50,000 units)

= [($90,000) + $400,000] ($1,550,000)

= [$490,000] $1,550,000 = 31.6% (rounded)

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -72

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

64.

A.

B.

C.

D.

$28.71

$26.50

$22.00

$32.67

Selling and administrative expenses = ($4 per unit 50,000 units) + $200,000 =

$400,000

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(15% $600,000) + $400,000] ($31.00 per unit 50,000 units)

= [($90,000) + $400,000] ($1,550,000)

= [$490,000] $1,550,000 = 31.6% (rounded)

Absorption cost based selling price = (1 + Markup percentage on absorption cost)

Unit product cost

= (1 + 0.316) $31.00 = $48.80 (rounded)

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

The management of Rispoli Corporation is considering introducing a new product-a compact lawn blower. At a selling price of $38 per unit, management projects

sales of 10,000 units. The lawn blower would require an investment of $700,000.

The desired return on investment is 11%.

AppA -73

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

65.

A.

B.

C.

D.

$380,000

$303,000

$41,800

$77,000

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

66.

A.

B.

C.

D.

$33.63

$30.30

$38.00

$42.18

= $38.00 per unit - ($77,000 10,000 units)

= $38.00 per unit - $7.70 per unit = $30.30 per unit

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

Samples Corporation would like to use target costing for a new product it is

considering introducing. At a selling price of $21 per unit, management projects

sales of 20,000 units. The new product would require an investment of $400,000.

The desired return on investment is 12%.

AppA -74

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

67.

A.

B.

C.

D.

$420,000

$50,400

$48,000

$372,000

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

68.

A.

B.

C.

D.

$21.00

$18.60

$23.52

$20.83

= $21.00 per unit - ($48,000 20,000 units)

= $21.00 per unit - $2.40 per unit = $18.60 per unit

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

Essay Questions

AppA -75

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

69.

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.

= ln(1 + (-10%))/ln(1 + 7%) = -1.56

b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.56)) =

1.79

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 1.79) $69.20 = (2.79) $69.20 = $193.07 (The answer without rounding

error is $193.38.)

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -76

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

70.

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.

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.

% change in price = ($44 - $46) $46 = -4.35%

d = ln(1 + % change in quantity sold)/ln(1 + % change in price)

= ln(1 + 7.40%)/ln(1 + (-4.35%)) = -1.61

b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.61)) =

1.64

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 1.64) $17.10 = (2.64) $17.10 = $45.14 (The answer without rounding

error is $45.34.)

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -77

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

71.

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.

= ln(1 + (-15%))/ln(1 + 10%) = -1.71

b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.71)) =

1.41

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 1.41) ($6.00 +$3.00) = (2.41) $9.00 = $21.69 (The answer without

rounding error is $21.76.)

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -78

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

72.

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.

= ln(1 + (-15%))/ln(1 + 8%) = -2.11

b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-2.11)) =

0.90

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 0.90) ($2.20 +$5.40) = (1.90) $7.60 = $14.44

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

AppA -79

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AppA -80

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

73.

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.

a.

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)

= [(15% $360,000) + $1,003,200] (48,000 $53.50)

= [($54,000) + $1,003,200] $2,568,000

= 41.17%

b. Absorption cost based selling price = (1 + Markup percentage on absorption

cost) Unit product cost

AppA -81

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

c. d = ln(1 + % change in quantity sold)/ln(1 + % change in price)

= ln(1 + (-13%))/ln(1 + 10%) = -1.46

Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.46)) = 2.17

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)

Variable cost per unit

= (1 + 2.17) $36.40 = (3.17) $36.40 = $115.33

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price

elasticity of demand and variable cost.

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -82

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

74.

company has gathered the following information concerning the product:

described in the text.

Required:

a. Compute the markup on absorption cost.

b. Compute the selling price.

and administrative expenses] (Unit product cost Unit sales)

= [(Required ROI Investment) + Selling and administrative expenses] [Unit

product cost Unit sales]

= [(20% $400,000) + $100,000] [$30 16,000]

= $180,000 $480,000 = 37.5%

b.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -83

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AppA -84

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

75.

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:

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.

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] [Unit product cost Units sales]

= [(10% $3,002,400) + ($72,000)] [9,000 $88]

= [$300,240 + $72,000] [$792,000]

= $372,240 $792,000

= 47%

c. The selling price is determined as follows:

AppA -85

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -86

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

76.

company has gathered the following information concerning the product:

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.

and administrative expenses] [Unit product cost Unit sales]

= [(20% $300,000) + $90,000] [$30 25,000]

= $150,000 $750,000 = 20%

b.

c. No, sales volume may be less than the 25,000 units projected annually, resulting

in inadequate contribution margin to cover fixed costs, and a consequent loss for

the company on the product.

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -87

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

77.

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.

a.

and administrative expenses] (Unit product cost Unit sales)

= [(15% $160,000) + ($4.10 37,000 + $691,900)] (37,000 $57.80)

= [($24,000) + ($843,600)] $2,138,600 = 40.57%

b. Absorption cost based selling price = (1 + Markup percentage on absorption

cost) Unit product cost

= (1 + 0.4057) $57.80 = $81.25

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -88

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

78.

$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.

Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] [Unit product cost Units sales]

= [(10% $2,192,000) + ($40,000)] [$81 8,000]

= [$219,200 + $40,000] [$648,000]

= $259,200 $648,000

= 40%

c. Absorption cost based selling price = (1 + Markup percentage on absorption

cost) Unit product cost

= (1 + 0.40) $81 = $113.40

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.

AppA -89

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

79.

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.

Target cost per unit ($3,830,000 50,000 units) = $76.60 per unit

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

80.

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.

Target cost per unit = $15,750,000 250,000 units = $63 per unit

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: AppA-03 Compute the target cost for a new product or service.

AppA -90

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

81.

Hepler Corporation would like to use target costing for a new product that is under

consideration. At a selling price of $76 per unit, management projects sales of

50,000 units. The new product would require an investment of $400,000. The

desired return on investment is 12%.

Required:

Determine the target cost per unit for the new product.

Target cost per unit ($3,752,000 50,000 units) = $75.04 per unit

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: AppA-03 Compute the target cost for a new product or service.

82.

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.

Target cost per unit ($2,541,000 60,000 units) = $42.35 per unit

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

AppA -91

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Learning Objective: AppA-03 Compute the target cost for a new product or service.

AppA -92

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

- 323-EX2-05aTransféré parQudratullah Rahmat
- Consumer Theory - MicroeconomicsTransféré parAdnan
- MBABEUK_SB_15_2015 EconomicsTransféré parWaqas Cheema
- 3ef0bdc7-5280-43ef-8bf2-61de3357cd90Transféré parMuhammad Zaheer Anwar
- Appendix ATransféré parKimyongseong
- EconomicsTransféré parYuhangyuhangyuhang Bewithoutships
- App ATransféré parJessica Cola
- MICROECONOMICTransféré parSashikala Garnaison
- Ch08 PricingTransféré parDaniel Kang
- Demand and Cost Determinants of PriceTransféré parRadHika GaNdotra
- 102 EABDTransféré parAmol Kare
- 7.Handout - CopyTransféré parBalasingam Prahalathan
- Pricing StrategiesTransféré parShivam Chauhan
- aasignment_elasticity of demandTransféré paracidreign
- Hw 4Transféré pardoug119
- uploadTransféré parJolyn Bola
- Economics - Skills And Practice - Constantine Ziogas - Second Edition - Oxford 2012.pdfTransféré parMayfair Ng
- Plugin-marshall Lerner PizzaTransféré parMai Nam
- Practice Exam 1Transféré parMohammed Alaskar
- Important-Distribution 3 Load MetricsTransféré parmukumar3503
- DemandTransféré parJazzd Sy Gregorio
- Managing Demand and CapacityTransféré parDr Rushen Singh
- Pestel AnalysisTransféré parpateldpl3gmailcom
- Target CostingTransféré parapi-3701467
- Econ 362 Writing #1.pdfTransféré parMeg Darnell
- marketing plan StepsTransféré parinstrutech
- Industrial BuyingTransféré pardefs_0612
- Marketing Management Multiple Choice Questions Answers QuizTransféré parPrasanna Kumar
- Entrepreneurship.file.Transféré parAlessa Molijon

- Marketing (Chapter 10) - KotlerTransféré parMarcus Thong
- Pom 14 Inppt 19 CFTransféré parSyah Adan
- Ch01.Ppt OverviewTransféré parMohammadYaqoob
- Ch04.Ppt-Level of Interest RatesTransféré parMohammadYaqoob
- Chapter 1Transféré parMohammadYaqoob
- 12Transféré parMohammadYaqoob
- test bank ch8Transféré parMohammadYaqoob
- T.B - CH01Transféré parMohammadYaqoob
- T.B - CH09Transféré parMohammadYaqoob
- Auditing Test Bank Chapter 9Transféré parMohammadYaqoob
- pom_14_inppt_08Transféré parMohammadYaqoob
- T.B - CH10Transféré parMohammadYaqoob
- Pom 14 Inppt 20 CFTransféré parSyah Adan
- T.B - CH02Transféré parMohammadYaqoob

- Safety Equipment_Protective Clothing - King's SafetynetTransféré parLanceKevin
- Inglés Segundo PeriodoTransféré parSedeElLago
- Return on InvestmentTransféré parAli Ezzat
- Case Study 1Transféré parMay-AnnJoyRedoña
- DHL Public Tracking Internal Communication Finalv1.3Transféré parnindyarie
- LongTransféré parGem Kristel Manay
- Create a Perceptual MapTransféré parRocio Donis
- Accounting Principle Kieso 8e_Ch02Transféré parSania M. Jayanti
- Managing InnovationTransféré parMas Tri
- Cotton King Industrial visit baramati.docxTransféré parOshoo
- The Advantages of Using Management Accounting.docxTransféré parKrunal Gilitwala
- avanaa 25 26 3Transféré parPraveen Kumar
- 028-CGFTMSETransféré parNavneet Mayank
- Types of CargoesTransféré parShephard Jack
- Internal HrTransféré parpatahul
- Coke vs Pepsi (1)Transféré paranirban_kaushik
- Relation Betwwen Yarn Count and Fabric GSM and About Accessories and Trimmings of BangladeshTransféré parAkanda Rasel
- Industry Outlook AssignmentTransféré parJohn Tran
- AmtrakTransféré parRitesh Singh
- 85774Transféré parelecompinn
- Case Memo of Aqualissa- Gp KapfererTransféré parSohini Mo Banerjee
- NSCB - Sexy Statistics - Understanding Income as Measured From GDP, GNI and NDITransféré parJustin Nicolas
- Macroeconomics 2 ISLM ModelTransféré parDanilo Scodellaro
- tleTransféré parDiana Capadosa
- 12th ACCOUNTANCY 12 Marks upto 3rd Lesson - EM.pdfTransféré parSekar M
- ACC 557 Week 3, Quiz (1)Transféré paracurashah
- Amazon Programming and Technical Interview QuestionsTransféré parNithin Rajendhran
- Economics 102 Lecture 8 Ways to Measure Utility RevTransféré parNoirAddict
- Nabunturan TransactionTransféré parJulius D Umali
- 108Transféré parM Nabil Amin