Appendix A PricingAppendix A Pricing968Garrison, Managerial Accounting, Eleventh EditionGarrison, Managerial Accounting, Eleventh Edition969True/False Questions1.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. Answer: True Level: Medium LO: 1 2.The sensitivity of unit sales to changes in price is called the price elasticity of demand. Answer: True Level: Easy LO: 1 3.If the formula for the markup percentage on absorption cost is used when setting prices, then the company's desired return on investment (ROI) will be attained regardless of how many units are actually sold. Answer: False Level: Medium LO: 2 4.In the absorption approach to cost-plus pricing, the anticipated markup in dollars will be equal to the anticipated profit. Answer: False Level: Easy LO: 2 5.If a company uses the absorption costing approach to setting prices, it should be able to avoid incurring operating losses. Answer: False Level: Medium LO: 2 6.Under the absorption approach to costs-plus pricing described in the text, selling, general, and administrative costs are not included in the cost base when computing a selling price. Answer: True Level: Easy LO: 2 7.Target costing involves adding a target profit per unit to actual unit cost to determine the selling price. Answer: False Level: Medium LO: 3 8.In target costing, a product or service is designed with the goal of meeting a certain predetermined cost. Answer: True Level: Easy LO: 3 9."Cost-plus" pricing means that all costs--manufacturing, selling, and administrative--are included in the cost base from which the target selling price is derived. Answer: False Level: Medium LO: 4 10.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. Answer: False Level: Medium LO: 4 Multiple Choice Questions11.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. Answer: C Level: Medium LO: 1,2 12.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. Answer: A Level: Hard LO: 1,2 13.Which of the following items are included in the markup under the absorption approach to cost-plus pricing described in the text?Variable CostFixed CostDesiredProductionSellingProductionSellingProfitA)YesNoYesNoYesB)NoYesNoYesYesC)NoNoYesYesYesD)NoYesNoYesNoAnswer: B Level: Medium LO: 2 14.In implementing the target costing approach, which of the following areas should be involved in keeping actual costs within the target cost? A)manufacturing B)distribution C)after-sales service D)all of the above Answer: D Level: Easy LO: 3 15.Which of the following methods would probably be the most beneficial to a company that has little or no control over the price that it can charge for its product or service? A)cost-plus pricing, absorption approach B)cost-plus pricing, contribution approach C)time and material pricing D)target costing Answer: D Level: Easy LO: 3 16.The formula for target cost is: A)anticipated selling price - desired profit. B)cost + (markup percentage x cost) C)volume in units x unit cost traceable to product D)(desired return on assets employed + selling, general, and administrative expenses)/(volume in units x unit product cost) Answer: A Level: Easy LO: 3 17.Firebaugh Company's management believes that every 9% increase in the selling price of one of the company's products results in a 10% decrease in the product's total unit sales. The variable production cost of this product is $12.60 per unit and the variable selling and administrative cost is $4.90 per unit.The product's profit-maximizing price according to the formula in the text is closest to: A)$104.20 B)$19.11 C)$20.83 D)$96.12 Answer: D Level: Medium LO: 1 18.Gorman Company's management has found that every 4% decrease in the selling price of one of the company's products leads to a 6% increase in the product's total unit sales. The product's absorption costing unit product cost is $23.60. The variable production cost of the product is $2.80 per unit and the variable selling and administrative cost is $6.30 per unit.According to the formula in the text, the product's profit-maximizing price is closest to: A)$29.04 B)$30.39 C)$31.06 D)$78.82 Answer: B Level: Medium LO: 1 19.Inman Company 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.Selling PriceUnit Sales$50.002,100$51.001,990The product's variable cost is $18.00 per unit.According to the formula in the text, the product's profit-maximizing price is closest to: A)$29.99 B)$19.30 C)$29.13 D)$28.48 Answer: D Level: Medium LO: 1 20.Erhardt Company's management believes that every 5% increase in the selling price of one of the company's products leads to a 8% decrease in the product's total unit sales. The product's price elasticity of demand as defined in the text is closest to: A)-2.41 B)-1.25 C)-1.99 D)-1.71 Answer: D Level: Easy LO: 1 21.Harra Company 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.Selling PriceUnit Sales$70.001,800$67.001,930The product's price elasticity of demand as defined in the text is closest to: A)-1.99 B)-1.59 C)-1.54 D)-1.53 Answer: B Level: Medium LO: 1 22.Kirchoff, Inc., manufactures a product with the following costs:Per UnitPer YearDirect materials$18.00Direct labor$11.90Variable manufacturing overhead$2.10Fixed manufacturing overhead$1,422,000Variable SG&A expenses$3.60Fixed SG&A expenses$1,540,500The 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 79,000 units per year.The company has invested $420,000 in this product and expects a return on investment of 15%.The selling price based on the absorption costing approach described in the text would be closest to: A)$108.04 B)$73.90 C)$47.29 D)$73.10 Answer: B Level: Medium LO: 2 23.Magnussen, 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 45,000 units next year, the unit product cost of a particular product is $15.60. The company's selling, general, and administrative expenses for this product are budgeted to be $1,035,000 in total for the year. The company has invested $280,000 in this product and expects a return on investment of 11%.The selling price for this product based on the absorption costing approach described in the text would be closest to: A)$39.28 B)$17.32 C)$97.20 D)$38.60 Answer: A Level: Medium LO: 2 24.Cost data relating to the single product produced by the Arby Company are given below:Per UnitTotalDirect materials$6Direct labor$4Variable manufacturing overhead$2Fixed manufacturing overhead$160,000Variable selling, general and administrative expense$2Fixed selling, general and administrative expenses$120,000The Arby Company uses the absorption costing approach described in the text and has a desired markup of 75%. If the company can produce and sell 20,000 units each period, the selling price per unit would be: A)$28.00 B)$35.00 C)$24.50 D)$36.00 Answer: B Level: Medium LO: 2 25.Delsey Company manufactures product X which has a selling price of $48 per unit. Unit costs associated with the manufacture and sale of product X based on 30,000 units manufactured and sold each year are:Direct materials$10Direct labor$6Variable manufacturing overhead$5Fixed manufacturing overhead$9Variable selling, general, and administrative expenses$3Fixed selling, general, and administrative expenses$8The company uses the absorption costing approach to cost-plus pricing described in the text. The percentage markup being used to determine the selling price for product X is: A)100.0% B)37.5% C)60.0% D)40.0% Answer: C Level: Hard LO: 2 26.Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of product Y:Number of units sold annually20,000Required investment in assets$400,000Unit product cost$25Selling, general, and administrative expenses$130,000If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 15% rate of return on investment (ROI), the required markup on absorption cost for product Y would be: A)12% B)15% C)26% D)38% Answer: D Level: Medium LO: 2 27.Jaakola Corporation makes a product with the following costs:Per UnitPer YearDirect materials$17.00Direct labor$22.00Variable manufacturing overhead$4.00Fixed manufacturing overhead$504,000Variable SG&A expenses$4.90Fixed SG&A expenses$319,200The 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 28,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 15%. The markup on absorption cost would be closest to: A)27.1% B)29.9% C)84.3% D)15.0% Answer: B Level: Medium LO: 2 28.Laduca 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 85,000 units next year, the unit product cost of a particular product is $30.60. The company's selling, general, and administrative expenses for this product are budgeted to be $926,500 in total for the year. The company has invested $580,000 in this product and expects a return on investment of 11%. The markup on absorption cost for this product would be closest to: A)12.0% B)38.1% C)11.0% D)46.6% Answer: B Level: Medium LO: 2 29.Sawit Company, a manufacturer of woodworking tools, wants to introduce a new 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)$15.50 B)$1.50 C)$14.00 D)$12.50 Answer: D Level: Easy LO: 3 Use the following to answer questions 30-32:Diep Company makes a product with the following costs:Per UnitPer YearDirect materials$15.70Direct labor$19.70Variable manufacturing overhead$3.50Fixed manufacturing overhead$1,146,600Variable SG&A expenses$2.00Fixed SG&A expenses$984,900The 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 49,000 units per year.The company has invested $340,000in this product and expects a return on investment of 9%.Direct labor is a variable cost in this company. 30.The markup on absorption cost is closest to: A)118.6% B)36.5% C)35.5% D)9.0% Answer: B Level: Medium LO: 2 31.The selling price based on the absorption costing approach is closest to: A)$84.40 B)$85.02 C)$53.09 D)$115.19 Answer: B Level: Medium LO: 2 32.If every 10% increase in price leads to a 16% decrease in quantity sold, the profit-maximizing price is closest to: A)$95.02 B)$90.22 C)$85.81 D)$84.40 Answer: B Level: Medium LO: 1 Use the following to answer questions 33-34:Amerio Corporation's vice president in charge of marketing believes that every 8% decrease in the selling price of one of the company's products would lead to a 26% increase in the product's total unit sales. The product's absorption costing unit product cost is $18.20. The variable production cost is $1.90 per unit and the variable selling and administrative cost is $2.30 per unit. 33.The product's price elasticity of demand as defined in the text is closest to: A)-2.82 B)-4.41 C)-2.00 D)-1.79 Answer: A Level: Medium LO: 1 34.The product's profit-maximizing price according to the formula in the text is closest to: A)$33.77 B)$3.60 C)$2.97 D)$6.57 Answer: D Level: Medium LO: 1 Use the following to answer questions 35-36:Bloomburg Company's management believes that every 9% decrease in the selling price of one of the company's products would lead to a 15% increase in the product's total unit sales. The product's variable cost is $11.80 per unit. 35.The product's price elasticity of demand as defined in the text is closest to: A)-1.12 B)-1.34 C)-1.61 D)-1.48 Answer: D Level: Easy LO: 1 36.The product's profit-maximizing price according to the formula in the text is closest to: A)$31.19 B)$46.07 C)$106.31 D)$36.28 Answer: D Level: Easy LO: 1 Use the following to answer questions 37-38:Clyde Company 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.Selling PriceUnit Sales$78.008,400$85.006,720The product's variable cost is $19.20 per unit. 37.The product's price elasticity of demand as defined in the text is closest to: A)-1.83 B)-2.50 C)-2.60 D)-3.04 Answer: C Level: Easy LO: 1 38.The product's profit-maximizing price according to the formula in the text is closest to: A)$42.47 B)$31.23 C)$28.62 D)$32.03 Answer: B Level: Easy LO: 1 Use the following to answer questions 39-40:Metler Company makes a number of products, including Product Q. The company produces and sells 20,000 units of Product Q each year. The costs of Product Q at that activity level are:Per UnitTotalVariable production costs$15Fixed production costs$10$200,000Variable selling, general, and administrative costs$3Fixed selling, general, and administrative costs$9$180,000Metler Company uses the absorption costing approach to cost-plus pricing as described in the text. 39.Assume that the company uses a markup of 80% in order to determine selling prices. The selling price for Product Q using the absorption costing approach would be: A)$32.40 B)$45.00 C)$37.00 D)$66.60 Answer: B Level: Medium LO: 2 40.Assume that the company has not yet determined a markup. Product Q requires an investment of $400,000. The company desires a 30% rate of return on investment. The markup for Product Q under the absorption costing approach to cost-plus pricing would be: A)100.0% B)76.0% C)72.0% D)80.0% Answer: C Level: Medium LO: 2 Use the following to answer questions 41-42:Eddings Company uses the absorption costing approach to cost-plus pricing as described in the text to set prices for its products. Based on budgeted sales of 21,000 units next year, the unit product cost of a particular product is $41.00. The company's selling, general, and administrative expenses for this product are budgeted to be $522,900 in total for the year. The company has invested $480,000 in this product and expects a return on investment of 11%. 41.The markup on absorption cost for this product would be closest to: A)60.7% B)11.0% C)66.9% D)71.7% Answer: C Level: Easy LO: 2 42.The selling price based on the absorption costing approach for this product would be closest to: A)$68.41 B)$65.90 C)$45.51 D)$109.96 Answer: A Level: Easy LO: 2 Essay Questions43.Quinn Company makes a product that has the following costs:Per UnitPer YearDirect materials$13.30Direct labor$23.00Variable manufacturing overhead$2.30Fixed manufacturing overhead$366,000Variable SG&A expenses$3.70Fixed SG&A expenses$336,000The 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 20,000 units per year.The company has invested $100,000 in this product and expects a return on investment of 12%.Required:Compute the markup on absorption cost.Compute the selling price of the product using the absorption costing approach.Assume that every 10% increase in price leads to a 12% decrease in quantity sold. Assuming no change in cost structure and that direct labor is a variable cost, compute the profit-maximizing price. Level: Hard LO: 1,2 Answer: a.Direct materials$13.30Direct labor23.00Variable manufacturing overhead2.30Fixed manufacturing overhead18.30Unit product cost$56.90Markup on absorption cost = [(12% $100,000) +($3.70 20,000 + $336,000)] (20,000 $56.90)= [($12,000) + ($410,000)] $1,138,000 = 37.08%Target selling price = $56.90 + 37.08% $56.90 = $78.00Price elasticity of demand= ln(1+%change in quantity sold)/ln(1+%change in price)= ln(1 + -12%)/ln(1 + 10%) = -1.34Profit-maximizing price = (d/(1+ d))*Variable cost per unit= (-1.34/(1+(-1.34)))*$42.30 = (3.93)*$42.30 = $166.26 44.Niccola Corporation's marketing manager believes that every 5% decrease in the selling price of one of the company's products would lead to a 7% increase in the product's total unit sales. The product's absorption costing unit product cost is $22.90. The variable production cost is $17.50 per unit and the variable selling and administrative cost is $1.10.Required:Compute the product's price elasticity of demand as defined in the text.Compute the product's profit-maximizing price according to the formula in the text. Level: Medium LO: 1 Answer: Price elasticity of demand= ln(1+%change in quantity sold)/ln(1+%change in price)= ln(1 + 7%)/ln(1 + -5%) = -1.32Profit-maximizing price = (d/(1+ d))*Variable cost per unit= (-1.32/(1+(-1.32)))*($17.50 +$1.10) = (4.13)*$18.60 = $76.90 45.Okeefe Company's management believes that every 8% increase in the selling price of one of the company's products would lead to a 19% decrease in the product's total unit sales. The variable cost per unit of this product is $42.60.Required:Compute the product's price elasticity of demand as defined in the text.Compute the product's profit-maximizing price according to the formula in the text. Level: Easy LO: 1 Answer: Price elasticity of demand= ln(1+%change in quantity sold)/ln(1+%change in price)= ln(1 + -19%)/ln(1 + 8%) = -2.74Profit-maximizing price = (d/(1+ d))*Variable cost per unit= (-2.74/(1+(-2.74)))*$42.60 = (1.58)*$42.60 = $67.11 46.Pasin 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.Selling PriceUnit Sales$62.008,800$56.0011,230The product's variable cost is $22.80 per unit.Required:Compute the product's price elasticity of demand as defined in the text.Compute the product's profit-maximizing price according to the formula in the text. Level: Medium LO: 1 Answer: % change in quantity = 27.61%; % change in price = -9.68%Price elasticity of demand == ln(1+%change in quantity sold)/ln(1+%change in price)= ln(1 + 27.61%)/ln(1 + -9.68%) = -2.40Profit-maximizing price = (d/(1+ d))*Variable cost per unit= (-2.40/(1+(-2.40)))*$22.80 = (1.72)*$22.80 = $39.14 47.Hill Company is contemplating the introduction of a new product. The company has gathered the following information concerning the product:Number of units to be produced and sold each year10,000Investment required by the company$200,000Projected unit manufacturing cost$30Projected annual selling, general, and administrative expenses$40,000Desired rate of return on investment10%The company uses the absorption costing approach to cost-plus pricing as described in the text.Required:Compute the markup.Compute the selling price.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. Level: Medium LO: 2 Answer: Markup percentage = [(10% $200,000) + $40,000]/[10,000 $30]= $60,000 $300,000 = 20%b.Target selling price:Unit manufacturing cost$30Markup (20%)6Target selling price$36No, sales volume may be less than the 10,000 units projected annually, resulting in inadequate contribution margin to cover fixed costs, and a consequent loss for the company on the product. 48.Rivera Corporation manufactures a product that has the following costs:Per UnitPer YearDirect materials$16.70Direct labor$11.60Variable manufacturing overhead$3.90Fixed manufacturing overhead$359,100Variable SG&A expenses$3.10Fixed SG&A expenses$438,900The 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 21,000 units per year.The company has invested $160,000 in this product and expects a return on investment of 10%.Required:a. Compute the markup on absorption cost.b. Compute the selling price of the product using the absorption costing approach. Level: Medium LO: 2 Answer: a.Direct materials$16.70Direct labor11.60Variable manufacturing overhead3.90Fixed manufacturing overhead17.10Unit product cost$49.30Markup on absorption cost = [(10% $160,000) +($3.10 21,000 + $438,900)] (21,000 $49.30)= [($16,000) + ($504,000)] $1,035,300 = 50.23%Target selling price = $49.30 + 50.23% $49.30 = $74.06 49.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. Level: Medium LO: 3 Answer: Sales($79 per unit 250,000 units)$19,750,000Less: desired return on investment (20% $20,000,000)4,000,000Target cost$15,750,000Target cost per unit = $15,750,000 250,000 units = $63 per unit