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Exam 18: Pricing Decisions

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Question 21

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Which of the following items are included in the cost base under the absorption approach to cost-plus pricing?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

E) A) and C)
F) A) and D)

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Question 22

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Hanisch Corporation would like to use target costing for a new product it is considering introducing. At a selling price of $22 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 14%. The target cost per unit is closest to:

A) $22.00
B) $23.80
C) $20.88
D) $25.08

E) A) and D)
F) A) and C)

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Question 23

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Management of Thebeau, Inc., is considering a new product that would have a selling price of $72 per unit and projected sales of 40,000 units. The new product would require an investment of $600,000. The desired return on investment is 19%. Required: Determine the target cost per unit for the new product.

Olivier Industries Inc. has developed a new instrument, model AG-06, that is designed to offer superior performance to a comparable instrument sold by Olivier's main competitor. The competing instrument sells for $74,000 and needs to be replaced after 1,000 hours of use. It also requires $7,000 of preventive maintenance during its useful life. Model AG-06's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 4,000 hours of use and it requires $14,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what is the differentiation value offered by model AG-06 relative to the competitor's offering for each 4,000 hours of usage?

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 be attained regardless of how many units are actually sold.

Attal Corporation manufactures numerous products, one of which is called Epsilon05. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Attal increases the price of Epsilon05 to $75.60, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $72.00? (Your answer should be rounded to the nearest 0.1%.)

Variable selling and administrative costs are excluded from the cost base used to set a selling price under the absorption approach to cost-plus pricing described in the text.

Companies that use value-based pricing establish selling prices based on the economic value of the benefits that their products and services provide to customers.

In target costing, the cost of a product is the starting point and the selling price follows from the cost.

Wermers Industries Inc. has developed a new drill press, model LS-88, that is designed to offer superior performance to a comparable drill press sold by Wermers's main competitor. The competing drill press sells for $31,000 and needs to be replaced after 1,000 hours of use. It also requires $6,000 of preventive maintenance during its useful life. ModelLS-88's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $7,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what is model LS-88's economic value to the customer over its 2,000 hour life?

Eytchison Industrial Products Inc. has developed a new industrial grinder, model OK-23, that is designed to offer superior performance to a comparable grinder sold by Eytchison's main competitor. The competing grinder sells for $33,000 and needs to be replaced after 1,000 hours of use. It also requires $6,000 of preventive maintenance during its useful life. Model OK-23's performance capabilities are similar to the competing grinder with two important exceptions-it needs to be replaced only after 3,000 hours of use and it requires $12,000 of preventive maintenance during its useful life. Required: From a value-based pricing standpoint what is model OK-23's economic value to the customer over its 3,000 hour life?

Shoun Mechanical Corporation has developed a new industrial grinder-model QJ-47-that has been designed to outperform a competitor's best-selling industrial grinder. Model QJ-47 has a useful life of 120,000 hours of service and its operating cost is $0.60 per hour. In contrast, the competitor's product has a useful life of 30,000 hours of service and has operating costs that average $0.90 per hour. The competitor's industrial grinder sells for $129,000. Shoun has not yet established a selling price for model QJ-47. From a value-based pricing standpoint what range of possible prices should Shoun consider when setting a price for QJ-47?

Wenner Corporation would like to use target costing for a new product it is considering introducing. At a selling price of $44 per unit, management projects sales of 10,000 units. The new product would require an investment of $900,000. The desired return on investment is 10%. The desired profit according to the target costing calculations is:

Chruch Corporation manufactures numerous products, one of which is called Tau-42. The company has provided the following data about this product: Management is considering decreasing the price of Tau-42 by 6%, from $64.00 to $60.16. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 60,000 units to 66,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Tau-42 earn at a price of $60.16 if this sales forecast is correct?

The management of Musselman 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 $1,305,000 and has a required return on investment of 10%. The absorption costing unit product cost is:

Morice Industries Inc. has developed a new injection mold, model IA-05, that is designed to offer superior performance to a comparable injection mold sold by Morice's main competitor. The competing injection mold sells for $54,000 and needs to be replaced after 1,000 hours of use. It also requires $7,000 of preventive maintenance during its useful life. Model IA-05's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $8,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what is the reference value that Morice should consider when pricing model IA-05?

Kopec Corporation manufactures numerous products, one of which is called Delta42. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. How many units of product Delta42 would Kopec need to sell at a price of $60.50 to earn the same net operating income that it currently earns at a price of $55.00? (Round your answer up to the nearest whole number.)

Quamma 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 23,000 units per year. The company has invested $280,000 in this product and expects a return on investment of 8%. Required: a. Compute the markup on absorption cost. b. Compute the selling price of the product using the absorption costing approach.

Lodholz Corporation would like to use target costing for a new product that is under consideration. At a selling price of $93 per unit, management projects sales of 10,000 units. The new product would require an investment of $900,000. The desired return on investment is 17%. Required: Determine the target cost per unit for the new product.

The markup over cost under the absorption costing approach would decrease if the unit product cost increases, holding everything else constant.