Appendix A Pricing Products and Services
True/False Questions
1. The price elasticity of demand is used to determine the markup over cost when
computing the profit-maximizing price.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
2. Assume that the price elasticity of demand is less than -1. If the absolute value of the
price elasticity of demand increases, the profit-maximizing price increases.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 1
AICPA BB: Critical Thinking
Level: Hard
3. If the unit sales for one product are more sensitive to price increases than another
product, then its markup over variable cost should be more than for the other product
if the company wants to maximize profit.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 1
AICPA BB: Critical Thinking
Level: Medium
4. Demand for a product is said to be elastic if a change in price has little effect on the
number of units sold.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
5. The demand for products that are sold in discount stores is generally less elastic than
the demand for products sold in upscale boutiques.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 1
AICPA BB: Critical Thinking
Level: Medium
6. The price elasticity of demand can be estimated using the formula ln(1 + percentage
change in quantity sold)/ln(1 + percentage change in selling price).
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-3
Appendix A Pricing Products and Services
7. Under the absorption approach to cost-plus pricing described in the text, all fixed costs
are included in the cost base in setting a selling price.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 2
AICPA BB: Critical Thinking
Level: Medium
8. The absorption costing approach to cost-plus pricing will result in attaining the
company's required rate of return only if forecasted unit sales are realized.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 2
AICPA BB: Critical Thinking
Level: Medium
9. The markup over cost under the absorption costing approach would decrease if the
required rate of return increases, holding everything else constant.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 2
AICPA BB: Critical Thinking
Level: Medium
10. The markup over cost under the absorption costing approach would decrease if the
unit product cost increases, holding everything else constant.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 2
AICPA BB: Critical Thinking
Level: Hard
11. Holding all other things constant, an increase in variable production costs will affect:
A) the markup under the absorption costing approach to cost-plus pricing.
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.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1; 2 Level: Hard
A-4
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Appendix A Pricing Products and Services
Multiple Choice Questions
12. Holding all other things constant, an increase in fixed production costs will affect:
A) the markup under the absorption costing approach to cost-plus pricing.
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.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1; 2 Level: Hard
13. Holding all other things constant, if fixed costs increase, the profit-maximizing price
will:
A) increase.
B) decrease.
C) remain the same.
D) The effect cannot be determined.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Hard
14. 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.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
15. Which of the following items are included in the cost base under the absorption
approach to cost-plus pricing?
A)
B)
C)
D)
Variable Cost
Production Selling
Yes
Yes
No
Yes
Yes
Yes
Yes
No
Fixed Cost
Production Selling
Yes
No
No
Yes
No
No
Yes
No
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-5
Appendix A Pricing Products and Services
16. Fipps Company's management believes that every 7% increase in the selling price of
one of the company's products results in a 12% decrease in the product's total unit
sales. The variable production cost of this product is $38.00 per unit and the variable
selling and administrative cost is $5.00 per unit.
The product's profit-maximizing price according to the formula in the text is closest
to:
A) $47.82
B) $51.17
C) $99.78
D) $91.35
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Price elasticity of demand
= ln(1 + % change in quantity sold)/ln(1 + % change in price)
= ln(1 + −12%)/ln(1 + 7%) = −1.8894
Profit maximizing markup on variable cost
= -1/(1+ed) = −1/(1+(-1.8894)) = 1.1244
Profit-maximizing price = (1+ Profit-maximizing markup on variable cost)*Variable
cost per unit = (1 + 1.1244)*($38 + $5) = (2.1244)*$43 = $91.35 (rounded)
17. Goren Company's management has found that every 3% decrease in the selling price
of one of the company's products leads to a 8% increase in the product's total unit
sales. The product's absorption costing unit product cost is $12.70. The variable
production cost of the product is $1.20 per unit and the variable selling and
administrative cost is $4.30 per unit.
According to the formula in the text, the product's profit-maximizing price is closest
to:
A) $9.10
B) $21.02
C) $9.62
D) $15.43
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
A-6
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Appendix A Pricing Products and Services
Solution:
Price elasticity of demand
= ln(1 + % change in quantity sold)/ln(1 + % change in price)
= ln(1 + 8%)/ln(1 + −3%) = ln(1.08)/ln(0.97) = −2.5267
Profit maximizing markup on variable cost
= −1/(1+ed) = −1/(1 + (−2.5267)) = 0.6550
Profit-maximizing price = (1+ Profit-maximizing markup on variable cost)*Variable
cost per unit = (1 + 0.6550)*($1.20 + $4.30) = (1.6550)*$5.50 = $9.10
18. Inoye 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 Price Unit Sales
$36.00
2,500
$37.00
2,350
The product's variable cost is $21.00 per unit.
According to the formula in the text, the product's profit-maximizing price is closest
to:
A) $39.91
B) $22.84
C) $38.81
D) $37.71
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Percent change in price = ($37.00 − $36.00)/$36.00 = 2.78%
Percent change in total unit sales = (2,350 − 2,500)/2,500 = -6%
Price elasticity of demand
= ln(1 + % change in quantity sold)/ln(1 + % change in price)
= ln(1 + −6%)/ln(1 + 2.78%) = −2.2565
Profit maximizing markup on variable cost
= −1/(1 + ed) = -1/(1 + (−2.2565)) = 0.7959
Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)*Variable
cost per unit = (1 + 0.7959)*$21.00 = (1.7959)*$21.00 = $37.71
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
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Appendix A Pricing Products and Services
19. Ericksen Company's management believes that every 7% decrease in the selling price
of one of the company's products leads to a 19% increase in the product's total unit
sales. The product's price elasticity of demand as defined in the text is closest to:
A) -1.39
B) -2.88
C) -2.40
D) -1.83
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Price elasticity of demand
= ln(1 + % change in quantity sold)/ln(1 + % change in price)
= ln(1 + 19%)/ln(1 + −7%) = -2.40
20. Haptas 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 Price Unit Sales
$24.00
6,900
$25.00
6,600
The product's price elasticity of demand as defined in the text is closest to:
A) −1.04
B) −1.13
C) −1.09
D) −1.10
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Percent change in price = ($24 − $25)/$25 = −4%
Percent change in total unit sales = (6,900 − 6,600)/6,600 = −4.545%
Price elasticity of demand
= ln(1 + % change in quantity sold)/ln(1 + % change in price)
= ln(1 + 4.545%)/ln(1 + -4%) = −1.09
A-8
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Appendix A Pricing Products and Services
21. Willow Company manufactures and sells 20,000 units of Product Z each year. In order
to produce and sell this many units, it has been necessary for the company to make an
investment of $500,000 in Product Z. The company requires a 20% rate of return on
all investments in products. Selling and administrative expenses associated with
Product Z total $200,000 per year. The unit product cost of Product Z is $20. The
company uses the absorption costing approach to cost-plus pricing described in the
text. The selling price for Product Z is:
A) $25.00
B) $30.00
C) $35.00
D) $40.00
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
Markup on absorption cost = [(20% × $500,000) + $200,000] ÷ ($20.00 × 20,000)
= [$100,000 + $200,000] ÷ $400,000 = 75.00%
Target selling price = $20.00 + (75.00% × $20.00) = $35.00
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
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Appendix A Pricing Products and Services
22. Kirk, Inc., manufactures a product with the following costs:
Direct materials .....................................................
Direct labor ...........................................................
Variable manufacturing overhead .........................
Fixed manufacturing overhead ..............................
Variable selling and administrative expenses .......
Fixed selling and administrative expenses ............
Per unit
$17.40
$15.10
$4.10
Per year
$696,600
$2.90
$761,400
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
54,000 units per year.
The company has invested $420,000 in this product and expects a return on
investment of 12%.
The selling price based on the absorption costing approach would be closest to:
A) $67.43
B) $49.86
C) $90.59
D) $66.50
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Direct materials .........................................
Direct labor ...............................................
Variable manufacturing overhead .............
Fixed manufacturing overhead..................
Unit product cost .......................................
$17.40
15.10
4.10
12.90
$49.50
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
Markup on absorption cost = [(12% × $420,000) +
($2.90 × 54,000 + $761,400)] ÷ ($49.50 × 54,000)
= [$50,400 + $918,000] ÷ $2,673,000 = 36.23%
Target selling price = $49.50 + (36.23% × $49.50) = $67.43
A-10
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Appendix A Pricing Products and Services
23. Mahaffey, 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 56,000 units next
year, the unit product cost of a particular product is $63.40. The company's selling and
administrative expenses for this product are budgeted to be $1,237,600 in total for the
year. The company has invested $540,000 in this product and expects a return on
investment of 8%.
The selling price for this product based on the absorption costing approach would be
closest to:
A) $86.27
B) $85.50
C) $68.47
D) $116.34
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Unit sales]
Markup on absorption cost
= [(8% × $540,000) + $1,237,600] ÷ ($63.40 × 56,000)
= [$43,200 + $1,237,600] ÷ $3,550,400 = 36.07%
Target selling price = $63.40 + (36.07% × $63.40) = $86.27
24. Perkins Company estimates that an investment of $500,000 would be needed to
produce and sell 25,000 units of Product A each year. At this level of activity, the unit
product cost would be $40. Selling and administrative expenses would total $300,000
each year. The company uses the absorption costing approach to cost-plus pricing
described in the text. If a 20% rate of return on investment is desired, then the required
markup for Product A would be:
A) 10%
B) 20%
C) 30%
D) 40%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-11
Appendix A Pricing Products and Services
Solution:
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
Markup on absorption cost = [(20% × $500,000) + $300,000] ÷ ($40 × 25,000)
= [$100,000 + $300,000] ÷ $1,000,000 = 40%
25. The following information is available on Morton Company's Product B:
Number of units sold each year ........
Unit product cost ..............................
Investment in the product line ..........
Required return on investment .........
40,000
$25
$850,000
20%
The company uses the absorption costing approach to cost-plus pricing described in
the text and a 60% markup. Based on these data, the company's total selling and
administrative expenses associated with Product B each year are:
A) $625,000
B) $600,000
C) $510,000
D) $430,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
Solution:
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(20% × $850,000) + Selling and administrative expenses] ÷ [$25 × 40,000] = 60%
= [$170,000 + Selling and administrative expenses] ÷ $1,000,000 = 60%
$170,000 + Selling and administrative expenses = $600,000
Selling and administrative expenses = $430,000
A-12
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Appendix A Pricing Products and Services
26. Jaap Corporation makes a product with the following costs:
Direct materials .....................................................
Direct labor ............................................................
Variable manufacturing overhead .........................
Fixed manufacturing overhead ..............................
Variable selling and administrative expenses .......
Fixed selling and administrative expenses ............
Per unit
$12.50
$13.10
$3.80
Per year
$1,314,500
$2.50
$869,000
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
55,000 units per year.
The company has invested $200,000 in this product and expects a return on
investment of 8%.
The markup on absorption cost would be closest to:
A) 144.5%
B) 8.0%
C) 34.3%
D) 34.9%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
The unit product cost is:
Direct materials........................................................................
Direct labor ..............................................................................
Variable manufacturing overhead............................................
Fixed manufacturing overhead ($1,314,500 ÷ 55,000 units)...
Unit product cost .....................................................................
$12.50
13.10
3.80
23.90
$53.30
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(8% × $200,000) + ($2.50 × 55,000 + $869,000)] ÷ [$53.30 × 55,000] = 34.9%
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-13
Appendix A Pricing Products and Services
27. Laflam 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 55,000
units next year, the unit product cost of a particular product is $53.60. The company's
selling and administrative expenses for this product are budgeted to be $709,500 in
total for the year. The company has invested $100,000 in this product and expects a
return on investment of 15%.
The markup on absorption cost for this product would be closest to:
A) 24.1%
B) 15.0%
C) 24.6%
D) 39.1%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(15% × $100,000) + $709,500] ÷ [$53.60 × 55,000] = 24.6%
28. Hieko Company, a manufacturer of moderate-priced time pieces, would like to
introduce a new electronic watch. To compete effectively, the watch could not be
priced at more than $30. The company requires a return on investment of 15% on all
new products. The plan is to produce and sell 25,000 watches each year. This would
require a $500,000 investment. The target cost per watch would be:
A) $27.00
B) $20.00
C) $21.50
D) $23.00
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Projected sales (25,000 units × $30 per unit) .............. $750,000
Less desired profit (15% × $500,000) .........................
75,000
Target cost for 25,000 units ......................................... $675,000
Target cost per unit ($675,000 ÷ 25,000 units) ...........
$27.00
A-14
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29. Home Products, Inc., is planning the introduction of a new food dryer. To compete
effectively, the dryer would have to be priced at no more than $40 per unit. An
investment of $600,000 would have to be made in order to produce and sell the new
dryer. The company requires a return on investment of at least 25% on new products.
Assuming that the company expects to produce and sell 30,000 dryers per year, the
target cost per dryer would be closest to:
A) $18.00
B) $35.00
C) $20.00
D) $24.67
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Projected sales (30,000 units × $40 per unit) ..............
Less desired profit (25% × $600,000) .........................
Target cost for 30,000 units ........................................
Target cost per unit ($1,050,000 ÷ 30,000 units) ........
$1,200,000
150,000
$1,050,000
$35.00
30. Aldose Candy Company is implementing a target costing approach for its latest new
product, the “Big Glob” candy bar. The following information relates to the Big Glob
project:
Target cost per candy bar ......................................
Expected annual sales (in units) of candy bars......
Required investment in additional assets ..............
Desired return on investment ................................
$0.30
400,000
$800,000
20%
Based on this information, what is Aldose's target selling price per bar for the Big
Glob?
A) $0.46
B) $0.50
C) $0.55
D) $0.70
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-15
Appendix A Pricing Products and Services
Solution:
(Expected annual sales in units × Target selling price) − (Desired return on investment
× Required investment)
= (400,000 × Target selling price) − (20% × $800,000) = ($0.30 × 400,000)
= (400,000 × Target selling price) = $120,000 + $160,000
= (400,000 × Target selling price) = $280,000
Target selling price = $0.70
31. The management of Giammarino Corporation is considering introducing a new
product--a compact barbecue. At a selling price of $78 per unit, management projects
sales of 10,000 units. Launching the barbecue as a new product would require an
investment of $100,000. The desired return on investment is 11%. The target cost per
barbecue is closest to:
A) $86.58
B) $78.00
C) $76.90
D) $85.36
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Projected sales (10,000 units × $78 per unit) .............. $780,000
Less desired profit (11% × $100,000) .........................
11,000
Target cost for 10,000 units ......................................... $769,000
Target cost per unit ($769,000 ÷ 10,000 units) ...........
$76.90
32. 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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
A-16
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Solution:
Projected sales (50,000 units × $22 per unit) .............. $1,100,000
Less desired profit (14% × $400,000) .........................
56,000
Target cost for 50,000 units ......................................... $1,044,000
Target cost per unit ($1,044,000 ÷ 50,000 units) ........
$20.88
33. A new product, an automated crepe maker, is being introduced at Knutt Corporation.
At a selling price of $59 per unit, management projects sales of 70,000 units.
Launching the crepe maker as a new product would require an investment of
$500,000. The desired return on investment is 12%. The target cost per crepe maker is
closest to:
A) $59.00
B) $66.08
C) $58.14
D) $65.12
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Projected sales (70,000 units × $59 per unit) .............. $4,130,000
Less desired profit (12% × $500,000) .........................
60,000
Target cost for 70,000 units ......................................... $4,070,000
Target cost per unit ($4,070,000 ÷ 70,000 units) ........
$58.14
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
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Appendix A Pricing Products and Services
Use the following to answer questions 34-36:
Diercks Company makes a product with the following costs:
Direct materials .....................................................
Direct labor............................................................
Variable manufacturing overhead .........................
Fixed manufacturing overhead ..............................
Variable selling and administrative expenses .......
Fixed selling and administrative expenses ............
Per unit
$22.30
$11.00
$1.70
Per year
$1,360,800
$1.70
$733,600
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 56,000 units per year.
The company has invested $400,000 in this product and expects a return on investment of
12%.
Direct labor is a variable cost in this company.
34. The markup on absorption cost is closest to:
A) 25.0%
B) 114.2%
C) 26.4%
D) 12.0%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
The unit product cost is:
Direct materials........................................................................ $22.30
Direct labor .............................................................................. 11.00
Variable manufacturing overhead............................................
1.70
Fixed manufacturing overhead ($1,360,800 ÷ 56,000 units)... 24.30
Unit product cost ..................................................................... $59.30
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(12% × $400,000) + ($1.70 × 56,000 + $733,600)] ÷ [$59.30 × 56,000]
= [$48,000 + $828,800] ÷ $3,320,800 = 26.4%
A-18
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35. The selling price based on the absorption costing approach is closest to:
A) $74.10
B) $74.96
C) $44.24
D) $93.66
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
The unit product cost is:
Direct materials........................................................................ $22.30
Direct labor .............................................................................. 11.00
Variable manufacturing overhead............................................
1.70
Fixed manufacturing overhead ($1,360,800 ÷ 56,000 units)... 24.30
Unit product cost ..................................................................... $59.30
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(12% × $400,000) + ($1.70 × 56,000 + $733,600)] ÷ [$59.30 × 56,000]
= [$48,000 + $828,800] ÷ $3,320,800 = 26.4%
The target selling price is determined as follows:
Unit product cost ............... $59.30
Markup--26.4% ................. 15.66
Target selling price ............ $74.96
36. If every 10% increase in price leads to an 11% decrease in quantity sold, the profitmaximizing price is closest to:
A) $74.10
B) $203.00
C) $201.51
D) $192.18
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-19
Appendix A Pricing Products and Services
Solution:
Price elasticity of demand
= ln(1 + %change in quantity sold)/ln(1 + %change in price)
= ln(1 + −11%)/ln(1 + 10%) = −1.22268
Variable cost per unit = $22.30 + $11.00 + $1.70 +$1.70 = $36.70
Profit maximizing markup on variable cost = −1/(1 + ed) = −1/(1+(-1.22268)) =
4.4907
Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)*Variable
cost per unit = (1+4.4907)*$36.70 = (5.4907)*$36.70 = $201.51
Use the following to answer questions 37-38:
Alsberg Corporation's vice president in charge of marketing believes that every 2% decrease
in the selling price of one of the company's products would lead to a 3% increase in the
product's total unit sales. The product's absorption costing unit product cost is $12.90. The
variable production cost is $1.80 per unit and the variable selling and administrative cost is
$2.20 per unit.
37. The product's price elasticity of demand as defined in the text is closest to:
A) −1.46
B) −1.77
C) −1.76
D) −1.32
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Price elasticity of demand
= ln(1 + %change in quantity sold)/ln(1 + %change in price)
= ln(1 + 3%)/ln(1 + −2%) = −1.46
A-20
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Appendix A Pricing Products and Services
38. The product's profit-maximizing price according to the formula in the text is closest
to:
A) $5.69
B) $40.76
C) $6.95
D) $12.64
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Price elasticity of demand
= ln(1 + %change in quantity sold)/ln(1 + %change in price)
= ln(1 + 3%)/ln(1 + −2%) = −1.4631
Profit maximizing markup on variable cost = −1/(1 + ed) = −1/(1+(−1.4631)) = 2.16
Profit-maximizing price = (1+ Profit-maximizing markup on variable cost)*Variable
cost per unit = (1 + 2.16)*$4.00 = (3.16)*$4.00 = $12.64
Use the following to answer questions 39-40:
Boe Company's management believes that every 3% decrease in the selling price of one of the
company's products would lead to a 9% increase in the product's total unit sales. The product's
variable cost is $11.30 per unit.
39. The product's price elasticity of demand as defined in the text is closest to:
A) −2.33
B) −1.07
C) −2.83
D) −2.95
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Price elasticity of demand
= ln(1 + %change in quantity sold)/ln(1 + %change in price)
= ln(1 + 9%)/ln(1 + −3%) = −2.83
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-21
Appendix A Pricing Products and Services
40. The product's profit-maximizing price according to the formula in the text is closest
to:
A) $17.46
B) $183.77
C) $17.10
D) $19.81
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Price elasticity of demand
= ln(1 + %change in quantity sold)/ln(1 + %change in price)
= ln(1 + 9%)/ln(1 + −3%) = −2.83
Profit maximizing markup on variable cost = −1/(1 + ed) = −1/(1+(−2.83)) = 0.546
Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)*Variable
cost per unit = (1 + 0.546)*$11.30 = (1.546)*$11.30 = $17.46
Use the following to answer questions 41-42:
Coco 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 Price Unit Sales
$50.00
1,700
$47.00
1,900
The product's variable cost is $18.50 per unit.
A-22
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Appendix A Pricing Products and Services
41. The product's price elasticity of demand as defined in the text is closest to:
A) −1.24
B) −2.59
C) −1.30
D) −1.80
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Percent change in price = ($47.00 − $50.00) ÷ $50.00 = −6%
Percent change in quantity sold = (1,700 − 1,900) ÷ 1,700 = 11.76%
Price elasticity of demand
= ln(1 + %change in quantity sold)/ln(1 + %change in price)
= ln(1 + 11.76%)/ln(1 + −6%) = −1.80
42. The product's profit-maximizing price according to the formula in the text is closest
to:
A) $30.17
B) $94.72
C) $79.77
D) $41.70
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Percent change in price = ($47.00 − $50.00) ÷ $50.00 = −6%
Percent change in quantity sold = (1,700 − 1,900) ÷ 1,700 = 11.76%
Price elasticity of demand
= ln(1 + %change in quantity sold)/ln(1 + %change in price)
= ln(1 + 11.76%)/ln(1 + −6%) = −1.7969
Profit maximizing markup on variable cost = -1/(1 + ed) = −1/(1+(−1.7969)) = 1.254
Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)*Variable
cost per unit = (1 + 1.254)*$18.50 = (2.254)*$18.50 = $41.70
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-23
Appendix A Pricing Products and Services
Use the following to answer questions 43-45:
Nance Company is about to introduce a new product. It is expected that the following costs
would be incurred at an activity level of 40,000 units produced and sold each year:
Variable production costs ......................................
Fixed production costs ..........................................
Variable selling and administrative costs ..............
Fixed selling and administrative costs ..................
Per Unit
Total
$10
$5 $200,000
$2
$3 $120,000
Nance Company uses the absorption costing approach to cost-plus pricing as described in the
text.
43. Assume that the company uses a markup of 75% in order to determine selling prices.
The selling price for one unit of product would be:
A) $21.00
B) $26.25
C) $31.50
D) $35.00
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
The unit product cost is:
Variable production cost ..................................................... $10
Fixed manufacturing overhead ($200,000 ÷ 40,000 units) .
5
Unit product cost ................................................................. $15
The target selling price is determined as follows:
Unit product cost ............... $15.00
Markup--75% .................... 11.25
Target selling price ............ $26.25
A-24
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Appendix A Pricing Products and Services
44. Assume that the company has not yet determined a markup to use on the new product.
The new product would require an investment of $1,200,000. The company requires a
25% rate of return on investment in all new products. The markup under the
absorption costing approach would be closest to:
A) 70.0%
B) 50.0%
C) 83.3%
D) 63.3%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
The unit product cost is:
Variable production cost ..................................................... $10
Fixed manufacturing overhead ($200,000 ÷ 40,000 units) .
5
Unit product cost ................................................................. $15
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(25% × $1,200,000) + ($2.00 × 40,000 + $120,000)] ÷ [$15 × 40,000]
= [$300,000 + $200,000] ÷ $600,000 = 83.3%
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-25
Appendix A Pricing Products and Services
45. After introducing the product, the company finds that it has excess capacity. A foreign
dealer has offered to purchase 5,000 units of the product at a special price of $21 per
unit. This sale would not disturb regular business. If the special price is accepted on
the 5,000 units, the effect on total profits for the year should be:
A) $45,000 increase
B) $30,000 increase
C) $5,000 increase
D) $26,250 decrease
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
Solution:
Incremental revenue (5,000 units @ $21 per unit) ...........................
Less incremental costs:
Variable production costs (5,000 units @ $10 per unit) ...............
Selling and administrative costs (5,000 units @ $2 per unit) .......
Total incremental cost ......................................................................
Incremental net operating income ....................................................
$105,000
50,000
10,000
60,000
$ 45,000
Use the following to answer questions 46-47:
Diewold Company has just developed a new product. At an expected sales level of 50,000
units per year, the company anticipates that the following costs will be incurred:
Variable production costs ................................
Fixed production costs ....................................
Variable selling and administrative costs ........
Fixed selling and administrative costs ............
Per Unit
Total
$16
$8 $400,000
$4
$5 $250,000
Diewold Company uses the absorption costing approach to cost-plus pricing as described in
the text.
A-26
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Appendix A Pricing Products and Services
46. The new product would require an investment of $1,500,000 on which the company
would like to earn a return of 18%. The markup using the absorption costing approach
would be:
A) 72%
B) 43.3%
C) 60%
D) 22.5%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
The unit product cost is:
Variable production costs .................................................... $16
Fixed manufacturing overhead ($400,000 ÷ 50,000 units) .
8
Unit product cost ................................................................. $24
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(18% × $1,500,000) + ($4.00 × 50,000 + $250,000)] ÷ [$24 × 50,000]
= [$270,000 + $450,000] ÷ $1,200,000 = 60%
47. After introducing the new product, the company finds that it has excess capacity. A
foreign dealer has offered to purchase 3,000 units at a special price of $26 per unit.
This sale would not disturb regular business. If the special price is accepted on the
3,000 units, the company's overall net income for the year should:
A) increase by $6,000
B) decrease by $48,000
C) decrease by $21,000
D) increase by $18,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-27
Appendix A Pricing Products and Services
Solution:
Incremental revenue (3,000 units @ $26 per unit) ...........................
Less incremental costs:
Variable production costs (3,000 units @ $16 per unit) ...............
Selling and administrative (3,000 units @ $4 per unit) ................
Total incremental cost ......................................................................
Incremental net operating income ....................................................
$78,000
48,000
12,000
60,000
$18,000
Use the following to answer questions 48-49:
Eckley 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 49,000 units next year, the unit
product cost of a particular product is $51.00. The company's selling and administrative
expenses for this product are budgeted to be $1,009,400 in total for the year. The company
has invested $240,000 in this product and expects a return on investment of 13%.
48. The markup on absorption cost for this product would be closest to:
A) 53.4%
B) 13.0%
C) 41.6%
D) 40.4%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(13% × $240,000) + $1,009,400] ÷ [$51 × 49,000]
= [$31,200 + $1,009,400] ÷ $2,499,000 = 41.6%
A-28
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Appendix A Pricing Products and Services
49. The selling price based on the absorption costing approach for this product would be
closest to:
A) $71.60
B) $57.63
C) $101.41
D) $72.24
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(13% × $240,000) + $1,009,400] ÷ [$51 × 49,000]
= [$31,200 + $1,009,400] ÷ $2,499,000 = 41.64%
The target selling price is determined as follows:
Unit product cost ............... $51.00
Markup--41.64% ............... 21.24
Target selling price ............ $72.24
Use the following to answer questions 50-52:
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:
Direct materials ..............................................................
Direct labor.....................................................................
Variable manufacturing overhead ..................................
Fixed annual manufacturing overhead ...........................
Variable selling and administrative expenses ................
Fixed annual selling and administrative expenses .........
Per Unit
$27
$16
$8
Total
$216,000
$3
$72,000
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%.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-29
Appendix A Pricing Products and Services
50. The absorption costing unit product cost is:
A) $51
B) $54
C) $75
D) $86
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
The unit product cost is:
Direct materials ................................................................... $27
Direct labor .......................................................................... 16
Variable manufacturing overhead .......................................
8
Fixed manufacturing overhead ($216,000 ÷ 9,000 units) ... 24
Unit product cost ................................................................. $75
51. To the nearest whole percent, the markup percentage on absorption cost is:
A) 25%
B) 34%
C) 15%
D) 10%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
The unit product cost is:
Direct materials ................................................................... $27
Direct labor .......................................................................... 16
Variable manufacturing overhead .......................................
8
Fixed manufacturing overhead ($216,000 ÷ 9,000 units) ... 24
Unit product cost ................................................................. $75
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(10% × $1,305,000) + ($3.00 × 9,000 + $72,000)] ÷ [$75 × 9,000]
= [$130,500 + $99,000] ÷ $675,000 = 34%
A-30
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Appendix A Pricing Products and Services
52. The unit target selling price using the absorption costing approach is closet to:
A) $115
B) $86
C) $101
D) $83
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
The unit product cost is:
Direct materials ................................................................... $27
Direct labor .......................................................................... 16
Variable manufacturing overhead .......................................
8
Fixed manufacturing overhead ($216,000 ÷ 9,000 units) ... 24
Unit product cost ................................................................. $75
Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(10% × $1,305,000) + ($3.00 × 9,000 + $72,000)] ÷ [$75 × 9,000]
= [$130,500 + $99,000] ÷ $675,000 = 34%
The target selling price is determined as follows:
Unit product cost ...............
$ 75
Markup--34% ....................
26
Target selling price ............
$101
Use the following to answer questions 53-54:
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%.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-31
Appendix A Pricing Products and Services
53. The desired profit according to the target costing calculations is:
A) $90,000
B) $350,000
C) $44,000
D) $440,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Desired profit = 10% × $900,000 = $90,000
54. The target cost per unit is closest to:
A) $44.00
B) $38.50
C) $48.40
D) $35.00
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Projected sales (10,000 units × $44 per unit) .............. $440,000
Less desired profit (10% × $900,000) .........................
90,000
Target cost for 10,000 units ......................................... $350,000
Target cost per unit ($350,000 ÷ 10,000 units) ...........
$35.00
Use the following to answer questions 55-56:
The management of Rademacher Corporation is considering introducing a new product--a
compact lawn blower. At a selling price of $24 per unit, management projects sales of 30,000
units. The lawn blower would require an investment of $200,000. The desired return on
investment is 12%.
A-32
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Appendix A Pricing Products and Services
55. The desired profit according to the target costing calculations is:
A) $696,000
B) $24,000
C) $86,400
D) $720,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Desired profit = 12% × $200,000 = $24,000
56. The target cost per lawn blower is closest to:
A) $24.00
B) $23.20
C) $26.88
D) $25.98
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Desired profit = 12% × $200,000 = $24,000
Projected sales (30,000 units × $24 per unit) .............. $720,000
Less desired profit (12% × $200,000) .........................
24,000
Target cost for 30,000 units ......................................... $696,000
Target cost per unit ($696,000 ÷ 30,000 units) ...........
$23.20
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-33
Appendix A Pricing Products and Services
Essay Questions
57. Quickel Company makes a product that has the following costs:
Direct materials .....................................................
Direct labor ............................................................
Variable manufacturing overhead .........................
Fixed manufacturing overhead ..............................
Variable selling and administrative expenses .......
Fixed selling and administrative expenses ............
Per unit
$10.30
$10.40
$1.60
Per year
$429,000
$1.80
$495,000
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
33,000 units per year.
The company has invested $100,000 in this product and expects a return on
investment of 12%.
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 16% decrease in quantity sold.
Assuming no change in cost structure and that direct labor is a variable cost,
compute the profit-maximizing price.
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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Appendix A Pricing Products and Services
Ans:
a.
Direct materials .........................................
Direct labor ................................................
Variable manufacturing overhead .............
Fixed manufacturing overhead ..................
Unit product cost .......................................
$10.30
10.40
1.60
13.00
$35.30
Markup on absorption cost
= [(12% × $100,000) + ($1.80 × 33,000 + $495,000)] ÷ ($35.30 × 33,000)
= [($12,000) + ($554,400)] ÷ $1,164,900 = 48.62%
b. Target selling price = $35.30 + 48.62% × $35.30 = $52.46
c. Price elasticity of demand
= ln(1 + % change in quantity sold)/ln(1 + % change in price)
= ln(1 + −16%)/ln(1 + 10%) = −1.83
Profit maximizing markup on variable cost = −1/(1 + ed) = −1/(1 + (−1.83)) = 1.2058
Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)*Variable
cost per unit = (1 + 1.2058)*$24.10 = (2.2058)*$24.10 = $53.16
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1; 2 Level: Hard
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
A-35
Appendix A Pricing Products and Services
58. Nicely Corporation's marketing manager believes that every 2% decrease in the selling
price of one of the company's products would lead to a 3% increase in the product's
total unit sales. The product's absorption costing unit product cost is $23.20. The
variable production cost is $1.80 per unit and the variable selling and administrative
cost is $1.30.
Required:
b. Compute the product's price elasticity of demand as defined in the text.
c. Compute the product's profit-maximizing price according to the formula in the
text.
Ans:
a. Price elasticity of demand
= ln(1 + %change in quantity sold)/ln(1 + %change in price)
= ln(1 + 3%)/ln(1 + −2%)
= −1.46
b. Profit maximizing markup on variable cost = -1/(1+ed) = -1/(1+(-1.46)) = 2.16
Profit-maximizing price = (1+ Profit-maximizing markup on variable
cost)*Variable cost per unit = (1 + 2.16)*($1.30 +$1.80) = (3.16)*$3.10 = $9.79
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1 Level: Medium
AICPA FN: Reporting
59. Pasley 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 Price Unit Sales
$78.00
6,500
$82.00
6,060
The product's variable cost is $22.10 per unit.
Required:
b. a Compute the product's price elasticity of demand as defined in the text.
d. Compute the product's profit-maximizing price according to the formula in the
text.
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Appendix A Pricing Products and Services
Ans:
a. % change in quantity = -6.77%
% change in price = 5.13%
Price elasticity of demand
= ln(1 + %change in quantity sold)/ln(1 + %change in price)
= ln(1 + −6.77%)/ln(1 + 5.13%) = −1.40
b. Profit maximizing markup on variable cost = −1/(1 + ed) = -1/(1+(−1.40)) = 2.49
Profit-maximizing price = (1 + Profit-maximizing markup on variable
cost)*Variable cost per unit = (1 + 2.49)*$22.10 = (3.49)*$22.10 = $77.13
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1 Level: Medium
AICPA FN: Reporting
60. Robak Corporation manufactures a product that has the following costs:
Direct materials .....................................................
Direct labor ............................................................
Variable manufacturing overhead .........................
Fixed manufacturing overhead ..............................
Variable selling and administrative expenses .......
Fixed selling and administrative expenses ............
Per unit
$15.40
$17.90
$1.20
Per year
$580,800
$2.00
$919,600
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
44,000 units per year.
The company has invested $160,000 in this product and expects a return on
investment of 13%.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price of the product using the absorption costing approach.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
A-37
Appendix A Pricing Products and Services
Ans:
a.
Direct materials .........................................
Direct labor ................................................
Variable manufacturing overhead .............
Fixed manufacturing overhead ..................
Unit product cost .......................................
$15.40
17.90
1.20
13.20
$47.70
Markup on absorption cost = [(13% × $160,000) +
($2.00 × 44,000 + $919,600)] ÷ ($47.70 × 44,000)
= [($20,800) + ($1,007,600)] ÷ $2,098,800 = 49.00%
b. Target selling price = $47.70 + 49.00% × $47.70 = $71.07
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2 Level: Medium
AICPA FN: Reporting
61. The management of Landstrom 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:
Direct materials ..............................................................
Direct labor .....................................................................
Variable manufacturing overhead ..................................
Fixed annual manufacturing overhead ...........................
Variable selling and administrative expenses ................
Fixed annual selling and administrative expenses .........
Per Unit
$28
$12
$9
Total
$132,000
$4
$30,000
Management plans to produce and sell 6,000 units of the new product annually. The
new product would require an investment of $1,036,200 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 target selling price for the new product using the absorption costing
approach.
A-38
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Appendix A Pricing Products and Services
Ans:
a. The unit product cost is:
Direct materials ................................................................... $28
Direct labor .......................................................................... 12
Variable manufacturing overhead .......................................
9
Fixed manufacturing overhead ($132,000 ÷ 6,000 units) ... 22
Unit product cost ................................................................. $71
b. Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(10% × $1,036,200) + ($4.00 × 6,000 + $30,000)] ÷ [$71 × 6,000] = 37%
c. The target selling price is determined as follows:
Unit product cost ............... $71.00
Markup--37% .................... 26.27
Target selling price ............ $97.27
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
A-39
Appendix A Pricing Products and Services
62. Bohmker Corporation is introducing a new product whose direct materials cost is $25
per unit, direct labor cost is $13 per unit, variable manufacturing overhead is $9 per
unit, and variable selling and administrative expense is $4 per unit. The annual fixed
manufacturing overhead associated with the product is $18,000 and its annual fixed
selling and administrative expense is $9,000. Management plans to produce and sell
1,000 units of the new product annually. The new product would require an
investment of $110,500 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 target selling price for the new product using the absorption costing
approach.
Ans:
a. The unit product cost is:
Direct materials .......................................................................
Direct labor ..............................................................................
Variable manufacturing overhead ...........................................
Fixed manufacturing overhead ($18,000 ÷ 1,000 units) .........
Unit product cost .....................................................................
$25
13
9
18
$65
b. Markup percentage on absorption cost
= [(Required ROI × Investment) + Selling and administrative expenses]
÷ [Unit product cost × Units sales]
= [(10% × $110,500) + ($4.00 × 1,000 + $9,000)] ÷ [$65 × 1,000] = 37%
c. The target selling price is determined as follows:
Unit product cost ............... $65.00
Markup--37% .................... 24.05
Target selling price ............ $89.05
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2 Level: Easy
A-40
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Appendix A Pricing Products and Services
63. 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.
Ans:
Projected sales (10,000 units × $93 per unit) .............. $930,000
Less desired profit (17% × $900,000) ......................... 153,000
Target cost for 10,000 units ......................................... $777,000
Target cost per unit ($777,000 ÷ 10,000 units) ...........
$77.70
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3 Level: Easy
AICPA FN: Reporting
64. The 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.
Ans:
Projected sales (40,000 units × $72 per unit) .............. $2,880,000
Less desired profit (19% × $600,000) .........................
114,000
Target cost for 40,000 units ......................................... $2,766,000
Target cost per unit ($2,766,000 ÷ 40,000 units) ........
$69.15
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3 Level: Easy
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
AICPA FN: Reporting
A-41
Appendix A Pricing Products and Services
65. Management of Niemczyk Corporation is considering a new product–an outside
speaker–that would have a selling price of $31 per unit and projected sales of 10,000
units. Launching the new product would require an investment of $700,000. The
desired return on investment is 16%.
Required:
Determine the target cost per unit for the outdoor speaker.
Ans:
Projected sales (10,000 units × $31 per unit) ........
Less desired profit (16% × $700,000) ...................
Target cost for 10,000 units ...................................
Target cost per unit ($198,000 ÷ 10,000 units) .....
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3 Level: Easy
A-42
$310,000
112,000
$198,000
$19.80
AICPA FN: Reporting
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition