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Exam 18: Pricing Decisions

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Question 1

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Aboud Industrial Products Inc. has developed a new industrial high pressure pump, model ON-28, that is designed to offer superior performance to a comparable high pressure pump sold by Aboud's main competitor. The competing high pressure pump sells for $87,000 and needs to be replaced after 1,000 hours of use. It also requires $15,000 of preventive maintenance during its useful life. Model ON-28's performance capabilities are similar to the competing high pressure pump with two important exceptions-it needs to be replaced only after 3,000 hours of use and it requires $31,000 of preventive maintenance during its useful life. Required: From a value-based pricing standpoint what range of possible prices should Aboud consider when setting a price for model ON-28?

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The range of possible prices is as follo...

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Question 2

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Mercer Corporation estimates that an investment of $650,000 would be necessary to produce and sell 60,000 units of a new product each year. Other costs associated with the new product would be: The company requires a 25% return on the investment in all products. The company uses the absorption costing approach costing to pricing as described in the text. The markup percentage on the new product would be closest to:

A) 51.0%
B) 12.5%
C) 24.0%
D) 59.5%

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

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D

Question 3

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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:

Maccarone Corporation manufactures numerous products, one of which is called Tau10. The company has provided the following data about this product: Required: a. What net operating income is the company earning now on its sales of Tau10? b. Management is considering decreasing the price of Tau10 by 5%, from $36.00 to $34.20. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 130,000 units to 143,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Tau10 earn at a price of $34.20 if this sales forecast is correct? c. Assuming that the total traceable fixed expense does not change, if Maccarone decreases the price of Tau10 to $34.20, what percentage change in unit sales would provide the same net operating income that it currently earns at a price of $36.00? (Round your answer to the nearest one-tenth of a percent.)

Ralph Plastics Equipment Corporation has developed a new injection mold-model IX-94-that has been designed to outperform a competitor's best-selling injection mold. Model IX-94 has a useful life of 50,000 hours of service and its operating cost is $2.00 per hour. In contrast, the competitor's product has a useful life of 10,000 hours of service and has operating costs that average $3.50 per hour. The competitor's injection mold sells for $129,000. Ralph has not yet established a selling price for model IX-94. Required: From a value-based pricing standpoint what is model IX-94's economic value to the customer over its 50,000 hour useful life?

Most of the opportunities to reduce the cost of a product come from outsourcing production to where labor is relatively inexpensive.

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.

Tavis Robotics Corporation has developed a new robot-model FI-73-that has been designed to out perform a competitor's best-selling robot. The competitor's product has a useful life of 10,000 hours of service, has operating costs that average $4.60 per hour, and sells for $109,000. In contrast, model FI-73 has a useful life of 30,000 hours of service and its operating cost is $2.60 per hour. Tavis has not yet established a selling price for model FI-73. From a value-based pricing standpoint what is the reference value that Tavis should consider when pricing model FI-73?

Buzby Corporation manufactures numerous products, one of which is called Epsilon39. The company has provided the following data about this product: Required: a. Management is considering decreasing the price of Epsilon39 by 5%, from $43.00 to $40.85. 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 Epsilon39 earn at a price of $40.85 if this sales forecast is correct? b. Assuming that the total traceable fixed expense does not change, how many units of Epsilon39 would Buzby need to sell at a price of $40.85 to earn the same net operating income that it currently earns at a price of $43.00? (Round your answer up to the nearest whole number.)

Ladle 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 63,000 units next year, the unit product cost of a particular product is $39.00. The company's selling and administrative expenses for this product are budgeted to be $1,020,600 in total for the year. The company has invested $560,000 in this product and expects a return on investment of 11%. The markup on absorption cost for this product would be closest to:

Timdat Corporation, 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 25% on all new products. The plan is to produce and sell 40,000 watches each year. This would require a $600,000 investment. The target cost per watch would be:

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 differentiation value offered by model IA-05 relative to the competitor's offering for each 2,000 hours of usage?

Gildersleeve 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 30,000 units per year. The company has invested $600,000 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.

Nance Corporation is about to introduce a new product. The following costs would be incurred if 40,000 units are produced and sold each year: Nance Corporation uses the absorption costing approach to cost-plus pricing as described in the text. 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 net income for the year should be:

Blauvelt Electronics Corporation has developed a new instrument-model GZ-29-that has been designed to outperform a competitor's best-selling instrument. Model GZ-29 has a useful life of 30,000 hours of service and its operating cost is $3.20 per hour.In contrast, the competitor's product has a useful life of 10,000 hours of service and has operating costs that average $5.60 per hour. The competitor's instrument sells for $149,000. Blauvelt has not yet established a selling price for model GZ-29. From a value-based pricing standpoint what range of possible prices should Blauvelt consider when setting a price for GZ-29?

Weitman Corporation manufactures numerous products, one of which is called Epsilon-50. The company has provided the following data about this product: Management is considering increasing the price of Epsilon-50 by 9%, from$29.00 to $31.61. The company's marketing managers estimate that this price hike would decrease unit sales by 15%, from 130,000 units to 110,500 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Epsilon 50 earn at a price of $31.61 if this sales forecast is correct?

Cogdill Corporation manufactures numerous products, one of which is called Epsilon78. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Cogdill increases the price of Epsilon78 to $19.76, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $19.00? (Your answer should be rounded to the nearest 0.1%.)

Perwin Corporation estimates that an investment of $800,000 would be needed to produce and sell 50,000 units of Product B each year. At this level of activity, the unit product cost would be $50. Selling and administrative expenses would total $400,000 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 B would be closest to:

Weakly Industrial Products Inc. has developed a new industrial instrument, model CT-60, that is designed to offer superior performance to a comparable instrument sold by Weakly's main competitor. The competing instrument sells for $22,000 and needs to be replaced after 1,000 hours of use. It also requires $4,000 of preventive maintenance during its useful life. Model CT-60's performance capabilities are similar to the competing instrument with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $6,000 of preventive maintenance during its useful life. Required: From a value-based pricing standpoint: a. What is the reference value that Weakly should consider when pricing model CT-60? b. What is the differentiation value offered by model CT-60 relative to the competitor's instrument for each 2,000 hours of usage? c. What is model CT-60's economic value to the customer over its 2,000 hour life? d. What range of possible prices should Weakly consider when setting a price for model CT-60?

Hoder Corporation manufactures numerous products, one of which is called Gamma45. 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 Gamma45 would Hoder need to sell at a price of $38.95 to earn the same net operating income that it currently earns at a price of $41.00? (Round your answer up to the nearest whole number.)