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Exam 14: Pricing Products and Services

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Question 31

True/False

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All variable costs are included in the cost base used to set a selling price under the absorption approach to cost-plus pricing described in the text.

A) True
B) False

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Question 32

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Demand for a product is said to be elastic if a change in price has:

A) no effect on the volume of units sold.
B) substantial effect on the volume of units sold.
C) little effect on the volume of units sold.
D) little effect on the volume of units produced.

E) B) and D)
F) All of the above

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Question 33

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The demand for products that are sold in discount stores is generally more elastic than the demand for products sold in upscale boutiques.

The management of Matsuura 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 1,000 units of the new product annually.The new product would require an investment of $254,000 and has a required return on investment of 10%. -To the nearest whole percent,the markup percentage on absorption cost is:

Coble 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. The product's variable cost is $15.70 per unit. -The product's price elasticity of demand as defined in the text is closest to:

Raymond Company estimates that an investment of $800,000 would be necessary to produce and sell 40,000 units of Product S each year.Costs associated with the new product would be: The company requires a 20% return on the investment in all products.The company used the absorption costing approach to cost-plus pricing as described in the text. -The markup percentage needed on Product S in order to achieve the company's required return on investment would be:

Demand for a product is said to be elastic if a change in price has a substantial effect on the number of units sold.

The management of Matsuura 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 1,000 units of the new product annually.The new product would require an investment of $254,000 and has a required return on investment of 10%. -The absorption costing unit product cost is:

Turnhilm,Inc.is considering adding a small electric mower to its product line.Management believes that in order to be competitive,the mower cannot be priced above $139.The company requires a minimum return of 25% on its investments.Launching the new product would require an investment of $8,000,000.Sales are expected to be 40,000 units of the mower per year. Required: Compute the target cost of a mower.

Boatsman Company's management believes that every 4% 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 variable cost is $14.20 per unit. -The product's price elasticity of demand as defined in the text is closest to:

Boatsman Company's management believes that every 4% 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 variable cost is $14.20 per unit. -The product's profit-maximizing price according to the formula in the text is closest to:

The price elasticity of demand is used in the absorption costing approach to cost-plus pricing to determine the markup over cost.

A new product,an automated crepe maker,is being introduced at Boorman Corporation.At a selling price of $72 per unit,management projects sales of 20,000 units.Launching the crepe maker as a new product would require an investment of $700,000.The desired return on investment is 14%.The target cost per crepe maker is closest to:

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

Trevor Company is contemplating the introduction of a new product.The company has gathered the following information concerning the product: The company uses the absorption costing approach to cost-plus pricing as described in the text. Required: a.Compute the markup on absorption cost. b.Compute the selling price. c.If the price computed in "b" above is charged,and costs turn out as projected,can the company be assured that no loss will be sustained on the new product? Explain.

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

The markup over cost under the absorption costing approach would decrease if selling and administrative expenses increase,holding everything else constant.

Hauber Corporation would like to use target costing for a new product it is considering introducing.At a selling price of $26 per unit,management projects sales of 60,000 units.The new product would require an investment of $300,000.The desired return on investment is 20%. -The target cost per unit is closest to:

Bourret Corporation is introducing a new product whose direct materials cost is $42 per unit,direct labor cost is $16 per unit,variable manufacturing overhead is $9 per unit,and variable selling and administrative expense is $3 per unit.The annual fixed manufacturing overhead associated with the product is $84,000 and its annual fixed selling and administrative expense is $16,000.Management plans to produce and sell 4,000 units of the new product annually.The new product would require an investment of $1,022,400 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.

Price elasticity measures the degree to which unit sales are affected by a change in price.