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Difficulty
ID
New,6/10/98,B
4/e: 12-716
8/25/2001 A
New,6/10/98,G
New,6/10/98,I
6/e: 12-1
New,6/10/98,T
New,6/1/0/98,E
New,6/1/0/98,L
9eLD:AppA,Q3
6/e: 12-51
9eLD:AppA,Q2
9eLD:AppA,Q4
New,6/1/0/98,A
New,6/11/98,F5
New,6/11/98,G5
New,6/11/98,I5
New,6/11/98,E5
New,6/11/98,H5
7/e: AppL-25
New,6/11/98,K5
New,6/11/98,M5
9eLD:AppA,Q11
2/e: 12-8
New,6/11/98,J5
New,6/11/98,L5
4/e: 12-736
11/2/2004 Single MC A3
11/2/2004 Single MC B3
11/2/2004 Single MC C3
New, 6/10/98, D5
New, 6/10/98, A5
New, 6/10/98, B5
New, 6/10/98, C5
New, 6/10/98, E5
9eLD:AppA,Q12-13
A-1
Origin
CMA/CPA origin
E.N.
Authors
E.N.
E.N.
E.N.
Authors
E.N.
E.N.
E.N.
Larry Deppe
Authors
Larry Deppe
Larry Deppe
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
Authors
E.N.
E.N.
Larry Deppe
Authors
E.N.
E.N.
Authors
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
Larry Deppe
Multipart M/C
Multipart M/C
Multipart M/C
Problem
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11/2/2004 Muli MC A3
11/2/2004 Multi MC B3
11/2/2004 Multi MC C3
New,6/11/98,Q5
New,6/11/98,N5
New,6/11/98,O4
New,6/11/98,P5
2/e: Problem 12-1
New,6/11/98,R5
11/2/2004 Problem A3
11/2/2004 Problem B3
Clone 7/e EL-5
11/2/2004 Problem C3
11/2/2004 Problem D3
11/2/2004 Problem E3
A-2
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
Authors
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
E.N.
2. If a product is price inelastic, then a small change in selling price will result in a substantial
change in the volume of units sold.
True False
3. Price elasticity measures the degree to which unit sales are affected by a change in price.
True False
4. Demand for a product is said to be elastic if a change in price has a substantial effect on the
number of units sold.
True False
5. The demand for products that are sold in discount stores is generally more elastic than the
demand for products sold in upscale boutiques.
True False
6. 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.
True False
7. The markup over cost under the absorption costing approach would decrease if selling and
administrative expenses increase, holding everything else constant.
True False
A-3
9. Holding all other things constant, an increase in fixed selling 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.
A-4
14. Holding all other things constant, if the unit sales increase, then the markup under
absorption costing will:
A. increase.
B. decrease.
C. remain the same.
D. The effect cannot be determined.
15. Firestack Company's management believes that every 5% increase in the selling price of
one of the company's products results in a 13% decrease in the product's total unit sales. The
variable production cost of this product is $37.50 per unit and the variable selling and
administrative cost is $4.30 per unit.
The product's profit-maximizing price according to the formula in the text is closest to:
A. $46.98
B. $49.32
C. $64.34
D. $65.13
A-5
16. Gorsche Company's management has found that every 3% 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 absorption costing unit product cost is $11.50. The variable production cost of the
product is $6.20 per unit and the variable selling and administrative cost is $1.00 per unit.
According to the formula in the text, the product's profit-maximizing price is closest to:
A. $11.15
B. $11.91
C. $19.65
D. $17.82
17. Innes 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.
18. Epler Company's management believes 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 price elasticity of demand as defined in the text is closest to:
A. -1.29
B. -2.87
C. -3.83
D. -2.53
A-6
19. Harvey 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 price elasticity of demand as defined in the text is closest to:
A. -1.98
B. -1.78
C. -2.40
D. -1.92
The company uses the absorption costing approach to cost-plus pricing described in the text.
Based on these data, the total selling and administrative expenses each year would be:
A. $240,000
B. $300,000
C. $140,000
D. $200,000
A-7
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 19,000 units per year.
The company has invested $580,000 in this product and expects a return on investment of
14%.
The selling price based on the absorption costing approach would be closest to:
A. $74.30
B. $56.11
C. $96.50
D. $78.57
22. Mahan, 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 60,000 units next year, the unit
product cost of a particular product is $56.20. The company's selling and administrative
expenses for this product are budgeted to be $1,302,000 in total for the year. The company has
invested $320,000 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. $108.57
B. $77.90
C. $78.33
D. $60.70
A-8
The company uses the absorption costing approach to cost-plus pricing described in the text.
Based on these data, the total selling and administrative expenses each year are:
A. $720,000
B. $480,000
C. $640,000
D. $400,000
24. Cost data relating to the single product produced by the Jones Company are given below:
The Jones Company uses the absorption costing approach to cost-plus pricing described in the
text with a desired markup of 60%. If the company plans to produce and sell 20,000 units
each year, the selling price per unit would be:
A. $32.00
B. $41.60
C. $43.20
D. $36.00
A-9
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 28,000 units per year.
The company has invested $560,000 in this product and expects a return on investment of
10%.
The markup on absorption cost would be closest to:
A. 46.0%
B. 10.0%
C. 141.1%
D. 49.7%
26. Lagace 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 20,000 units next year, the
unit product cost of a particular product is $81.60. The company's selling and administrative
expenses for this product are budgeted to be $354,000 in total for the year. The company has
invested $260,000 in this product and expects a return on investment of 13%.
The markup on absorption cost for this product would be closest to:
A. 34.7%
B. 23.8%
C. 13.0%
D. 21.7%
A-10
29. Hostetter Corporation would like to use target costing for a new product it is considering
introducing. At a selling price of $30 per unit, management projects sales of 30,000 units. The
new product would require an investment of $200,000. The desired return on investment is
13%. The target cost per unit is closest to:
A. $32.92
B. $30.00
C. $33.90
D. $29.13
30. 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:
A. $72.00
B. $82.08
C. $76.49
D. $67.10
A-11
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 52,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 8%.
Direct labor is a variable cost in this company.
32. The selling price based on the absorption costing approach is closest to:
A. $78.50
B. $54.10
C. $79.15
D. $108.62
33. If every 10% increase in price leads to an 11% decrease in quantity sold, the profitmaximizing price is closest to:
A. $234.46
B. $214.69
C. $256.45
D. $78.50
A-12
Altona Corporation's vice president in charge of marketing believes that every 3% increase in
the selling price of one of the company's products would lead to a 5% decrease in the
product's total unit sales. The product's absorption costing unit product cost is $13.50. The
variable production cost is $7.80 per unit and the variable selling and administrative cost is
$2.30 per unit.
34. The product's price elasticity of demand as defined in the text is closest to:
A. -1.51
B. -1.33
C. -1.14
D. -1.74
35. The product's profit-maximizing price according to the formula in the text is closest to:
A. $31.86
B. $23.84
C. $5.43
D. $18.41
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.
36. The product's price elasticity of demand as defined in the text is closest to:
A. -2.29
B. -2.24
C. -1.31
D. -1.66
A-13
37. The product's profit-maximizing price according to the formula in the text is closest to:
A. $25.66
B. $25.21
C. $35.80
D. $60.44
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.
38. The product's price elasticity of demand as defined in the text is closest to:
A. -1.51
B. -1.23
C. -2.09
D. -1.47
39. The product's profit-maximizing price according to the formula in the text is closest to:
A. $46.48
B. $30.12
C. $49.21
D. $84.37
A-14
Eckhart 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 64,000 units next year, the
unit product cost of a particular product is $13.60. The company's selling and administrative
expenses for this product are budgeted to be $729,600 in total for the year. The company has
invested $460,000 in this product and expects a return on investment of 11%.
40. The markup on absorption cost for this product would be closest to:
A. 83.8%
B. 11.0%
C. 94.8%
D. 89.6%
41. The selling price based on the absorption costing approach for this product would be
closest to:
A. $25.00
B. $25.79
C. $15.10
D. $47.41
A-15
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.
42. The markup percentage needed on Product S in order to achieve the company's required
return on investment would be:
A. 29%
B. 40%
C. 50%
D. 37%
43. The selling price based on the absorption costing approach would be:
A. $48.38
B. $56.25
C. $52.50
D. $51.38
A-16
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%.
45. To the nearest whole percent, the markup percentage on absorption cost is:
A. 10%
B. 8%
C. 18%
D. 36%
46. The unit target selling price using the absorption costing approach is closest to:
A. $122
B. $132
C. $99
D. $97
A-17
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%.
47. The desired profit according to the target costing calculations is:
A. $312,000
B. $60,000
C. $1,560,000
D. $1,500,000
49. The desired profit according to the target costing calculations is:
A. $410,400
B. $2,190,000
C. $2,280,000
D. $90,000
A-18
Essay Questions
51. Quare Company 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 35,000 units per
year.
The company has invested $100,000 in this product and expects a return on investment of
11%.
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 14% decrease in quantity sold.
Assuming no change in cost structure and that direct labor is a variable cost, compute the
profit-maximizing price.
A-19
52. Nichnols Corporation's marketing manager believes that every 6% decrease in the selling
price of one of the company's products would lead to a 18% increase in the product's total unit
sales. The product's absorption costing unit product cost is $10.10. The variable production
cost is $1.70 per unit and the variable selling and administrative cost is $1.60.
Required:
a. Compute the product's price elasticity of demand as defined in the text.
b. Compute the product's profit-maximizing price according to the formula in the text.
53. Okino Company's management believes that every 8% increase in the selling price of one
of the company's products would lead to a 17% decrease in the product's total unit sales. The
variable cost per unit of this product is $44.60.
Required:
a. Compute the product's price elasticity of demand as defined in the text.
b. Compute the product's profit-maximizing price according to the formula in the text.
A-20
54. Pasternack 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.
A-21
55. 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.
A-22
56. Roal 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 37,000 units per
year.
The company has invested $220,000 in this product and expects a return on investment of 9%.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price of the product using the absorption costing approach.
A-23
57. The management of Hettler 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 4,000 units of the new product annually. The new
product would require an investment of $643,000 and has a required return on investment of
20%.
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-24
58. 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.
59. 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.
A-25
60. Elio Corporation would like to use target costing for a new product that is under
consideration. At a selling price of $84 per unit, management projects sales of 40,000 units.
The new product would require an investment of $400,000. The desired return on investment
is 11%.
Required:
Determine the target cost per unit for the new product.
61. The management of Mozdzierz, Inc., is considering a new product that would have a
selling price of $83 per unit and projected sales of 90,000 units. The new product would
require an investment of $200,000. The desired return on investment is 15%.
Required:
Determine the target cost per unit for the new product.
A-26
A-27
2. If a product is price inelastic, then a small change in selling price will result in a substantial
change in the volume of units sold.
FALSE
3. Price elasticity measures the degree to which unit sales are affected by a change in price.
TRUE
4. Demand for a product is said to be elastic if a change in price has a substantial effect on the
number of units sold.
TRUE
A-28
5. The demand for products that are sold in discount stores is generally more elastic than the
demand for products sold in upscale boutiques.
TRUE
6. 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.
FALSE
7. The markup over cost under the absorption costing approach would decrease if selling and
administrative expenses increase, holding everything else constant.
FALSE
A-29
9. Holding all other things constant, an increase in fixed selling 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.
A-30
A-31
14. Holding all other things constant, if the unit sales increase, then the markup under
absorption costing will:
A. increase.
B. decrease.
C. remain the same.
D. The effect cannot be determined.
A-32
15. Firestack Company's management believes that every 5% increase in the selling price of
one of the company's products results in a 13% decrease in the product's total unit sales. The
variable production cost of this product is $37.50 per unit and the variable selling and
administrative cost is $4.30 per unit.
The product's profit-maximizing price according to the formula in the text is closest to:
A. $46.98
B. $49.32
C. $64.34
D. $65.13
Price elasticity of demand
= ln(1 + % change in quantity sold) ln(1 + % change in price)
= ln(1 + -13%) ln(1 + 5%) = -2.8541
Profit maximizing markup on variable cost
= -1 (1+ed) = -1 (1+ -2.8541) = 0.5393
Profit-maximizing price = (1+ Profit-maximizing markup on variable cost) x
Variable cost per unit = (1 + 0.5393) x ($37.50 + $4.30) = (1.5393) x $41.80 = $64.34
(rounded)
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
A-33
16. Gorsche Company's management has found that every 3% 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 absorption costing unit product cost is $11.50. The variable production cost of the
product is $6.20 per unit and the variable selling and administrative cost is $1.00 per unit.
According to the formula in the text, the product's profit-maximizing price is closest to:
A. $11.15
B. $11.91
C. $19.65
D. $17.82
Price elasticity of demand
= ln(1 + % change in quantity sold) ln(1 + % change in price)
= ln(1 + -8%) ln(1 + 3%) = -2.8201
Profit maximizing markup on variable cost
= -1 (1+ed) = -1 (1+ -2.8201) = 0.5494
Profit-maximizing price = (1+ Profit-maximizing markup on variable cost) x
Variable cost per unit = (1 + 0.5494) x ($6.20 + $1.00) = (1.5494) x $7.20 = $11.15 (rounded)
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
A-34
17. Innes 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.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
A-35
18. Epler Company's management believes 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 price elasticity of demand as defined in the text is closest to:
A. -1.29
B. -2.87
C. -3.83
D. -2.53
Price elasticity of demand
= ln(1 + % change in quantity sold)
= ln(1 + 8%) ln(1 + -3%) = -2.53
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
A-36
19. Harvey 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 price elasticity of demand as defined in the text is closest to:
A. -1.98
B. -1.78
C. -2.40
D. -1.92
Percent change in price = ($29.00 - $30.00) $30.00 = -3.3333%
Percent change in total unit sales = (5,870 - 5,500) 5,500 = 6.7273 %
Price elasticity of demand
= ln(1 + % change in quantity sold) ln(1 + % change in price)
= ln(1 + 6.7273%) ln(1 + -3.3333%) = -1.92
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
A-37
The company uses the absorption costing approach to cost-plus pricing described in the text.
Based on these data, the total selling and administrative expenses each year would be:
A. $240,000
B. $300,000
C. $140,000
D. $200,000
Markup percentage on absorption cost
= [(Required ROI x Investment) + Selling and administrative expenses] [Unit product cost
x Units sales]
= [(15% x $400,000) + Selling and administrative expenses] [$50 x 10,000] = 60%*
= [$60,000 + Selling and administrative expenses] $500,000 = 60%
$60,000 + Selling and administrative expenses = $300,000
Selling and administrative expenses = $240,000
*60% = (Selling price per unit ($80) Unit product cost ($50)) - 1
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Hard
A-38
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 19,000 units per year.
The company has invested $580,000 in this product and expects a return on investment of
14%.
The selling price based on the absorption costing approach would be closest to:
A. $74.30
B. $56.11
C. $96.50
D. $78.57
Unit Product Cost:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-39
22. Mahan, 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 60,000 units next year, the unit
product cost of a particular product is $56.20. The company's selling and administrative
expenses for this product are budgeted to be $1,302,000 in total for the year. The company has
invested $320,000 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. $108.57
B. $77.90
C. $78.33
D. $60.70
Markup percentage on absorption cost
= [(Required ROI x Investment) + Selling and administrative expenses]
x Unit sales]
= [(8% x $320,000) + $1,302,000] ($56.20 x 60,000)
= [$25,600 + $1,302,000] $3,372,000 = 39.37%
Selling price = $56.20 + (39.37% x $56.20) = $78.33
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-40
The company uses the absorption costing approach to cost-plus pricing described in the text.
Based on these data, the total selling and administrative expenses each year are:
A. $720,000
B. $480,000
C. $640,000
D. $400,000
Markup percentage on absorption cost
= [(Required ROI x Investment) + Selling and administrative expenses] [Unit product cost x
Units sales]
= [(16% x $500,000) + Selling and administrative expenses] [$60 x 20,000] = 60%*
= [$80,000 + Selling and administrative expenses] $1,200,000 = 60%
$80,000 + Selling and administrative expenses = $720,000
Selling and administrative expenses = $640,000
* (Selling price per unit ($96) Unit product cost ($60)) - 1 = 60%
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Hard
A-41
24. Cost data relating to the single product produced by the Jones Company are given below:
The Jones Company uses the absorption costing approach to cost-plus pricing described in the
text with a desired markup of 60%. If the company plans to produce and sell 20,000 units
each year, the selling price per unit would be:
A. $32.00
B. $41.60
C. $43.20
D. $36.00
Unit Product Cost:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-42
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 28,000 units per year.
The company has invested $560,000 in this product and expects a return on investment of
10%.
The markup on absorption cost would be closest to:
A. 46.0%
B. 10.0%
C. 141.1%
D. 49.7%
Unit Product Cost:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-43
26. Lagace 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 20,000 units next year, the
unit product cost of a particular product is $81.60. The company's selling and administrative
expenses for this product are budgeted to be $354,000 in total for the year. The company has
invested $260,000 in this product and expects a return on investment of 13%.
The markup on absorption cost for this product would be closest to:
A. 34.7%
B. 23.8%
C. 13.0%
D. 21.7%
Markup percentage on absorption cost
= [(Required ROI x Investment) + Selling and administrative expenses]
Units sales]
= [(13% x $260,000) + $354,000] [$81.60 x 20,000]
= ($33,800 + $354,000) $1,632,000 = 23.8%
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
A-44
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
29. Hostetter Corporation would like to use target costing for a new product it is considering
introducing. At a selling price of $30 per unit, management projects sales of 30,000 units. The
new product would require an investment of $200,000. The desired return on investment is
13%. The target cost per unit is closest to:
A. $32.92
B. $30.00
C. $33.90
D. $29.13
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
A-45
30. 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:
A. $72.00
B. $82.08
C. $76.49
D. $67.10
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
A-46
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 52,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 8%.
Direct labor is a variable cost in this company.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-47
32. The selling price based on the absorption costing approach is closest to:
A. $78.50
B. $54.10
C. $79.15
D. $108.62
Unit Product Cost:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-48
33. If every 10% increase in price leads to an 11% decrease in quantity sold, the profitmaximizing price is closest to:
A. $234.46
B. $214.69
C. $256.45
D. $78.50
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 = $18.80 + $16.20 + $4.10 +$3.60 = $42.70
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) x
Variable cost per unit = (1+4.4907) x $42.70 = (5.4907) x $42.70 = $234.46
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-49
Altona Corporation's vice president in charge of marketing believes that every 3% increase in
the selling price of one of the company's products would lead to a 5% decrease in the
product's total unit sales. The product's absorption costing unit product cost is $13.50. The
variable production cost is $7.80 per unit and the variable selling and administrative cost is
$2.30 per unit.
34. The product's price elasticity of demand as defined in the text is closest to:
A. -1.51
B. -1.33
C. -1.14
D. -1.74
Price elasticity of demand
= ln(1 + % change in quantity sold)
= ln(1 + -5%) ln(1 + 3%) = -1.74
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
A-50
35. The product's profit-maximizing price according to the formula in the text is closest to:
A. $31.86
B. $23.84
C. $5.43
D. $18.41
Price elasticity of demand
= ln(1 + % change in quantity sold) ln(1 + % change in price)
= ln(1 + -5%) ln(1 + 3%) = -1.73561
Variable cost per unit = $7.80 + $2.30 = $10.10
Profit maximizing markup on variable cost = -1 (1 + ed) = -1 (1 + -1.735) =
1.36
Profit-maximizing price = (1+ Profit-maximizing markup on variable cost) x
Variable cost per unit = (1 + 1.36) x $36.70 = (2.36) x $10.10 = $23.84
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
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.
36. The product's price elasticity of demand as defined in the text is closest to:
A. -2.29
B. -2.24
C. -1.31
D. -1.66
Price elasticity of demand
= ln(1 + % change in quantity sold)
= ln(1 + 7%) ln(1 + -4%) = -1.66
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
A-51
37. The product's profit-maximizing price according to the formula in the text is closest to:
A. $25.66
B. $25.21
C. $35.80
D. $60.44
Price elasticity of demand
= ln(1 + % change in quantity sold) ln(1 + % change in price)
= ln(1 + 7%) ln(1 + -4%) = -1.657
Profit maximizing markup on variable cost = -1 (1 + ed) = -1 (1 + -1.657) =
1.52
Profit-maximizing price = (1+ Profit-maximizing markup on variable cost) x
Variable cost per unit = (1 + 1.52) x $14.20 = (2.52) x $14.20 = $35.78
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
A-52
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
A-53
39. The product's profit-maximizing price according to the formula in the text is closest to:
A. $46.48
B. $30.12
C. $49.21
D. $84.37
Percent change in price = ($27.00 - $30.00) $30.00 = -10%
Percent change in total unit sales = (1,620 - 1,300) 1,300 = 24.62%
Price elasticity of demand
= ln(1 + % change in quantity sold) ln(1 + % change in price)
= ln(1 + 24.62%) ln(1 + -10%) = -2.09
Profit maximizing markup on variable cost = -1 (1 + ed) = -1 (1 + -2.09) = 0.92
Profit-maximizing price = (1+ Profit-maximizing markup on variable cost) x Variable cost per
unit = (1 + 0.92) x $15.70 = 1.92 x $15.70 = $30.14
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
A-54
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
41. The selling price based on the absorption costing approach for this product would be
closest to:
A. $25.00
B. $25.79
C. $15.10
D. $47.41
A-55
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.
42. The markup percentage needed on Product S in order to achieve the company's required
return on investment would be:
A. 29%
B. 40%
C. 50%
D. 37%
Markup percentage on absorption cost
= [(Required ROI x Investment) + Selling and administrative expenses] [Unit product cost x
Units sales]
= [(20% x $800,000) + ($5.00 x 40,000 + $240,000)] [$37.50* x 40,000]
= ($160,000 + $440,000) $1,500,000 = 40%
*$37.50 = Variable product cost per unit ($30.00) + Fixed product cost per unit
($300,000 40,000)
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-56
43. The selling price based on the absorption costing approach would be:
A. $48.38
B. $56.25
C. $52.50
D. $51.38
Markup percentage on absorption cost
= [(Required ROI x Investment) + Selling and administrative expenses] [Unit product cost x
Units sales]
= [(20% x $800,000) + ($5.00 x 40,000 + $240,000)] [$37.50* x 40,000]
= ($160,000 + $440,000) $1,500,000 = 40%
*$37.50 = Variable product cost per unit ($30.00) + Fixed product cost per unit
($300,000 40,000)
Selling price = $37.50 + (40% x $37.50) = $52.50
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-57
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%.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
A-58
45. To the nearest whole percent, the markup percentage on absorption cost is:
A. 10%
B. 8%
C. 18%
D. 36%
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
A-59
46. The unit target selling price using the absorption costing approach is closest to:
A. $122
B. $132
C. $99
D. $97
Unit Product Cost:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
A-60
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%.
47. The desired profit according to the target costing calculations is:
A. $312,000
B. $60,000
C. $1,560,000
D. $1,500,000
Desired profit = Desired return on investment x Investment
= 20% x $300,000 = $60,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
A-61
49. The desired profit according to the target costing calculations is:
A. $410,400
B. $2,190,000
C. $2,280,000
D. $90,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
A-62
Essay Questions
51. Quare Company 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 35,000 units per
year.
The company has invested $100,000 in this product and expects a return on investment of
11%.
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 14% decrease in quantity sold.
Assuming no change in cost structure and that direct labor is a variable cost, compute the
profit-maximizing price.
A-63
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Learning Objective: 2
Level: Hard
A-64
52. Nichnols Corporation's marketing manager believes that every 6% decrease in the selling
price of one of the company's products would lead to a 18% increase in the product's total unit
sales. The product's absorption costing unit product cost is $10.10. The variable production
cost is $1.70 per unit and the variable selling and administrative cost is $1.60.
Required:
a. Compute the product's price elasticity of demand as defined in the text.
b. Compute the product's profit-maximizing price according to the formula in the text.
a. Price elasticity of demand
= ln(1+%change in quantity sold)/ln(1+%change in price)
= ln(1 + 18%)/ln(1 + -6%) = -2.67
b. Profit-maximizing markup on variable cost = -1/(1+ed) = -1/(1+(-2.67)) = 0.60
Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) x Variable cost
per unit
= (1+0.60)*($1.60 +$1.70) = (1.60) x $3.30 = $5.27
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
A-65
53. Okino Company's management believes that every 8% increase in the selling price of one
of the company's products would lead to a 17% decrease in the product's total unit sales. The
variable cost per unit of this product is $44.60.
Required:
a. Compute the product's price elasticity of demand as defined in the text.
b. Compute the product's profit-maximizing price according to the formula in the text.
a. Price elasticity of demand
= ln(1+%change in quantity sold)/ln(1+%change in price)
= ln(1 + -17%)/ln(1 + 8%) = -2.42
b. Profit-maximizing markup on variable cost = -1/(1+ed) = -1/(1+(-2.42)) = 0.70
Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) x Variable cost
per unit
= (1+0.70) x $44.60 = (1.70) x $44.60 = $75.98
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy
A-66
54. Pasternack 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.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
A-67
55. 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.
a. Markup percentage on absorption cost = [(Required ROI x Investment) + Selling and
administrative expenses]
[Unit product cost x Unit sales]
= [(15% x $200,000) + $90,000]
[$25 x 12,000]
= $120,000
$300,000 = 40%
c. No, sales volume may be less than the 12,000 units projected annually, resulting in
inadequate contribution margin to cover fixed costs, and a consequent loss for the company
on the product.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-68
56. Roal 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 37,000 units per
year.
The company has invested $220,000 in this product and expects a return on investment of 9%.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price of the product using the absorption costing approach.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium
A-69
Management plans to produce and sell 4,000 units of the new product annually. The new
product would require an investment of $643,000 and has a required return on investment of
20%.
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-70
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
A-71
58. 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.
a. The unit product cost is:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy
A-72
59. 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.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
60. Elio Corporation would like to use target costing for a new product that is under
consideration. At a selling price of $84 per unit, management projects sales of 40,000 units.
The new product would require an investment of $400,000. The desired return on investment
is 11%.
Required:
Determine the target cost per unit for the new product.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
A-73
61. The management of Mozdzierz, Inc., is considering a new product that would have a
selling price of $83 per unit and projected sales of 90,000 units. The new product would
require an investment of $200,000. The desired return on investment is 15%.
Required:
Determine the target cost per unit for the new product.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy
A-74