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Appendix A Pricing Products and Services

LO1: Economists' approach to pricing

LO2: Absorption costing approach

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Question Type T/F T/F T/F T/F T/F T/F T/F T/F T/F T/F T/F Conceptual M/C Conceptual M/C Conceptual M/C Conceptual M/C Conceptual M/C Conceptual M/C

Professional Exam Adapted

LO3: Target costing

Other topics

Difficulty

H H E M M M M H E M H M H H H H E

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ID New,6/10/98,M 6/e: 12-10 New,6/10/98,D New,6/10/98,F New,6/10/98,H New,6/10/98,L New,6/10/98,W New,6/10/98,U New,3/24/95,E 5/e: 12-6 New,6/10/98,Z New,6/1/0/98,D New,6/1/0/98,G New,6/1/0/98,J New,6/1/0/98,M New,6/1/0/98,C 8/e: ATB A-06

Origin E.N. Authors 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. David Keyes

CMA/CPA origin

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8/e: ATB A-12 New,6/11/98,H6 New,6/11/98,G6 New,6/11/98,F6 New,6/11/98,I6 New,6/11/98,E6 4/e: 12-753 4/e: 12-733 New,6/11/98,L6 New,6/11/98,J6 4/e: 12-750 New,6/11/98,M6 New,6/11/98,K6 11/2/2004 Single MC C4 4/e: 12-755 11/2/2004 Single MC A4 11/2/2004 Single MC B4 New, 6/10/98, D6 New, 6/10/98, C6 New, 6/10/98, A6 New, 6/10/98, B6 6/e: 12-52 to 54 New, 6/10/98, E6 11/2/2004 Muli MC A4 11/2/2004 Multi MC C4

David Keyes E.N. E.N. E.N. E.N. E.N. Authors Authors E.N. E.N. Authors E.N. E.N. E.N. Authors E.N. E.N. E.N. E.N. E.N. E.N. Authors E.N. E.N. E.N.

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Multipart M/C Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem Problem

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11/2/2004 Multi MC B4 New,6/11/98,Q6 New,6/11/98,N6 New,6/11/98,O5 New,6/11/98,P6 11/2/2004 Problem A4 7/e: AppL-Problem 27 11/2/2004 Problem B4 New,6/11/98,R6 11/2/2004 Problem E4 11/2/2004 Problem C4 Clone 7/e EL-5 11/2/2004 Problem D4

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.

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True / False Questions

1. Assume that the price elasticity of demand is less than -1 (for example, -1.5). As the absolute value of the price elasticity of demand increases, the profit-maximizing price decreases. True False

2. Salt is an example of a product whose demand is price inelastic. True False

3. Demand for a product is said to be inelastic if a change in price has little effect on the number of units sold. True False

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

5. Gasoline is a product whose demand is elastic. True False

6. The price elasticity of demand can be estimated using the formula ln(1 + % change in selling price)/ln(1 + % change in quantity sold). True False

7. The absorption costing approach to cost-plus pricing provides assurance that the company's required rate of return will be realized even if unit sales are less than forecasted. True False

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

9. Target costing is primarily used when developing a new product. True False

10. Cost-plus pricing is so named because all costs--production, selling, and administrative-are included in the cost base from which a target selling price is derived. True False

11. If a company sells a product for less than its budgeted unit product cost under absorption costing, then the company will lose money. True False

Multiple Choice Questions

12. Holding all other things constant, an increase in variable production costs will affect: A. the selling price under the absorption costing approach to cost-plus pricing. B. the profit-maximizing price. C. both the selling price under the absorption costing approach to cost-plus pricing and the profit-maximizing price. D. neither the selling price under the absorption costing approach to cost-plus pricing nor the profit-maximizing price.

13. Holding all other things constant, an increase in fixed selling costs will affect: A. the selling price under the absorption costing approach to cost-plus pricing. B. the profit-maximizing price. C. both the selling price under the absorption costing approach to cost-plus pricing and the profit-maximizing price. D. neither the selling price under the absorption costing approach to cost-plus pricing nor the profit-maximizing price.

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14. Holding all other things constant, an increase in variable 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.

15. Holding all other things constant, an increase in the company's required ROI 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.

16. Holding all other things constant, if the price elasticity of demand increases (i.e., becomes more negative), then the markup under absorption costing will: A. increase. B. decrease. C. remain the same. D. The effect cannot be determined.

17. In the absorption approach to cost-plus pricing, which costs below are included in the cost base?

A. Option A B. Option B C. Option C D. Option D

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18. Which of the following methods would probably be the most beneficial to a company that has little or no control over the price that it can charge for its product or service? A. Cost-plus pricing, absorption approach B. Cost-plus pricing, contribution approach C. Time and material pricing D. Target costing

19. Hanvold 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. -3.14 B. -3.55 C. -4.72 D. -2.90

20. Gorry Company's management has found that every 7% increase in the selling price of one of the company's products leads to a 11% decrease in the product's total unit sales. The product's absorption costing unit product cost is $13.00. The variable production cost of the product is $4.00 per unit and the variable selling and administrative cost is $5.40 per unit. According to the formula in the text, the product's profit-maximizing price is closest to: A. $22.41 B. $31.00 C. $23.60 D. $20.06

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21. Finnie 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 $23.10 per unit and the variable selling and administrative cost is $5.40 per unit. The product's profit-maximizing price according to the formula in the text is closest to: A. $32.03 B. $47.48 C. $43.87 D. $33.63

22. Inkeo 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 $12.70 per unit. According to the formula in the text, the product's profit-maximizing price is closest to: A. $28.87 B. $28.53 C. $15.91 D. $29.91

23. Epperson Company's management believes that every 3% decrease in the selling price of one of the company's products leads to an 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. -2.82 B. -2.98 C. -2.53 D. -2.03

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24. The following information is available on Bruder Inc.'s Product A:

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. $240,000 B. $300,000 C. $140,000 D. $200,000

25. Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of one unit of product Y:

If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 15% rate of return on investment (ROI), the required markup on absorption cost for product Y would be: A. 12% B. 15% C. 26% D. 38%

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26. Lafave 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 79,000 units next year, the unit product cost of a particular product is $50.80. The company's selling and administrative expenses for this product are budgeted to be $1,896,000 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 15%. The markup on absorption cost for this product would be closest to: A. 62.2% B. 15.0% C. 47.2% D. 48.2%

27. Jaber Corporation makes a product with the following costs:

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 $200,000 in this product and expects a return on investment of 9%. The markup on absorption cost would be closest to: A. 37.7% B. 9.0% C. 110.8% D. 37.1%

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28. Delsey Company manufactures product A which has a selling price of $48 per unit. Unit costs associated with the manufacture and sale of product A follow (based on 30,000 units manufactured and sold each year):

The company uses the absorption costing approach to cost-plus pricing described in the text. The percentage markup being used to determine the selling price for product A is closest to: A. 100.0% B. 37.5% C. 60.0% D. 40.0%

29. Mahboud, 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 64,000 units next year, the unit product cost of a particular product is $84.20. The company's selling and administrative expenses for this product are budgeted to be $1,292,800 in total for the year. The company has invested $560,000 in this product and expects a return on investment of 13%. The selling price for this product based on the absorption costing approach would be closest to: A. $95.15 B. $130.86 C. $104.40 D. $105.54

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30. Kirsch, Inc., manufactures a product with the following costs:

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 41,000 units per year. The company has invested $540,000 in this product and expects a return on investment of 13%. The selling price based on the absorption costing approach would be closest to: A. $95.43 B. $72.31 C. $41.50 D. $70.60

31. A new product, an automated crepe maker, is being introduced at Laguna Corporation. At a selling price of $52 per unit, management projects sales of 90,000 units. Launching the crepe maker as a new product would require an investment of $200,000. The desired return on investment is 15%. The target cost per crepe maker is closest to: A. $59.80 B. $52.00 C. $59.42 D. $51.67

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32. Penrod Company wants to manufacture and sell a new electric shaver. To compete effectively, the shaver would have to be priced at no more than $40 per unit. The following additional information is available:

The target cost per shaver would be: A. $25 B. $45 C. $35 D. $40

33. The management of Kozloff Corporation is considering introducing a new product--a compact barbecue. At a selling price of $74 per unit, management projects sales of 80,000 units. Launching the barbecue as a new product would require an investment of $800,000. The desired return on investment is 14%. The target cost per barbecue is closest to: A. $72.60 B. $82.76 C. $84.36 D. $74.00

34. Perin Corporation would like to use target costing for a new product it is considering introduce. At a selling price of $25 per unit, management projects sales of 30,000 units. The new product would require an investment of $500,000. The desired return on investment is 11%. The target cost per unit is closest to: A. $23.17 B. $25.00 C. $25.72 D. $27.75

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Dieckman Company makes a product with the following costs:

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 71,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 13%. Direct labor is a variable cost in this company.

35. The markup on absorption cost is closest to: A. 25.7% B. 13.0% C. 24.2% D. 72.4%

36. The selling price based on the absorption costing approach is closest to: A. $70.88 B. $41.60 C. $56.40 D. $57.06

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37. If every 10% increase in price leads to a 12% decrease in quantity sold, the profitmaximizing price is closest to: A. $56.40 B. $130.10 C. $144.16 D. $134.03

Coan 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 $21.40 per unit.

38. The product's price elasticity of demand as defined in the text is closest to: A. -3.46 B. -3.67 C. -2.92 D. -1.44

39. The product's profit-maximizing price according to the formula in the text is closest to: A. $30.08 B. $70.54 C. $29.43 D. $32.55

Allen Corporation's vice president in charge of marketing believes that every 8% increase in the selling price of one of the company's products would lead to an 11% decrease in the product's total unit sales. The product's absorption costing unit product cost is $10.70. The variable production cost is $1.50 per unit and the variable selling and administrative cost is $4.40 per unit.

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40. The product's price elasticity of demand as defined in the text is closest to: A. -1.06 B. -1.96 C. -1.51 D. -1.81

41. The product's profit-maximizing price according to the formula in the text is closest to: A. $12.96 B. $4.42 C. $17.37 D. $31.51

Boden Company's management believes that every 2% 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 variable cost is $19.30 per unit.

42. The product's price elasticity of demand as defined in the text is closest to: A. -3.01 B. -2.07 C. -1.89 D. -2.59

43. The product's profit-maximizing price according to the formula in the text is closest to: A. $37.39 B. $31.44 C. $40.88 D. $28.91

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Werry Company is about to introduce a new product. It is expected that the following costs would be incurred when 25,000 units are produced and sold in a year:

Werry Company uses the absorption costing approach to cost-plus pricing as described in the text.

44. Assume that Werry Company has not yet determined a markup to use on the new product. The new product would require an investment of $800,000. The company requires a 20% rate of return on investment on all new products. The markup under the absorption costing approach would be closest to: A. 62.0% B. 80.0% C. 35.0% D. 24.6%

45. Assume that the company uses a markup of 90% in order to determine selling prices. The selling price under the absorption costing approach would be: A. $45.60 B. $38.00 C. $41.80 D. $49.40

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46. After introducing the product at a markup of 90%, the company finds that it has excess capacity. A foreign dealer has offered to purchase 4,000 units of the product at a special price of $32 per unit. This sale would not disturb regular business. If the special price is accepted on the 4,000 units, the effect on total profits for the year will be a: A. 56,000 increase B. 76,800 increase C. 16,000 increase D. 48,000 increase

Edelheit 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 26,000 units next year, the unit product cost of a particular product is $24.20. The company's selling and administrative expenses for this product are budgeted to be $629,000 in total for the year. The company has invested $340,000 in this product and expects a return on investment of 14%.

47. The markup on absorption cost for this product would be closest to: A. 100.0% B. 14.0% C. 114.0% D. 107.5%

48. The selling price based on the absorption costing approach for this product would be closest to: A. $27.59 B. $50.22 C. $48.40 D. $100.46

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The management of Store 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 6,000 units of the new product annually. The new product would require an investment of $1,140,000 and has a required return on investment of 10%.

49. The absorption costing unit product cost is: A. $57 B. $64 C. $77 D. $53

50. To the nearest whole percent, the markup percentage on absorption cost is: A. 10% B. 30% C. 50% D. 20%

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51. The unit target selling price using the absorption costing approach is closest to: A. $77 B. $116 C. $70 D. $96

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The management of Nerby Corporation is considering introducing a new product--a compact lawn blower. At a selling price of $28 per unit, management projects sales of 40,000 units. The lawn blower would require an investment of $900,000. The desired return on investment is 20%.

52. The desired profit according to the target costing calculations is: A. $1,120,000 B. $224,000 C. $940,000 D. $180,000

53. The target cost per lawn blower is closest to: A. $28.20 B. $23.50 C. $33.60 D. $28.00

Blumstein 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 60,000 units. The new product would require an investment of $300,000. The desired return on investment is 11%.

54. The desired profit according to the target costing calculations is: A. $33,000 B. $145,200 C. $1,287,000 D. $1,320,000

55. The target cost per unit is closest to: A. $22.00 B. $23.81 C. $21.45 D. $24.42

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Essay Questions

56. Qudsi 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 36,000 units per year. The company has invested $580,000 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 13% 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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57. Nicklos Corporation's marketing manager believes that every 7% decrease in the selling price of one of the company's products would lead to a 10% increase in the product's total unit sales. The product's absorption costing unit product cost is $18.60. The variable production cost is $7.60 per unit and the variable selling and administrative cost is $4.90. 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.

58. Okano Company's management believes that every 5% increase in the selling price of one of the company's products would lead to a 7% decrease in the product's total unit sales. The variable cost per unit of this product is $47.00. 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.

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59. Pasta 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.

The product's variable cost is $15.90 per unit. 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.

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60. The management of Heimrich 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 5,000 units of the new product annually. The new product would require an investment of $420,000 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.

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61. Mercer Company estimates that an investment of $800,000 would be necessary in order to produce and sell 40,000 units of Product A each year. Costs associated with the new product would be:

The company requires a 20% rate of return on the investment on all products. Required: a. Compute the markup that would be used under the absorption costing approach to cost-plus pricing as described in the text. b. Compute the selling price under the absorption costing approach to cost-plus pricing as described in the text.

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62. Madonia Corporation is introducing a new product whose direct materials cost is $37 per unit, direct labor cost is $19 per unit, variable manufacturing overhead is $6 per unit, and variable selling and administrative expense is $4 per unit. The annual fixed manufacturing overhead associated with the product is $91,000 and its annual fixed selling and administrative expense is $42,000. Management plans to produce and sell 7,000 units of the new product annually. The new product would require an investment of $595,000 and has a required return on investment of 20%. 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.

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63. Rizer 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 40,000 units per year. The company has invested $200,000 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.

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64. Management of Fabiano Corporation is considering a new product, an outdoor speaker that would have a selling price of $43 per unit and projected sales of 20,000 units. Launching the new product would require an investment of $600,000. The desired return on investment is 14%. Required: Determine the target cost per unit for the outdoor speaker.

65. Guzzetta Corporation would like to use target costing for a new product that is under consideration. At a selling price of $70 per unit, management projects sales of 40,000 units. The new product would require an investment of $700,000. The desired return on investment is 17%. Required: Determine the target cost per unit for the new product.

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66. Kupperson, Inc. is considering adding an inline roller skate to its product line. Management believes that in order to be competitive, the skate cannot be priced above $65 per pair. The company requires a minimum return of 25% on its investments. Launching the new product would require an investment of $4,000,000. Sales are expected to be 50,000 pairs of skates per year. Required: Compute the target cost of a pair of skates.

67. The management of Mendoza, Inc., is considering a new product that would have a selling price of $98 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 10%. Required: Determine the target cost per unit for the new product.

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Appendix A Pricing Products and Services Answer Key

True / False Questions

1. Assume that the price elasticity of demand is less than -1 (for example, -1.5). As the absolute value of the price elasticity of demand increases, the profit-maximizing price decreases. TRUE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Hard

2. Salt is an example of a product whose demand is price inelastic. TRUE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Hard

3. Demand for a product is said to be inelastic if a change in price has little effect on the number of units sold. TRUE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Easy

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

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

5. Gasoline is a product whose demand is elastic. TRUE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

6. The price elasticity of demand can be estimated using the formula ln(1 + % change in selling price)/ln(1 + % change in quantity sold). FALSE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

7. The absorption costing approach to cost-plus pricing provides assurance that the company's required rate of return will be realized even if unit sales are less than forecasted. FALSE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

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

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Hard

9. Target costing is primarily used when developing a new product. TRUE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

10. Cost-plus pricing is so named because all costs--production, selling, and administrative-are included in the cost base from which a target selling price is derived. FALSE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: Other topics Level: Medium

11. If a company sells a product for less than its budgeted unit product cost under absorption costing, then the company will lose money. FALSE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: Other topics Level: Hard

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Multiple Choice Questions

12. Holding all other things constant, an increase in variable production costs will affect: A. the selling price under the absorption costing approach to cost-plus pricing. B. the profit-maximizing price. C. both the selling price under the absorption costing approach to cost-plus pricing and the profit-maximizing price. D. neither the selling price under the absorption costing approach to cost-plus pricing nor the profit-maximizing price.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

13. Holding all other things constant, an increase in fixed selling costs will affect: A. the selling price under the absorption costing approach to cost-plus pricing. B. the profit-maximizing price. C. both the selling price under the absorption costing approach to cost-plus pricing and the profit-maximizing price. D. neither the selling price under the absorption costing approach to cost-plus pricing nor the profit-maximizing price.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Hard

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14. Holding all other things constant, an increase in variable 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.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Hard

15. Holding all other things constant, an increase in the company's required ROI 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.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Hard

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16. Holding all other things constant, if the price elasticity of demand increases (i.e., becomes more negative), then the markup under absorption costing will: A. increase. B. decrease. C. remain the same. D. The effect cannot be determined.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Hard

17. In the absorption approach to cost-plus pricing, which costs below are included in the cost base?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Easy

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18. Which of the following methods would probably be the most beneficial to a company that has little or no control over the price that it can charge for its product or service? A. Cost-plus pricing, absorption approach B. Cost-plus pricing, contribution approach C. Time and material pricing D. Target costing

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

19. Hanvold 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. -3.14 B. -3.55 C. -4.72 D. -2.90 d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (1,410 - 1,700)/1,700)/ln(1 + ($32 - $30)/$30) = -2.90

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

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20. Gorry Company's management has found that every 7% increase in the selling price of one of the company's products leads to a 11% decrease in the product's total unit sales. The product's absorption costing unit product cost is $13.00. The variable production cost of the product is $4.00 per unit and the variable selling and administrative cost is $5.40 per unit. According to the formula in the text, the product's profit-maximizing price is closest to: A. $22.41 B. $31.00 C. $23.60 D. $20.06 d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.11))/ln(1 + 0.07) = -1.72 Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.72)) = 1.39 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 1.38) ($4.00 + $5.40) = $22.47 (the exact answer without rounding error is $22.41)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

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21. Finnie 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 $23.10 per unit and the variable selling and administrative cost is $5.40 per unit. The product's profit-maximizing price according to the formula in the text is closest to: A. $32.03 B. $47.48 C. $43.87 D. $33.63 d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.13))/ln(1 + 0.05) = -2.85 Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-2.85)) = 0.54 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 0.54) ($23.10 + $5.40) = $43.89 (the exact answer without rounding error is $43.87)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

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22. Inkeo 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 $12.70 per unit. According to the formula in the text, the product's profit-maximizing price is closest to: A. $28.87 B. $28.53 C. $15.91 D. $29.91 % change in quantity sold = (5,030 - 4,300)/4,300 = +16.98% % change in price = ($11 - $12)/$12 = -8.33% d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (0.1698))/ln(1 + (-0.0833)) = -1.80 Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.80)) = 1.25 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 1.25) $12.70 = $28.58 (the exact answer without rounding error is $28.53)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

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23. Epperson Company's management believes that every 3% decrease in the selling price of one of the company's products leads to an 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. -2.82 B. -2.98 C. -2.53 D. -2.03 d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (0.08))/ln(1 + (-0.03) = -2.53

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Easy

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24. The following information is available on Bruder Inc.'s Product A:

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. $240,000 B. $300,000 C. $140,000 D. $200,000 Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost $80 = (1 + Markup percentage on absorption cost) $50 1 + Markup percentage on absorption cost = $80 $50 = 1.6 Markup percentage on absorption cost = 0.6 Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) 0.6 = [(15% $400,000) + Selling and administrative expenses] ($50 per unit 10,000 units) 0.6 = [$60,000 + Selling and administrative expenses] $500,000 $60,000 + Selling and administrative expenses = 0.6 $500,000 Selling and administrative expenses = $300,000 - $60,000 = $240,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Hard

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25. Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of one unit of product Y:

If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 15% rate of return on investment (ROI), the required markup on absorption cost for product Y would be: A. 12% B. 15% C. 26% D. 38% Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(15% $400,000) + $130,000] ($25 per unit 20,000 units) = $190,000 $500,000 = 38%

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

App A-42

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26. Lafave 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 79,000 units next year, the unit product cost of a particular product is $50.80. The company's selling and administrative expenses for this product are budgeted to be $1,896,000 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 15%. The markup on absorption cost for this product would be closest to: A. 62.2% B. 15.0% C. 47.2% D. 48.2% Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(15% $260,000) + $1,896,000] ($50.80 per unit 79,000 units) = ($39,000 + $1,896,000) $4,013,200 = $1,935,000 $4,013,200 = 48.2%

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

App A-43

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27. Jaber Corporation makes a product with the following costs:

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 $200,000 in this product and expects a return on investment of 9%. The markup on absorption cost would be closest to: A. 37.7% B. 9.0% C. 110.8% D. 37.1% Selling and administrative expenses = $2.30 per unit 52,000 units + $988,000 = $1,107,600

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(9% $200,000) + $1,107,600] ($57.40 per unit 52,000 units) = [$18,000 + $1,107,600] $2,984,800 = $1,125,600 $2,984,800 = 37.7%

App A-44

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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

App A-45

Appendix A Pricing Products and Services

28. Delsey Company manufactures product A which has a selling price of $48 per unit. Unit costs associated with the manufacture and sale of product A follow (based on 30,000 units manufactured and sold each year):

The company uses the absorption costing approach to cost-plus pricing described in the text. The percentage markup being used to determine the selling price for product A is closest to: A. 100.0% B. 37.5% C. 60.0% D. 40.0%

Selling price = (1 + Markup percentage) Cost $48 = (1 + Markup percentage) $30 1 + Markup percentage = $48 $30 Markup percentage = $48 $30 - 1 = 1.6 - 1 = 0.6 or 60%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Hard

App A-46

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29. Mahboud, 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 64,000 units next year, the unit product cost of a particular product is $84.20. The company's selling and administrative expenses for this product are budgeted to be $1,292,800 in total for the year. The company has invested $560,000 in this product and expects a return on investment of 13%. The selling price for this product based on the absorption costing approach would be closest to: A. $95.15 B. $130.86 C. $104.40 D. $105.54 Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(13% $560,000) + $1,292,800] ($84.20 per unit 64,000 units) = [$72,800 + $1,292,800] $5,388,800 = [$72,800 + $1,292,800] $5,388,800 = $1,365,600 $5,388,800 = 25.34% Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost = (1 + 0.2534) $84.20 = $105.54

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

App A-47

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30. Kirsch, Inc., manufactures a product with the following costs:

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 41,000 units per year. The company has invested $540,000 in this product and expects a return on investment of 13%. The selling price based on the absorption costing approach would be closest to: A. $95.43 B. $72.31 C. $41.50 D. $70.60

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Selling and administrative expenses = $2.90 per unit 41,000 units + $582,000 = $700,900 Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(13% $540,000) + $700,900] ($53.50 per unit 41,000 units) = [$70,200 + $700,900] $2,193,500 = [$771,100] $2,193,500 = 35.15% Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost = (1 + 0.3515) $53.50 = $72.31
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

App A-49

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31. A new product, an automated crepe maker, is being introduced at Laguna Corporation. At a selling price of $52 per unit, management projects sales of 90,000 units. Launching the crepe maker as a new product would require an investment of $200,000. The desired return on investment is 15%. The target cost per crepe maker is closest to: A. $59.80 B. $52.00 C. $59.42 D. $51.67

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

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32. Penrod Company wants to manufacture and sell a new electric shaver. To compete effectively, the shaver would have to be priced at no more than $40 per unit. The following additional information is available:

The target cost per shaver would be: A. $25 B. $45 C. $35 D. $40

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

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33. The management of Kozloff Corporation is considering introducing a new product--a compact barbecue. At a selling price of $74 per unit, management projects sales of 80,000 units. Launching the barbecue as a new product would require an investment of $800,000. The desired return on investment is 14%. The target cost per barbecue is closest to: A. $72.60 B. $82.76 C. $84.36 D. $74.00

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

App A-52

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34. Perin Corporation would like to use target costing for a new product it is considering introduce. At a selling price of $25 per unit, management projects sales of 30,000 units. The new product would require an investment of $500,000. The desired return on investment is 11%. The target cost per unit is closest to: A. $23.17 B. $25.00 C. $25.72 D. $27.75

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

Dieckman Company makes a product with the following costs:

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 71,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 13%. Direct labor is a variable cost in this company.

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35. The markup on absorption cost is closest to: A. 25.7% B. 13.0% C. 24.2% D. 72.4%

Selling and administrative expenses = $1.00 per unit 71,000 units + $710,000 = $781,000 Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(13% $360,000) + $781,000] ($45.40 per unit 71,000 units) = [($46,800) + $781,000] ($3,223,400) = [$827,800] $3,223,400 = 25.7%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

App A-54

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36. The selling price based on the absorption costing approach is closest to: A. $70.88 B. $41.60 C. $56.40 D. $57.06

Selling and administrative expenses = $1.00 per unit 71,000 units + $710,000 = $781,000 Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(13% $360,000) + $781,000] ($45.40 per unit 71,000 units) = [($46,800) + $781,000] ($3,223,400) = [$827,800] $3,223,400 = 25.7% Absorption cost based selling price = (1 + 0.257) $45.40 = $57.06
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

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37. If every 10% increase in price leads to a 12% decrease in quantity sold, the profitmaximizing price is closest to: A. $56.40 B. $130.10 C. $144.16 D. $134.03 d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.12))/ln(1 + (+0.10)) = -1.34 Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.34)) = 2.94

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 2.94) ($34.10) = $134.35 (the exact answer, without rounding error, is $134.03)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

Coan 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 $21.40 per unit.

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38. The product's price elasticity of demand as defined in the text is closest to: A. -3.46 B. -3.67 C. -2.92 D. -1.44 % change in price = ($26 - $24)/$24 = 8.33% % change in quantity sold = (1,200 - 950)/1,200 = -20.83% d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.2083))/ln(1 + (+0.0833)) = -2.92

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Easy

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39. The product's profit-maximizing price according to the formula in the text is closest to: A. $30.08 B. $70.54 C. $29.43 D. $32.55 % change in price = ($26 - $24)/$24 = 8.33% % change in quantity sold = (1,200 - 950)/1,200 = -20.83% d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.2083))/ln(1 + (+0.0833)) = -2.92 Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-2.92)) = 0.52 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 0.52) $21.40 = $32.53 (the exact answer, without rounding error, is $32.55)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Easy

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Allen Corporation's vice president in charge of marketing believes that every 8% increase in the selling price of one of the company's products would lead to an 11% decrease in the product's total unit sales. The product's absorption costing unit product cost is $10.70. The variable production cost is $1.50 per unit and the variable selling and administrative cost is $4.40 per unit.

40. The product's price elasticity of demand as defined in the text is closest to: A. -1.06 B. -1.96 C. -1.51 D. -1.81 d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.11))/ln(1 + (+0.08)) = -1.51

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

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41. The product's profit-maximizing price according to the formula in the text is closest to: A. $12.96 B. $4.42 C. $17.37 D. $31.51 d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.11))/ln(1 + (+0.08)) = -1.51 Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.51)) = 1.96 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 1.96) ($1.50 + $4.40) = $17.46 (the exact answer, without rounding error, is $17.37)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

Boden Company's management believes that every 2% 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 variable cost is $19.30 per unit.

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42. The product's price elasticity of demand as defined in the text is closest to: A. -3.01 B. -2.07 C. -1.89 D. -2.59 d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.05))/ln(1 + (+0.02)) = -2.59

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Easy

43. The product's profit-maximizing price according to the formula in the text is closest to: A. $37.39 B. $31.44 C. $40.88 D. $28.91 d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + (-0.05))/ln(1 + (+0.02)) = -2.59 Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-2.59)) = 0.63 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 0.63) $19.30 = $31.46 (the exact answer, without rounding error, is $31.44)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Easy

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Werry Company is about to introduce a new product. It is expected that the following costs would be incurred when 25,000 units are produced and sold in a year:

Werry Company uses the absorption costing approach to cost-plus pricing as described in the text.

44. Assume that Werry Company has not yet determined a markup to use on the new product. The new product would require an investment of $800,000. The company requires a 20% rate of return on investment on all new products. The markup under the absorption costing approach would be closest to: A. 62.0% B. 80.0% C. 35.0% D. 24.6% Unit product cost = $14 per unit + $6 per unit = $20 per unit Selling and administrative expenses = $4 per unit 25,000 units + $50,000 = $150,000 Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(20% $800,000) + $150,000] ($20 per unit 25,000 units) = [($160,000) + $150,000] ($500,000) = [$310,000] $500,000 = 62%

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

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45. Assume that the company uses a markup of 90% in order to determine selling prices. The selling price under the absorption costing approach would be: A. $45.60 B. $38.00 C. $41.80 D. $49.40 Unit product cost = $14 per unit + $6 per unit = $20 per unit Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost = (1 + 0.90) $20 = $38

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

46. After introducing the product at a markup of 90%, the company finds that it has excess capacity. A foreign dealer has offered to purchase 4,000 units of the product at a special price of $32 per unit. This sale would not disturb regular business. If the special price is accepted on the 4,000 units, the effect on total profits for the year will be a: A. 56,000 increase B. 76,800 increase C. 16,000 increase D. 48,000 increase Variable cost per unit = $14 per unit + $4 per unit = $18 per unit Incremental profit = ($32 per unit - $18 per unit) 4,000 units = $14 per unit 4,000 units = $56,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

App A-63

Appendix A Pricing Products and Services

Edelheit 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 26,000 units next year, the unit product cost of a particular product is $24.20. The company's selling and administrative expenses for this product are budgeted to be $629,000 in total for the year. The company has invested $340,000 in this product and expects a return on investment of 14%.

47. The markup on absorption cost for this product would be closest to: A. 100.0% B. 14.0% C. 114.0% D. 107.5% Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(14% $340,000) + $629,000] ($24.20 26,000 units) = [($47,600) + $629,000] ($629,200) = [($47,600) + $629,000] $629,200 = [$676,600] $629,200 = 107.5%

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Easy

App A-64

Appendix A Pricing Products and Services

48. The selling price based on the absorption costing approach for this product would be closest to: A. $27.59 B. $50.22 C. $48.40 D. $100.46 Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(14% $340,000) + $629,000] ($24.20 26,000 units) = [($47,600) + $629,000] ($629,200) = [($47,600) + $629,000] $629,200 = [$676,600] $629,200 = 107.5% Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost = (1 + 1.075) $24.20 = $50.22

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Easy

App A-65

Appendix A Pricing Products and Services

The management of Store 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 6,000 units of the new product annually. The new product would require an investment of $1,140,000 and has a required return on investment of 10%.

49. The absorption costing unit product cost is: A. $57 B. $64 C. $77 D. $53

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Easy

App A-66

Appendix A Pricing Products and Services

50. To the nearest whole percent, the markup percentage on absorption cost is: A. 10% B. 30% C. 50% D. 20%

Selling and administrative expenses = $4 per unit 6,000 units + $54,000 = $78,000 Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(10% $1,140,000) + $78,000] ($64 per unit 6,000 units) = [($114,000) + $78,000] ($384,000) = [$192,000] $384,000 = 0.50 or 50%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Easy

App A-67

Appendix A Pricing Products and Services

51. The unit target selling price using the absorption costing approach is closest to: A. $77 B. $116 C. $70 D. $96

Selling and administrative expenses = $4 per unit 6,000 units + $54,000 = $78,000 Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(10% $1,140,000) + $78,000] ($64 per unit 6,000 units) = [($114,000) + $78,000] ($384,000) = [$192,000] $384,000 = 0.50 or 50% Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost = (1 + 0.50) $64 = $96
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Easy

The management of Nerby Corporation is considering introducing a new product--a compact lawn blower. At a selling price of $28 per unit, management projects sales of 40,000 units. The lawn blower would require an investment of $900,000. The desired return on investment is 20%.

App A-68

Appendix A Pricing Products and Services

52. The desired profit according to the target costing calculations is: A. $1,120,000 B. $224,000 C. $940,000 D. $180,000 Desired profit = 20% $900,000 = $180,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

53. The target cost per lawn blower is closest to: A. $28.20 B. $23.50 C. $33.60 D. $28.00 Target cost = Anticipated selling price - Desired profit = $28.00 per unit - ($180,000/40,000 units) = $28.00 per unit - $4.50 per unit = $23.50 per unit

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

Blumstein 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 60,000 units. The new product would require an investment of $300,000. The desired return on investment is 11%.

App A-69

Appendix A Pricing Products and Services

54. The desired profit according to the target costing calculations is: A. $33,000 B. $145,200 C. $1,287,000 D. $1,320,000 Desired profit = 11% $300,000 = $33,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

55. The target cost per unit is closest to: A. $22.00 B. $23.81 C. $21.45 D. $24.42 Target cost = Anticipated selling price - Desired profit = $22.00 per unit - ($33,000/60,000 units) = $22.00 per unit - $0.55 per unit = $21.45 per unit

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

Essay Questions

App A-70

Appendix A Pricing Products and Services

56. Qudsi 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 36,000 units per year. The company has invested $580,000 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 13% decrease in quantity sold. Assuming no change in cost structure and that direct labor is a variable cost, compute the profit-maximizing price.

App A-71

Appendix A Pricing Products and Services

a.

Markup percentage on absorption cost = [(12% $580,000) + ($3.20 36,000 + $561,600)] (36,000 $57.00) = [($69,600) + ($676,800)] $2,052,000 = 36.37% b. Target selling price = $57.00 + 36.37% $57.00 = $77.73 c. d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + -13%)/ln(1 + 10%) = -1.46 Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.46)) = 2.17 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 2.17) $39.10 = (3.17) $39.10 = $123.89

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Hard

App A-72

Appendix A Pricing Products and Services

57. Nicklos Corporation's marketing manager believes that every 7% decrease in the selling price of one of the company's products would lead to a 10% increase in the product's total unit sales. The product's absorption costing unit product cost is $18.60. The variable production cost is $7.60 per unit and the variable selling and administrative cost is $4.90. 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 + 10%)/ln(1 + -7%) = -1.31 b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.31)) = 3.19 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 3.19) ($4.90 + $7.60) = (4.19) $12.50 = $52.39

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

App A-73

Appendix A Pricing Products and Services

58. Okano Company's management believes that every 5% increase in the selling price of one of the company's products would lead to a 7% decrease in the product's total unit sales. The variable cost per unit of this product is $47.00. 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. d = ln(1 + %change in quantity sold)/ln(1 + %change in price) = ln(1 + -7%)/ln(1 + 5%) = -1.49 b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.49)) = 2.05 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 2.05) $47.00 = (3.05) $47.00 = $143.43

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Easy

App A-74

Appendix A Pricing Products and Services

59. Pasta 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.

The product's variable cost is $15.90 per unit. 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. % change in quantity = -13.67% % change in price = 8.93% d = ln(1 + % change in quantity sold)/ln(1 + % change in price) = ln(1 + -13.67%)/ln(1 + 8.93%) = -1.72 b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.72)) = 1.39 Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) Variable cost per unit = (1 + 1.39) $15.90 = (2.39) $15.90 = $38.03

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price elasticity of demand and variable cost Level: Medium

App A-75

Appendix A Pricing Products and Services

60. The management of Heimrich 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 5,000 units of the new product annually. The new product would require an investment of $420,000 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.

App A-76

Appendix A Pricing Products and Services

a. The unit product cost is:

b. Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] [Unit product cost Units sales] = [(20% $420,000) + ($3.00 5,000 + $5,000)] [$52 5,000] = 40% c. The target selling price is determined as follows:

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Easy

App A-77

Appendix A Pricing Products and Services

61. Mercer Company estimates that an investment of $800,000 would be necessary in order to produce and sell 40,000 units of Product A each year. Costs associated with the new product would be:

The company requires a 20% rate of return on the investment on all products. Required: a. Compute the markup that would be used under the absorption costing approach to cost-plus pricing as described in the text. b. Compute the selling price under the absorption costing approach to cost-plus pricing as described in the text.

App A-78

Appendix A Pricing Products and Services

a. Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] [Unit product cost Unit sales]

Markup percentage on absorption cost = [(20% $800,000) + $440,000] [$37.50 40,000] = $600,000 $1,500,000 = 40% b. Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost = (1 + 0.40) $37.50 = $52.50

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

App A-79

Appendix A Pricing Products and Services

62. Madonia Corporation is introducing a new product whose direct materials cost is $37 per unit, direct labor cost is $19 per unit, variable manufacturing overhead is $6 per unit, and variable selling and administrative expense is $4 per unit. The annual fixed manufacturing overhead associated with the product is $91,000 and its annual fixed selling and administrative expense is $42,000. Management plans to produce and sell 7,000 units of the new product annually. The new product would require an investment of $595,000 and has a required return on investment of 20%. 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:

b. Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] [Unit product cost Units sales] = [(20% $595,000) + ($4.00 7,000 + $42,000)] [$75 7,000] = 36% c. Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost = (1 + 0.36) $75 = $102

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Easy

App A-80

Appendix A Pricing Products and Services

63. Rizer 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 40,000 units per year. The company has invested $200,000 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. a.

Markup percentage on absorption cost = [(Required ROI Investment) + Selling and administrative expenses] (Unit product cost Unit sales) = [(15% $200,000) + ($4.10 40,000 + $908,000)] (40,000 $57.10) = [($30,000) + ($1,072,000)] $2,284,000 = 48.25% b. Absorption cost based selling price = (1 + Markup percentage on absorption cost) Unit product cost = (1 + 0.4825) $57.10 = $84.65

App A-81

Appendix A Pricing Products and Services

App A-82

Appendix A Pricing Products and Services

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach Level: Medium

64. Management of Fabiano Corporation is considering a new product, an outdoor speaker that would have a selling price of $43 per unit and projected sales of 20,000 units. Launching the new product would require an investment of $600,000. The desired return on investment is 14%. Required: Determine the target cost per unit for the outdoor speaker.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

App A-83

Appendix A Pricing Products and Services

65. Guzzetta Corporation would like to use target costing for a new product that is under consideration. At a selling price of $70 per unit, management projects sales of 40,000 units. The new product would require an investment of $700,000. The desired return on investment is 17%. Required: Determine the target cost per unit for the new product.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

App A-84

Appendix A Pricing Products and Services

66. Kupperson, Inc. is considering adding an inline roller skate to its product line. Management believes that in order to be competitive, the skate cannot be priced above $65 per pair. The company requires a minimum return of 25% on its investments. Launching the new product would require an investment of $4,000,000. Sales are expected to be 50,000 pairs of skates per year. Required: Compute the target cost of a pair of skates.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Medium

App A-85

Appendix A Pricing Products and Services

67. The management of Mendoza, Inc., is considering a new product that would have a selling price of $98 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 10%. Required: Determine the target cost per unit for the new product.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: AppA-03 Compute the target cost for a new product or service Level: Easy

App A-86