Chapter 13A Review Guide 12/30/20

This is a suggested review guide. It is not intended to be all inclusive. You should also
study the course material covered. Remember – anything in the book or covered in class
is fair game!

Chapter 13A
 What are the three steps to determine the selling price when using cost-plus pricing?
 Use the CVP formula to compute profit impact of a change in the selling price. You did
this in chapter 5 already.
 Use the CVP formula, solving for Q, to determine the number of units to sale to
maintain the current profit, given a change in the selling price.
 When using value-based pricing, how is EVC computed?
 When using value-based pricing, what is the reference value and the differentiation
value?
 When using target costing, what is the equation for computing a target cost?

1. Holding all other things constant, if the expected unit sales increase, then the markup
under absorption costing will:
A. increase.
B. decrease.
C. remain the same.
D. The effect cannot be determined.
 2. Seamons Corporation has the following information available on Product K:
 
Number of units sold each year 60,000
Unit product cost $ 40
Investment in Product K $ 600,000
Required return on investment 18%
 
The company uses the absorption costing approach to cost-plus pricing described in the
text and a 40% markup. Based on these data, the company's total selling and
administrative expenses associated with Product K each year are:
 
A. $132,000
B. $852,000
C. $528,000
D. $172,800

0.4 = (0.18 * 600,000) + S&A / (60,000 * 40)

0.4 = 108,000 + S&A / 2,400,000
0.4 * 2,400,000 = 108,000 + S&A
960,000 = 108,000 + S&A
S&A = 960,000 – 108,000
S&A = 852,000
 3. Reppond Corporation manufactures numerous products, one of which is called
Gamma38. The company has provided the following data about this product:
 
Unit sales (a) 170,000
Selling price per unit $ 99.00
Variable cost per unit $ 66.00
Traceable fixed
expense
4,990,000
 
Assume that the total traceable fixed expense does not change. How many units of
product Gamma38 would Reppond need to sell at a price of $94.05 to earn the same net
operating income that it currently earns at a price of $99.00? (Round your answer up to
the nearest whole number.)
A. 177,897
B. 200,000
C. 151,212
D. 187,000

Profit = (Unit SP – Unit VC) X Q – FC

= (99 – 66) * 170,000 – 4,990,000
= 620,000

Profit = (Unit SP – Unit VC) X Q – FC

620,000 = (94.05 – 66) * Q – 4,990,000
620,000 + 4,990,000 = 28.05Q
5,610,000 = 28.05Q
Q = 5,610,000 / 28.05
Q = 200,000
 4. Hoder Corporation manufactures numerous products, one of which is called Gamma45.
The company has provided the following data about this product:
 
Unit sales (a) 60,000
Selling price per unit $ 41.00
Variable cost per unit 29.00
Contribution margin per unit (b) $ 12.00
Total contribution margin (a) ×
(b)
$ 720,000
Traceable fixed expense 680,000
Net operating income $ 40,000
 
Assume that the total traceable fixed expense does not change. How many units of
product Gamma45 would Hoder need to sell at a price of $38.95 to earn the same net
operating income that it currently earns at a price of $41.00? (Round your answer up to
the nearest whole number.) 
A. 56,667
B. 72,362
C. 68,342
D. 66,000

Profit = (Unit SP – Unit VC) * Q – FC

40,000 = (38.95 – 29) * Q – 680,000
40,000 = 9.95Q – 680,000
40,000 + 680,000 = 9.95Q
720,000 = 9.95Q
Q = 720,000/9.95
Q = 72,362
 5. Napp Heavy Machinery Corporation has developed a new drill press—model GJ-37—
that has been designed to outperform a competitor’s best-selling drill press. The
competitor’s product has a useful life of 30,000 hours of service, has operating costs that
average $1.70 per hour, and sells for $169,000. In contrast, model GJ-37 has a useful life
of 120,000 hours of service and its operating cost is $1.10 per hour. Napp has not yet
established a selling price for model GJ-37.

From a value-based pricing standpoint what range of possible prices should Napp
consider when setting a price for GJ-37?
A. $579,000 ≤ Value-based price ≤ $748,000
B. $169,000 ≤ Value-based price ≤ $748,000
C. $301,000 ≤ Value-based price ≤ $579,000
D. $169,000 ≤ Value-based price ≤ $301,000

A product’s value-based selling price range is determined as follows:

Reference value ≤ Value-based price ≤ EVC

The reference value is the price of the competitors, which is 169,000

EVC = Reference value + Differentiation value

GJ-37 Competitor’s drill press

Useful life 120,000 hr 30,000 hr
X4
120,000 hr
Price 169,000 * 4

Differentiation value = (3 * 169,000) + (1.7 – 1.1) * 120,000

= 579,000

EVC = Reference value + Differentiation value

= 169,000 + 579,000
= 748,000

Reference value ≤ Value-based price ≤ EVC

169,000 <= Value-based price <= 748,000
 6. Wermers Industries Incorporated has developed a new drill press, model LS-88, that is
designed to offer superior performance to a comparable drill press sold by Wermers’s
main competitor. The competing drill press sells for $31,000 and needs to be replaced
after 1,000 hours of use. It also requires $6,000 of preventive maintenance during its
useful life. ModelLS-88’s performance capabilities are similar to the competing product
with two important exceptions—it needs to be replaced only after 2,000 hours of use and
it requires $7,000 of preventive maintenance during its useful life.
 
From a value-based pricing standpoint what range of possible prices should Wermers
consider when setting a price for model LS-88?
A. $36,000 ≤ Value-based price ≤ $62,000
B. $31,000 ≤ Value-based price ≤ $62,000
C. $31,000 ≤ Value-based price ≤ $67,000
D. $36,000 ≤ Value-based price ≤ $67,000

A product’s value-based selling price range is determined as follows:

Reference value ≤ Value-based price ≤ EVC

EVC = Reference value + Differentiation value

The reference value is the price of the competitors, which is 31,000

LS-88 Competitor’s drill press

Useful life 2000 hr 1,000 hr
X2
2000 hr
Price 31,000 * 2
preventive maintenance 7,000 6,000 * 2 = 12,000

Differentiation value = (1 * 31,000) + (12,000 – 7000)

= 31,000 + 5,000
= 36,000

EVC = Reference value + Differentiation value

= 31,000 + 36,000
= 67,000

Let’s say we have 1 Competitor’s drill press  1000 hr useful life

In order to get 2000 hr of useful life in total  we’ll purchase 1 more

 7. The management of Rademacher Corporation is considering introducing a new product--
a compact lawn blower. At a selling price of $24 per unit, management projects sales of
30,000 units. The lawn blower would require an investment of $200,000. The desired
return on investment is 12%.
 
The target cost per lawn blower is closest to:
A. $24.00
B. $23.20
C. $26.88
D. $25.98

Target cost = Anticipated selling price – Desired profit

= (24 * 30,000) – (0.12 * 200,000)
= 696,000

target cost per lawn blower = 696,000 / 30,000

= 23.20

Question Answer
1 B
2 B
3 B
4 B
5 B
6 C
7 B