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Exam 8: Pricing Decisions

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Question 21

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Which of the following must be true for a company to accept a special order?

A) Variable costs must be less than the contribution margin.
B) Incremental revenues must be greater than incremental costs.
C) Opportunity costs must be greater than total revenue.
D) Total fixed costs must stay constant.

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

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Question 22

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Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity.The company is currently selling 40,000 units at $19.60 per unit.Each unit has a variable cost of $9.In addition, the company incurs $200,000 in fixed costs annually.If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge?

A) $15.25
B) $21.35
C) $19.60
D) $6.10

E) C) and D)
F) B) and C)

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Question 23

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The most difficult part of using cost-plus pricing is determining the demand function.

A new product is being designed by an engineering team at Gray Security.Several managers and employees from the cost accounting department and the marketing department are also on the team to evaluate the product and determine the cost using a target costing methodology.An analysis of similar products on the market suggests a price of $135 per unit.The company requires a profit of 30% of selling price.How much is the target cost per unit?

Wilkes Manufacturing sells one product with a variable unit cost of $18.The company knows that the price charged will affect demand.Fixed costs are $275,000.If sales exceed 50,000 units, the company will need to lease additional manufacturing space and equipment at an additional cost of $100,000 per year.The following chart represents the estimated demand at various price levels: $\begin{array}{rr}\text { Units Dem anded } &\text { Unit Price } \\25,000 & \$ 30 \\50,000 & \$ 28 \\75,000 & \$ 25 \\100,000 & \$ 23\end{array}$ Based on this information which of the following statements is true?

Harp Widgets determined each deluxe widget it produces has a unit variable cost of $15.00, with total fixed costs of $600,000 for the period.Harp expects to sell 60,000 deluxe widgets and has applied a markup percentage of 35%.What contribution margin will Harp earn from the sale of each deluxe widget?

A company believes it can sell 8,000 units of its proposed new garage door opener at a price of $100 each.If the company desires to make a profit of 30% of selling price on the garage door opener, what is the target cost per opener?

Cain Manufacturing produces 40,000 clocks at a total cost of $908,000.Total fixed costs are $408,000.If Cain increases production by 20% and uses a 50% markup, how much will the selling price per unit be?

A company has $8.00 per unit in variable costs and $4.00 per unit in fixed costs at a volume of 50,000 units.If the company marks up total cost by 60%, what price should be charged if 60,000 units are expected to be sold?

What occurs to the quantity demanded as the price decreases?

A company believes it can sell 2,000,000 units of its proposed new bottle stopper at a price of $16.00 each.If the company desires to make a profit of $3,000,000 on the bottle stopper, what is the target cost for each bottle stopper?

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs.The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit.Maker Sun Chairs has determined that the following relationships exist between price and demand: $\begin{array} { c c } \text { Unit Price } & \text { Unit Dem and } \\\$ 45 & 7,200 \\\$ 44 & 7,800 \\\$ 43 & 8,400 \\\$ 42 & 8,800\end{array}$ What is the anticipated revenue at a price of $44?

Which of the following factors is considered in a product pricing decision made using cost-plus pricing?

A company estimates that ordering costs are $3.20 per order, picking costs are $2.15 per unique item ordered, packing costs are $0.04 per item, and return costs are $15.00 per return.A customer orders $8,440 worth of goods with direct costs of $5,200.The customer places 85 orders, orders 72 unique items, 450 total items, and makes 5 returns.What is the customer profit?

What is the basic premise of target costing?

What should be maximized when setting the price for a product?

Which of the following stays constant when the price per unit changes?

The selling price that maximizes revenues is the price that will also maximize profit.

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs.The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit.Maker Sun Chairs has determined that the following relationships exist between price and demand: $\begin{array} { c c } \text { Unit Price } & \text { Unit Dem and } \\\$ 45 & 7,200 \\\$ 44 & 7,800 \\\$ 43 & 8,400 \\\$ 42 & 8,800\end{array}$ What is the anticipated profit at a price of $42?

Activity-based pricing uses ABC concepts to determine one optimum uniform price to charge all customers.