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PRICING DECISIONS:

Theories:
1. Holding all other things constant, an increase in variable 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 profitmaximizing price
d. neither the selling price under the absorption costing approach to cost-plus pricing nor the profitmaximizing price

2. Statement 1: Pricing decisions are most difficult in those situations in which a company makes a
product that is in competition with other, identical products for which a market already exists.
Statement 2: If the formula for the markup percentage on absorption cost is used when setting prices,
then the company's desired return on investment (ROI) will be attained regardless of how many units
are actually sold.
a. Statement 1 is true, statement 2 is false
b. Statement 1 is false, statement 2 is true
c. Both statements are true
d. Both statements are false

3. Holding all other things constant, an increase in the company's required return on investment (ROI) 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 profitmaximizing price
d. neither the selling price under the absorption costing approach to cost-plus pricing nor the profitmaximizing price

4. Several survey point out that most managers use full product costs, including unit fixed costs and unit
variable costs, in developing cost-based pricing. Which one of the following is least associated with
cost-based pricing?
a. Price stability
b. Price justification
c. Target pricing
d. Fixed-cost recovery

5. Buyer-based pricing involves


a. Adding a standard mark-up to the cost of the product
b. Determining the price at which the product will earn target profit
c. Basing price on the products perceived value
d. Basing price on competitors price

6. Statement 1: In the absorption approach to cost-plus pricing, the anticipated markup in dollars will be
equal to the anticipated profit. Statement 2: "Cost-plus" pricing means that all costs--manufacturing,
selling, and administrative--are included in the cost base from which the target selling price is derived.
a. Statement 1 is true, statement 2 is false
b. Statement 1 is false, statement 2 is true
c. Both statements are true
d. Both statements are false

Problem:
Diep Company makes a product with the following costs:
Per Unit
Direct materials.................................
P 15.70
Direct labor.......................................
P 19.70
Variable manufacturing overhead.....
P 3.50
Fixed manufacturing overhead..........
Variable SG&A expenses...................
P 2.00
Fixed SG&A expenses........................

Per Year

P 1,146,600
P 984,900

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 49,000 units per year. The
company has invested P 340,000 in this product and expects a return on investment of 9%. Direct
labor is a variable cost in this company.
1. What is the mark-up percentage based on cost? 36.50%
2. What is the closest selling price based on the absorption costing approach? P85.02

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