Managerial Accounting: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer

Managerial Accounting
Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Chapter – Appendix A
Pricing Products and Services

Appendix A: pricing products and services
Appendix A Pricing Products and Services
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

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

Bloom's: Knowledge
cost
Level: Easy
1/49
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

cost
Level: Medium
5. Gasoline is a product whose demand is elastic.

TRUE

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

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

Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach
Level: Medium
2/49
8. The markup over cost under the absorption costing approach would increase if the unit
product cost increases, holding everything else constant.
FALSE

Level: Hard
9. Target costing is primarily used when developing a new product.

TRUE

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

Learning Objective: Other topics
Level: Medium
3/49
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

Learning Objective: Other topics
Level: Hard
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

cost
Level: Medium
4/49
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
D. neither the selling price under the absorption costing approach to cost-plus pricing nor the

cost
Level: Hard
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.

cost
Level: Hard
5/49
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.

cost
Level: Hard
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.

cost
Level: Hard
6/49
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

Bloom's: Knowledge
Level: Easy
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

Bloom's: Knowledge
Level: Easy
7/49
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
εd = 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
Bloom's: Application
cost
Level: Medium
8/49
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

= ln(1 + (-0.11))/ln(1 + 0.07) = -1.72
Profit-maximizing markup on variable cost = -1/(1 + εd)
= -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
cost
Level: Medium
9/49
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

= ln(1 + (-0.13))/ln(1 + 0.05) = -2.85
= -1/(1 + (-2.85)) = 0.54
per unit
= (1 + 0.54) × ($23.10 + $5.40) = $43.89 (the exact answer without rounding error is $43.87)
AACSB: Analytic
cost
Level: Medium
10/49
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%
= ln(1 + (0.1698))/ln(1 + (-0.0833)) = -1.80
= -1/(1 + (-1.80)) = 1.25
per unit
= (1 + 1.25) × $12.70 = $28.58 (the exact answer without rounding error is $28.53)
AACSB: Analytic
cost
Level: Medium
11/49
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

= ln(1 + (0.08))/ln(1 + (-0.03) = -2.53
AACSB: Analytic
cost
Level: Easy
12/49
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
Level: Hard
13/49
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%

= [(15% × $400,000) + $130,000] ÷ ($25 per unit × 20,000 units)
= $190,000 ÷ $500,000 = 38%
AACSB: Analytic
Level: Medium
14/49
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%

= [(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
Level: Medium
15/49
27. Jaber Corporation makes a product with the following costs:
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

= [(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%
AACSB: Analytic
Level: Medium
16/49
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 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
Level: Hard
17/49
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

= [(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%
product cost
= (1 + 0.2534) × $84.20 = $105.54
AACSB: Analytic
Level: Medium
18/49
30. Kirsch, Inc., manufactures a product with the following costs:
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
Selling and administrative expenses = $2.90 per unit × 41,000 units + $582,000 = $700,900
= [(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%
product cost
= (1 + 0.3515) × $53.50 = $72.31
AACSB: Analytic
Level: Medium
19/49
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
Level: Easy
20/49
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
Level: Easy
21/49
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
Level: Easy
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
Level: Easy
22/49
Dieckman Company makes a product with the following costs:
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%
= [(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
Level: Medium
23/49
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
= [(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
Level: Medium
24/49
37. If every 10% increase in price leads to a 12% decrease in quantity sold, the profit-
maximizing price is closest to:
A. $56.40
B. $130.10
C. $144.16
D. $134.03

= ln(1 + (-0.12))/ln(1 + (+0.10)) = -1.34
Profit-maximizing markup on variable cost = -1/(1 + εd) = -1/(1 + (-1.34)) = 2.94

per unit
AACSB: Analytic
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.
25/49
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%
= ln(1 + (-0.2083))/ln(1 + (+0.0833)) = -2.92
AACSB: Analytic
cost
Level: Easy
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%
= ln(1 + (-0.2083))/ln(1 + (+0.0833)) = -2.92
per unit
= (1 + 0.52) × $21.40 = $32.53 (the exact answer, without rounding error, is $32.55)
AACSB: Analytic
cost
Level: Easy
26/49
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.
A. -1.06
B. -1.96
C. -1.51
D. -1.81

= ln(1 + (-0.11))/ln(1 + (+0.08)) = -1.51
AACSB: Analytic
cost
Level: Medium
27/49
A. $12.96
B. $4.42
C. $17.37
D. $31.51

= ln(1 + (-0.11))/ln(1 + (+0.08)) = -1.51
per unit
= (1 + 1.96) × ($1.50 + $4.40) = $17.46 (the exact answer, without rounding error, is $17.37)
AACSB: Analytic
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.
28/49
A. -3.01
B. -2.07
C. -1.89
D. -2.59

= ln(1 + (-0.05))/ln(1 + (+0.02)) = -2.59
AACSB: Analytic
cost
Level: Easy
A. $37.39
B. $31.44
C. $40.88
D. $28.91

= ln(1 + (-0.05))/ln(1 + (+0.02)) = -2.59
per unit
= (1 + 0.63) × $19.30 = $31.46 (the exact answer, without rounding error, is $31.44)
AACSB: Analytic
cost
Level: Easy
29/49
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
= [(20% × $800,000) + $150,000] ÷ ($20 per unit × 25,000 units)
= [($160,000) + $150,000] ÷ ($500,000)
= [$310,000] ÷ $500,000 = 62%
AACSB: Analytic
Level: Medium
30/49
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
product cost
= (1 + 0.90) × $20 = $38
AACSB: Analytic
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
Level: Medium
31/49
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%.
32/49
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%

= [(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
Level: Easy
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

= [(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%
product cost
= (1 + 1.075) × $24.20 = $50.22
AACSB: Analytic
Level: Easy
33/49
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
Level: Easy
34/49
50. To the nearest whole percent, the markup percentage on absorption cost is:
A. 10%
B. 30%
C. 50%
D. 20%
= [(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
Level: Easy
35/49
51. The unit target selling price using the absorption costing approach is closest to:
A. $77
B. $116
C. $70
D. $96
= [(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%
product cost
= (1 + 0.50) × $64 = $96
AACSB: Analytic
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%.
36/49
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
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
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%.
37/49
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
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
Level: Easy
Essay Questions
38/49
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.
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
a.
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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. εd = ln(1+%change in quantity sold)/ln(1+%change in price)
= ln(1 + -13%)/ln(1 + 10%) = -1.46
per unit
= (1 + 2.17) × $39.10 = (3.17) × $39.10 = $123.89
AACSB: Analytic
cost
Level: Hard
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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.
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 + εd) = -1/(1 + (-1.31)) = 3.19
per unit
= (1 + 3.19) × ($4.90 + $7.60) = (4.19) × $12.50 = $52.39
AACSB: Analytic
cost
Level: Medium
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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.
a. εd = ln(1 + %change in quantity sold)/ln(1 + %change in price)

= ln(1 + -7%)/ln(1 + 5%) = -1.49
per unit
= (1 + 2.05) × $47.00 = (3.05) × $47.00 = $143.43
AACSB: Analytic
cost
Level: Easy
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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.

Required:
a Compute the product's price elasticity of demand as defined in the text.
a. % change in quantity = -13.67%

% change in price = 8.93%
εd = ln(1+%change in quantity sold)/ln(1+%change in price)
= ln(1 + -13.67%)/ln(1 + 8.93%) = -1.72
per unit
= (1 + 1.39) × $15.90 = (2.39) × $15.90 = $38.03
AACSB: Analytic
cost
Level: Medium
43/49
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.
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
Level: Easy
44/49
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.
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
Level: Medium
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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.
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
Level: Easy
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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.
15%.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price of the product using the absorption costing approach.
a.

= [(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
AACSB: Analytic
Level: Medium
47/49
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
Level: Easy
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
Level: Easy
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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.
AACSB: Analytic
Level: Medium
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
Level: Easy
49/49

Managerial Accounting: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer

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Pricing Products and Services

Appendix A Pricing Products and Services

True / False Questions

AACSB: Reflective Thinking

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

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

5. Gasoline is a product whose demand is elastic.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

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

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

Multiple Choice Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

εd = ln(1 + % change in quantity sold)/ln(1 + % change in price)

εd = ln(1 + % change in quantity sold)/ln(1 + % change in price)

εd = ln(1 + % change in quantity sold)/ln(1 + % change in price)

The product's variable cost is $12.70 per unit.

% change in quantity sold = (5,030 - 4,300)/4,300 = +16.98%

εd = ln(1 + % change in quantity sold)/ln(1 + % change in price)

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

Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and

Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and

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

Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and

Selling price = (1 + Markup percentage) × Cost

Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and

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

The target cost per shaver would be:

33. The management of Kozloff Corporation is considering introducing a new product--a

Dieckman Company makes a product with the following costs:

35. The markup on absorption cost is closest to:

εd = ln(1 + % change in quantity sold)/ln(1 + % change in price)

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) × Variable cost

The product's variable cost is $21.40 per unit.

% change in price = ($26 - $24)/$24 = 8.33%

% change in price = ($26 - $24)/$24 = 8.33%

εd = ln(1 + % change in quantity sold)/ln(1 + % change in price)

εd = ln(1 + % change in quantity sold)/ln(1 + % change in price)

εd = ln(1 + % change in quantity sold)/ln(1 + % change in price)

εd = ln(1 + % change in quantity sold)/ln(1 + % change in price)

Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and

Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and

49. The absorption costing unit product cost is:

The management of Nerby Corporation is considering introducing a new product--a compact

Desired profit = 20% × $900,000 = $180,000

53. The target cost per lawn blower is closest to:

Target cost = Anticipated selling price - Desired profit

Desired profit = 11% × $300,000 = $33,000

55. The target cost per unit is closest to: