Managerial Accounting, 16e (Garrison)
Chapter 12A: Pricing Decisions
1) The absorption costing approach to cost-plus pricing will result in attaining the company’s
required rate of return only if forecasted unit sales are realized.
2) Variable selling and administrative costs are excluded from the cost base used to set a selling
price under the absorption approach to cost-plus pricing described in the text.
3) The markup over cost under the absorption costing approach would decrease if the unit
product cost increases, holding everything else constant.
4) In the absorption approach to cost-plus pricing, the anticipated markup in dollars is equal to
the anticipated profit.
5) The markup over cost under the absorption costing approach would decrease if the required
rate of return increases, holding everything else constant.
6) Under the absorption approach to cost-plus pricing described in the text, all fixed costs are
included in the cost base in setting a selling price.
7) If the formula for the markup percentage on absorption cost is used for setting prices, then the
company’s desired return on investment (ROI) will be attained regardless of how many units are
actually sold.
8) All other things equal including costs, if customers are more sensitive to price for one product
than another, then to maximize profit the first product should have a higher price.
9) The sensitivity of unit sales to changes in price is called the price elasticity of demand.
10) Demand for a product is said to be elastic if a change in price has little effect on the number
of units sold.
11) Generally speaking, managers should set higher prices when demand is elastic and lower
prices when demand is inelastic.
12) In value-based pricing, the value of what differentiates a product from the best available
alternative is known as the differentiation value.
13) Companies that use value-based pricing establish selling prices based on the economic value
of the benefits that their products and services provide to customers.
14) A product’s economic value to the customer is the variable cost of the product plus the value
of what differentiates the product from that alternative.
15) In value-based pricing, the economic value to the customer equals the reference value less
the differentiation value.
16) The target costing approach was developed in recognition of two important characteristics of
markets and costs. First, many companies have less control over price than they like to think.
Second, most of a product’s cost is determined when it is designed.
17) In target costing, the cost of a product is the starting point and the selling price follows from
the cost.
18) Target costing is primarily used with well-established products.
19) Target costing involves adding a target profit per unit to actual unit cost to determine the
selling price.
20) Most of the opportunities to reduce the cost of a product come from outsourcing production
to where labor is relatively inexpensive.
21) “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.
22) Which of the following items are included in the cost base under the absorption approach to
cost-plus pricing?
Variable Cost
Fixed Cost
Production
Selling
Production
Selling
A)
Yes
Yes
Yes
No
B)
No
Yes
No
Yes
C)
Yes
Yes
No
No
D)
Yes
No
Yes
No
A) Choice A
B) Choice B
C) Choice C
D) Choice D
23) 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.
24) Demand for a product is said to be elastic if a change in price has:
A) no effect on the volume of units sold.
B) substantial effect on the volume of units sold.
C) little effect on the volume of units sold.
D) little effect on the volume of units produced.
25) 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
6,00,000
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
26) The following information is available on Bruder Inc.’s Product A:
Number of units sold each year
10,000
Selling price per unit
$
80
Unit product cost
$
50
Investment in Product A
$
400,000
Required return on investment
15
%
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
27) Marvel Corporation estimates that the following costs and activity would be associated with
the manufacture and sale of product Y:
Number of units sold annually
20,000
Required investment in assets
400,000
Unit product cost
25
Selling and administrative expenses
130,000
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%
28) Ladle 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 63,000 units next year, the unit
product cost of a particular product is $39.00. The company’s selling and administrative expenses
for this product are budgeted to be $1,020,600 in total for the year. The company has invested
$560,000 in this product and expects a return on investment of 11%.
The markup on absorption cost for this product would be closest to:
A) 12.0%
B) 41.5%
C) 52.5%
D) 44.0%
29) Willow Corporation manufactures and sells 20,000 units of Product Z each year. In order to
produce and sell this many units, it has been necessary for the company to make an investment of
$500,000 in Product Z. The company requires a 20% rate of return on all investments in
products. Selling and administrative expenses associated with Product Z total $200,000 per year.
The unit product cost of Product Z is $20. The company uses the absorption costing approach to
cost-plus pricing described in the text. The selling price for Product Z is:
A) $25
B) $30
C) $35
D) $40
30) Jaakola Corporation makes a product with the following costs:
Per Unit
Per Year
Direct materials
$
17.00
Direct labor
$
22.00
Variable manufacturing overhead
$
4.00
Fixed manufacturing overhead
$
504,000
Variable selling and administrative expenses
$
4.90
Fixed selling and administrative expenses
$
319,200
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 28,000 units per year. The
company has invested $360,000 in this product and expects a return on investment of 15%. The
markup on absorption cost would be closest to:
A) 27.1%
B) 29.9%
C) 84.3%
D) 15.0%
31) Minden Corporation estimates that the following costs and activity would be associated with
the manufacture and sale of product A:
Number of units sold annually
40,000
Required investment
800,000
Unit product cost
25
Selling and administrative expenses
600,000
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 A would be closest to:
A) 12%
B) 15%
C) 60%
D) 72%
32) Kirgan, Inc., manufactures a product with the following costs:
Per Unit
Per Year
Direct materials
$
24.60
Direct labor
$
17.90
Variable manufacturing overhead
$
4.80
Fixed manufacturing overhead
$
718,200
Variable selling and administrative expenses
$
4.50
Fixed selling and administrative expenses
$
723,900
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 57,000 units per year.
The company has invested $140,000 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) $77.42
B) $99.65
C) $77.10
D) $61.13
33) Magney, 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 84,000 units next year, the unit product
cost of a particular product is $40.80. The company’s selling and administrative expenses for this
product are budgeted to be $1,705,200 in total for the year. The company has invested $300,000
in this product and expects a return on investment of 14%.
The selling price for this product based on the absorption costing approach would be closest to:
A) $92.25
B) $61.60
C) $46.51
D) $61.10
34) Perwin Corporation estimates that an investment of $800,000 would be needed to produce
and sell 50,000 units of Product B each year. At this level of activity, the unit product cost would
be $50. Selling and administrative expenses would total $400,000 each year. The company uses
the absorption costing approach to cost-plus pricing described in the text. If a 20% rate of return
on investment is desired, then the required markup for Product B would be closest to:
A) 20%
B) 22%
C) 24%
D) 26%