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Appendix A
Pricing Products and Services
Solutions to Questions
A-1 In cost-plus pricing, prices are set by
adding a markup to a product’s cost. The
lastic demand are relatively insensitive to the
price charged for the product. In contrast, the
unit sales of a product with elastic demand
are
sensitive to the price charged for the product.
unit and on the price elasticity of demand. Fixed
costs do not enter into the pricing decision.
Fixed costs are relevant in a decision of whether
has been made. Because price affects unit sales,
total variable costs are affected by the pricing
whose demand is elastic should have a lower
markup over cost than a product whose demand
A-5 The markup in the absorption costing
the product. Full cost is an alternative approach
not discussed in the chapter that is used almost
on the assets.
A-6 The absorption costing approach as-
sumes that consumers do not react to prices at
under very special circumstances.
A-7 The protection offered by full cost pric-
There is no assurance that a sufficient number
of units will be sold.
per unit. The product development team is
charged with the responsibility of ensuring that
pricing decision. Most companies start with their
full cost and then add their markup to arrive at
.
Exercise A-1 (30 minutes)
1. Kimio makes more money selling the ice cream cones at the lower price,
as shown below:
$1.79 Price
$1.39 Price
Unit sales ................................
860
1,340
Sales .......................................
$1,539.40
$1,862.60
Cost of goods sold @ $0.41 ......
352.60
549.40
Contribution margin .................
1,186.80
1,313.20
Fixed expenses ........................
425.00
425.00
Net operating income ...............
$ 761.80
$ 888.20
2. The price elasticity of demand, as defined in the text, is computed as
follows:
d =
ln(1 + % change in quantity sold)
ln(1 + % change in price)
=
1,340 - 860
ln(1 + )
860
1.39 - 1.79
ln(1 + )
1.79
æö
÷
ç÷
ç÷
ç
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÷
ç÷
ç÷
ç
èø
=
ln(1 + 0.55814)
ln(1 - 0.22346)
=
ln(1.55814)
ln(0.77654)
=
0.44349
-0.25291
= -1.75
