18 Managerial Accounting for Managers, 4th Edition
Problem A-7 (continued)
erating income.
Solutions Manual, Pricing Appendix 19
Problem A-7 (continued)
3. 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)
=
ln(1+0.08)
ln(1-0.05)
=
ln(1.08)
ln(0.95)
=
0.07696
-0.05129
= -1.500
The profit-maximizing price can be estimated using the following formu-
la from the text:
Profit-maximizing price =
d
d
εVariable cost per unit
1+ε
æö
÷
ç÷
ç÷
ç÷
ç
èø
=
= 3.00 × $6.00 = $18.00
Note that this answer is consistent with the plot of the data in part (2)
above. The formula for the profit-maximizing price works in this case
because the demand is characterized by constant price elasticity. Every
5% decrease in price results in an 8% increase in unit sales.
Problem A-7 (continued)
4. We must first compute the markup percentage, which is a function of
( )
Required ROI Selling and administrative
+
× Investment expenses
Markup percentage =
on absorption cost Unit sales × Unit product cost
(2% × $2,000,000) + $960,000
= 50,000 units × $6 per unit
= 3.33 (rounded) or 333%
Unit product cost ………….
$ 6.00
Markup ($6.00 × 3.33) …..
19.98
Selling price …………………
$25.98
ware at this price.
Note: It can be shown that the unit sales at the $25.98 price would be
Sales (47,198 units × $25.98 per unit) …….
$1,226,204
Variable cost (47,198 units × $6 per unit) ..
283,188
Contribution margin …………………………….
943,016
Fixed expenses …………………………………..
960,000
Net operating loss ……………………………….
$ (16,984)
Problem A-8 (45 minutes)
1.
Projected sales (100 machines × $4,950 per machine) ..
$495,000
Less desired profit (15% × $600,000) ……………………..
90,000
Target cost for 100 machines …………………………………
$405,000
Target cost per machine ($405,000 ÷ 100 machines) ….
$4,050
Less National Restaurant Supply’s variable selling cost
per machine …………………………………………………….
650
Maximum allowable purchase price per machine ………..
$3,400
2. The relation between the purchase price of the machine and ROI can
be developed as follows:
Total projected sales – Total cost
ROI = Investment
$495,000 – ($650 + Purchase price of machines) × 100
= $600,000
Purchase price
ROI
$3,000
21.7%
$3,100
20.0%
$3,200
18.3%
$3,300
16.7%
$3,400
15.0%
$3,500
13.3%
$3,600
11.7%
$3,700
10.0%
$3,800
8.3%
$3,900
6.7%
$4,000
5.0%
22 Managerial Accounting for Managers, 4th Edition
Problem A-8 (continued)
Using the above data, the relation between purchase price and ROI can
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Solutions Manual, Pricing Appendix 23
Problem A-8 (continued)
3. A number of options are available in addition to simply giving up on
adding the new sorbet machines to the company’s product lines. These
options include:
more profitable.
• Rethink the investment that would be required to carry this new prod-
uct. Can the size of the inventory be reduced? Are the new warehouse
fixtures really necessary?
this much to acquire more funds?