Ch16 Test Bank The Art And Science Of Pricing To Optimize

CHAPTER 16

THE ART AND SCIENCE OF PRICING TO OPTIMIZE REVENUE

CHAPTER LEARNING OBJECTIVES

1. Outline the context of pricing: a critically important management decision.
2. Discuss pricing in the short-term: special order pricing.
3. Describe the cost-plus long-term pricing method.
4. Explain the target costing long-term pricing method.
5. Define additional pricing policies that impact consumers.

Current count is:
Knowledge: 42
Comprehension: 33
Application: 50
Analysis: 5
Evaluation: 0
Synthesis: 0
Total: 130

Number and percentage of questions:

Easy: 35 questions, 27 percent (target of 25%)

Medium: 82 questions, 63 percent (target of 65%)
Hard: 13 questions, 10 percent (target of 10%)

Question types:
Multiple Choice: 75

Short Answer: 15

Brief Exercises: 18

Exercises: 15

Problems: 7

MULTIPLE CHOICE QUESTIONS

1. Which of the following statements is correct regarding the relationship between a product’s cost, price, and profit?
2. Price a product too low, customers will always purchase a product because the price

is lower than the competitor.

1. Price a product too high, customers will most likely continue to buy if they have

purchased the product in the past.

1. Price a product too high or too low can result in lost sales to competitors.
2. There is no direct correlation between a product’s cost, price and profit since a company can charge whatever it desires for a product.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. The point at which the number of units supplied intersects with the number of units demanded is called the
2. break-even point.
3. equilibrium point.
4. optimum capacity point.
5. preferred performance point.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Price takers
2. must accept the prevailing market price and sell each unit at that given price.
3. are found in non-competitive markets.
4. have the power to influence the market price.
5. enjoy pricing power since they can set their own product prices.

Ans: A, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Companies that have the power to influence the market price, and thus, enjoy pricing power are referred to as price
2. takers.
3. gougers.
4. makers.
5. analysts.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Which of the following are found in competitive markets?
2. Price makers
3. Price takers
4. Market makers
5. Speculative takers
   

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. The primary decision to sell a product or service is whether a firm
   1. can control the costs associated with the product/service being provided.
2. has significant competition in the market for the specific product/service.
3. can afford to produce or provide the product/service.
4. can sell the product/service at a profit.

Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Which of the following is not a characteristic of price takers?
   1. Customers see little difference in the product/service being offered with other firms.
   2. Customers see real or perceived differentiated quality/innovation in the product or

service.

• 1. Product/service costs must be carefully controlled by the provider since the price

cannot be adjusted easily.

• 1. Much competition exists in the market for comparable products/services with each

firm working toward being a market leader.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Which of the following is a characteristic of price makers?
2. Customers see real or perceived differentiated quality/innovation in the product/service.
3. Firms must carefully control costs of the product/services since the price cannot be easily adjusted.
4. Competition exists in the market for comparable product/service with firms striving for market leadership.
5. Customers see little differentiation in the product/service being offered.

Ans: A, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Which of the following statements is correct regarding price, products, and competitors?
2. A product or service only has to appeal to the customer in terms of price, not in terms of quality or characteristics.
3. It is only necessary to know pricing and product strategies, and not competitor strategies.
4. It is important to know not only pricing and product strategies, but also to know your competitors’ strategies for controlling costs and knowing customers.
5. If a product is priced too low, sales will increase dramatically.
   

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Magnum Beverages sells it premium champagne at $55 per bottle. It current costs $40 per bottle to produce each bottle of champagne. Magnum has overhead costs of $1,800 per month. If Magnum produced and sold 100 bottles of champagne last month, has the company adequately priced each bottle of champagne to make a positive monthly operating income?
2. Yes, since the revenues from the sales exceeds the total costs incurred.
3. No, because the revenues from the sales just equals the total costs incurred.
4. No, because the revenues from the sales is less than the total costs incurred.
5. This cannot be determined due to lack of sufficient information.

Ans: C, LO 1, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Total Revenues – Total Costs = Operating Income (Loss); (100 x $55) – (100 x $40) - $1,800 = $5,500 - $4,000 - $1,800 = ($300) Operating Loss.

1. Magnum Beverages sells bottles of premium champagne. It currently costs $40 per bottle to produce each bottle of champagne. Magnum has overhead costs of $1,800 per month, and expects to incur this amount each month. Magnum produced and sold 100 bottles of champagne last month and expects to continue this production and sales pattern for the rest of this current year. Its closest competitor currently sells its bottles of champagne at $65 per bottle. What is the lowest price that Magnum could sell each bottle of champagne for and to make a monthly operating profit?
   1. $55.01
   2. $58.01
   3. $65.00
   4. $68.00

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Total Revenues – Total Costs = Operating Profit (Loss); (100 x $58.01) – (100 x $40) - $1,800 = $5,801 - $4,000 - $1,800 = $1 Operating Profit

1. Which of the following would not affect the determination of the price of a product or service?
2. Supply and demand
3. Competition
4. Product or service costs
5. Market share

Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. You are presented with the following three scenarios for Sing Company:

With regards to Sing’s price, cost, and product, what can be concluded from Scenario #2?

1. Sing Company has a profit because it is not charging a high enough price to cover the costs incurred.
2. Sing Company should have incurred a loss because its sales in units are lower in this scenario than any other option.
3. Sing Company can make a profit by increasing its unit selling price, but the unit sales are normally going to decrease, and may result in the company being driven out of the market due to competitors having lower unit selling prices.
4. Sing Company can raise its price to become profitable without having to worry about unit sales declining or other competitors with lower selling prices driving it out of the market.

Ans: C, LO 1, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. not accept a special order if it must incur additional fixed costs.
2. determine if the differential revenues are greater than the differential costs in order to accept the special order, even if the special-order price is lower than its regular unit selling price.
3. always exclude fixed costs in determining whether to accept or reject a special order since they are not relevant and do not change.

Ans: C, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA:

Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis

1. Accept even though the selling price per unit equals the total cost per unit.
2. Accept because the contribution margin per unit to be recognized will be $8.

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Unit Contribution Margin = Unit Selling Price (Special Order) – Unit Variable Cost = $20 - $12 = $8

1. Reject because the total per unit cost to produce the special-order exceeds the special-order unit selling price.
2. Accept because the differential revenue exceeds the differential costs.

Ans: D, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Which of the following statements is correct if a company accepts a special order without having to add capacity or affecting current sales?
2. Operating income will not be impacted.
3. Operating income will decrease if the special-order unit selling price is less than the total unit cost.
4. Operating income will increase if the special-order unit selling price is greater than the unit variable cost.
5. Fixed costs will increase.
   

Ans: C, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Palm Furniture manufactures outdoor patio sets with the following unit selling price and unit costs at capacity of 5,000 units:

A wholesale outlet has offered to purchase 200 outdoor patio sets but is not willing to pay the retail price of $1,300. What is the lowest price that Palm Furniture should accept if it is currently operating at only 80% capacity?

1. $720
2. $870
3. $950
4. $1,300

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Lowest acceptable price (excess capacity available) = Total Unit Variable Costs = Direct Materials +

Direct Labor + Variable Overhead = $400 + $320 + $150 = $870.

1. Palm Furniture manufactures outdoor patio sets with the following unit selling price and unit costs at capacity of 5,000 units:

A wholesale outlet has offered to purchase 300 outdoor patio sets but is not willing to pay the retail price of $1,300. What is the lowest price that Palm Furniture should accept if it is currently operating at full capacity and is unable to add additional capacity?

1. $720
2. $870
3. $950
4. $1,300

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Lowest acceptable price (no excess capacity available) = Current Unit Selling Price to outside customers = $1,300.

1. Which of the following costs is not relevant in a special-order decision when a company has sufficient operating capacity to accept the order?
2. Direct labor
3. Direct materials
4. Fixed overhead
5. Variable overhead

Ans: C, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Canine Creations produces treats for dogs called “bark-bites.” It currently sells the treats nationally at a price of $15 per bag, with a unit variable cost of $4 and total fixed costs of $2,200 per month. A local organic pet store has requested a special order of 250 “bark-bites” treat bags but would like them to be gluten-free. The flour that would be required to make the special-order treats would add an additional $1 to each bag of treats. Since the company is currently operating at full capacity, it would have to add production capacity which would add $500 to the current fixed costs. What is the minimum special-order price that Canine Creations would be willing to accept for a bag of “bark-bites?”
2. $5.00
3. $7.00
4. $13.80
5. $15.00

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.
Solution: Lowest acceptable price (no excess capacity available) = Total Unit Variable Costs + Additional Unit Fixed Cost = Original Unit Variable Cost + Additional Unit Variable Unit Cost + Additional Unit Fixed Cost = $4 + $1 + $500/250 bags = $7.00.

1. If a company has the opportunity for a special order, but is currently operating at full capacity and is unable to add additional production capacity to fulfill the special order,
2. the company should reject the special-order request.
3. the company should accept the special order if the company requesting the special order is willing to at least offer a unit selling price that covers the unit variable costs.
4. the company should accept the special order if the company requesting the special order is willing to pay the current unit selling price.
5. the company should accept the special order if the company requesting the special order is willing to at least offer a unit selling price that covers the unit fixed costs.

Ans: C, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Winters Company is considering accepting a special order. Based on 10,000 units, the following costs are incurred by Winters: direct materials of $5, direct labor of $10, variable overhead of $8, and fixed overhead of $6. The wholesaler requesting the special order wants to only pay $25 for 2,000 units when the normal retail unit selling price is $50. If Winters accepts the special order, assuming it has sufficient capacity to fill the order, what amount of differential operating income (loss) would it recognize?
2. ($6,000)
3. $4,000
4. $20,000
5. $24,000

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Operating Income = Differential Revenue – Differential Costs = (2,000 special order units x $25

special order unit selling price) – [($5 + $10 + $8) x 2,000 special order units] = $50,000 - $46,000 = $4,000;

or Unit Selling Price (Special Order) – Unit Variable Costs (Special Order) = Unit Contribution Margin

(Special Order) = $25 – ($5 + $10 + $8) = $2 Unit Contribution margin x Special Order Units, 2,000 = $4,000

1. The “plus” in the cost-plus pricing method represents the
2. fixed cost per unit.
3. selling and administrative cost per unit.
4. markup or profit per unit.
5. overhead cost per unit.

Ans: C, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis

1. The cost-plus method for pricing is a(n)
2. cost-based method.
3. market-based method.
4. Income-based method.
5. price-based method.

Ans: A, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. The cost-plus method for pricing a company’s products is used in markets where
2. products are not differentiated from those of competitors.
3. products are differentiated from those of competitors.
4. competition is high, with no one producer dictating the price.
5. price takers prevail in setting prices.

Ans: B, LO 3, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. In applying the cost-plus method of pricing, full cost refers to
2. product cost.
3. both variable production and variable selling and administrative costs.
4. total production and selling and administrative costs.
5. total fixed production and selling and administrative costs.

Ans: C, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Which of the following statements is correct regarding pricing for a company’s product or service?
2. Decision-makers must be very inflexible in making and managing prices.
3. Selling goods/services involve a value proposition offer which is usually perceived the same way by the company offering them and the customers buying them.
4. Price calculations are the end point, not the starting point.
5. Companies must be flexible in making and managing prices.

Ans: D, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. In setting a target profit, companies set the target rate of return
2. using the same bases.
3. to cover only internal benchmarks.
4. to cover only external benchmarks.
5. to cover both internal and external benchmarks.

Ans: D, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Synergy Technologies produces wireless keyboards for computers. The costs associated with production of 10,000 units are variable costs of $80,000 and fixed costs of $30,000. The budgeted operating income at 10,000 units is $200,000. What is the expected unit selling price if Synergy uses a cost-plus method based on full cost?
2. $11.00
3. $20.00
4. $28.00
5. $31.00
   

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.
Solution: (Total Variable Cost + Total Fixed Cost) ÷ Units produced = Full Cost per Unit; ($80,000 + $30,000) ÷ 10,000 units = $11 per Unit; Profit per Unit = Operating Income ÷ Units Produced = $200,000 ÷ 10,000 units = $20 Profit per Unit; Unit Selling Price = Full Cost per Unit + Profit per Unit = $11 + $20 = $31.

1. Sansom Industries manufactures car radios to be installed in Ford automobiles. The unit variable cost is $25 and the unit fixed cost is $7. The desired return on investment (ROI) per unit is $8. What is the markup percentage that Sansom Industries uses to determine the price for each radio produced using a cost-plus pricing method?
2. 15%
3. 20%
4. 25%
5. 32%

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.
Solution: Unit Variable Cost + Unit Fixed Cost = Total Unit Cost; $25 + $7 + $32; ROI Markup = Unit ROI/ Total Unit Cost = $8/$32 = 25%

1. Massano Motors expects to produce 10,000 motors during the upcoming year. It has budgeted for the following: net income of $200,000; variable costs of $500,000; and fixed costs of $300,000. The company has invested assets of $1,000,000 and a budgeted return on investment (ROI) of 20%. What is the budgeted markup percentage used in pricing each motor using a cost-plus method of pricing?
2. 15%
3. 20%
4. 25%
5. 30%

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: ROI per unit = (ROI percentage x Invested Assets) ÷ Estimated Production Units = (20% x $1,000,000) ÷ 10,000 units = $20 per unit; Total Cost per Unit = (Total Variable Costs + Total Fixed Costs) ÷ Estimated Production Units = ($500,000 + $300,000) ÷ 10,000 units = $80; Markup Percentage = ROI per unit ÷ Total Unit Cost = $20 ÷ $80 = 25%

1. Nguyen Corporation has collected the following data concerning one of its products:

Unit selling price $150

Total sales 20,000 units

Total Unit cost $120

Total assets investment $2,000,000

What is the return on investment (ROI) percentage for Nguyen Corporation for its product?

1. 20.0%
2. 22.5%
3. 25.0%
4. 30.0%

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: (Total investment x ROI percentage (X) = ROI); $2,000,000 * X = [($150 - $120) x 20,000] ÷ $2,000,000; X = $600,000 ÷$2,000,000 = .30 or 30%

1. When using the cost-plus pricing method, if the actual units produced and sold differ from expected when the unit selling price was set, which per unit amount will remain the same?
2. Total unit cost
3. Fixed cost
4. Variable cost
5. Return on investment (ROI) per unit

Ans: C, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. When the actual units sold are lower than what was used to set the original price, why should the unit selling price be increased?
   1. Unit variable cost and fixed cost increase because of fewer units.
2. Unit fixed cost and desired ROI per unit increase because of fewer units.
3. Unit variable cost and desired ROI per unit decrease because of fewer units.
4. Only unit fixed cost increases because of fewer units.

Ans: B, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. The unit selling price is computed in the cost-plus method for pricing as
2. fixed cost per unit + desired ROI per unit
3. variable cost per unit + desired ROI per unit.
4. variable overhead cost per unit + fixed overhead cost per unit + desired ROI per unit.
5. variable cost per unit + fixed cost per unit + ROI per unit.

Ans: D, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. In the cost-plus method of pricing, a markup percentage is computed by dividing the per unit return on investment (ROI) by the
2. variable cost per unit.
3. fixed cost per unit.
4. total manufacturing overhead cost per unit.
5. total cost per unit.

Ans: D, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Ixtapa Company. has determined the following per unit amounts:

Direct materials $40 Fixed selling and administrative $50

Direct labor 36 Fixed overhead 35

Return on Investment (ROI) 27 Variable selling and administrative 15

Variable overhead 24

The unit selling price using the cost-plus method is

• 1. $142
  2. $162
  3. $215

1. $227

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Direct materials + Direct labor + Variable overhead + Variable selling and administrative + Fixed overhead + Fixed selling and administrative + Desired ROI = Unit Selling Price; $40 + $36 + $24 + $15 + $35 + $50 + $27 = $227

1. Target costing for target pricing
2. starts with the price and then subtracts the plus, or markup, to determine the target cost per unit.
3. starts with the cost per unit and adds the plus, or markup, to determine the unit selling price.
4. is used for products and services where a competitive market does not exist.
5. is used when products are unique in nature and firms can influence price-setting.

Ans: A, LO 4, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. The formula used to compute a Target Cost per Unit is
2. Target price per unit + Budgeted profit per unit.
3. Full cost per unit + Unit markup on cost.
4. Target price per unit – Budgeted profit per unit.
5. Full cost per unit – Unit markup on cost.

Ans: C, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. If the existing unit cost is above a target cost per unit, then
2. the unit selling price is adjusted upward to cover the unit cost.
3. cost analysis is performed to identify which components of the product/service can be targeted for cost reduction.
4. the company should not manufacture and sell this particular product/service.
5. the company should recompute the cost per unit only using the variable unit costs.

Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. In a competitive market, where target costing is used, the price per unit is established by
2. management.
3. the marketplace.
4. sales representatives.
5. managerial accountants.

Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. In a target costing pricing approach, the desired profit per unit is
2. added to the total cost per unit.
3. added to the variable cost per unit.
4. deducted from the market selling price per unit.
5. deducted from the total cost per unit.

Ans: C, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. To achieve a target unit cost, management usually undertakes a business process called
2. breakeven analysis.
3. differential analysis.
4. capital budgeting.
5. value engineering

Ans: D, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Which of the following statements is not true regarding value engineering?
2. Value engineering involves communication and collaboration between people form business functions that make up the value chain.
3. The process of value engineering is simple and inexpensive.
4. A cross-functional team reviews steps in the company’s value chain to identify where costs can be cut.
5. If an activity within a business process drives up the cost, then the activity can be rethought or perhaps eliminated.

Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Target costing is used for products and services sold
2. in competitive markets.
3. that are unique, with distinguishing characteristics.
4. where customers lack good information on the market.
5. where specific firms can influence prices.

Ans: A, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Target costing for target pricing is
2. a cost-based approach.
3. a market-based approach.
4. similar to the cost-plus pricing method.
5. used where products are distinct, and companies set their own prices.

Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. In highly competitive markets, players are
2. price takers.
3. price makers.
4. price negotiators.
5. price leaders.

Ans: A, LO 4, Bloom: K, Difficulty: Easy, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Recently, Shasta Corporation has decided to play a more-active role in the soda beverage industry. It is aware that the current market price for a can of soda is $2.00. Shasta plans to sell 100,000 cans of soda in its first year and would like to generate an ROI of 20% on its invested assets of $600,000. Using the target costing for target pricing approach, what will Shasta’s target cost per unit be?
2. $0.80
3. $1.20
4. $2.00
5. $3.20

Ans: A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Budgeted operating income = ROI x Invested Assets = $600,000 x 20% = $120,000; Budgeted Profit per Unit = $120,000/100,000 units = $1.20. Target Unit Cost = (Market Unit SP – Profit per Unit) = $2.00 - $1.20 = $0.80.

1. Revco, Inc. is using the target costing for target pricing approach for its new product. If its expected annual sales for this product are 200,000 units, its total target cost is $170,000, and its ROI is 10% on $500,000 of invested assets, what is the expected selling price per unit?
2. $0.25
3. $0.60
4. $0.85
5. $1.10

Ans: D, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Target cost per unit = Total target cost ÷ Expected annual unit sales = $170,000 ÷ 200,000 units = $0.85; Budgeted profit per unit = Budgeted profit ÷ Expected annual unit sales = (ROI x Invested Assets) ÷ Expected annual unit sales = (10% x $500,000) ÷ 200,000 units = $0.25; Expected unit selling price = Target cost per unit + Budgeted profit per unit = $0.85 + $0.25 = $1.10.

1. The first step in the target costing for target pricing approach is
   1. calculating a target cost per unit.
   2. using the prevailing market price per unit as a price ceiling.
   3. computing the budgeted profit per unit.
   4. determining the total cost per unit.

Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. The last step in the target costing for target pricing approach is
2. calculating a target cost per unit.
3. setting the unit selling price by using the prevailing market price per unit as a price ceiling.
4. performing value engineering to achieve the target cost per unit.
5. applying cost analysis to determine which parts of the service/product cost can be targeted for reduction or control.

Ans: C, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. If a company that has opted to use target costing for target pricing computes a unit production cost that exceeds the target unit cost, then the company should
2. not manufacture and sell the product.
3. use lower quality materials which cost less to make the product.
4. perform cost analysis and value engineering to achieve a target unit cost.
5. increase the unit selling price so that the unit target cost will increase.

Ans: D, LO 4, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. The act of charging different prices to different customers for the same product or service is called
2. price fixing.
3. price discrimination.
4. price gouging.
5. predatory pricing.

Ans: B, LO 5, Bloom: K, Difficulty: Easy, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. When a business charges exorbitant prices for necessities, typically in the aftermath of a natural disaster or pandemic, it is referred to as
2. predatory pricing.
3. price fixing.
4. price gouging.
5. price discrimination.

Ans: C, LO 5, Bloom: K, Difficulty: Easy, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Although formulas can be used to compute unit selling prices, which of the following is a key factor in determining product/service pricing and is very hard to measure?
2. Company supply of products
3. Customer demand for products
4. Perceived value
5. Overall state of the economy

Ans: C, LO 5, Bloom: K, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. When one company makes a deal with another company to set a price at a given level for a product or service, which is usually higher than the equilibrium price in competitive markets, this act is called
2. price gouging.
3. price fixing.
4. predatory pricing.
5. price discrimination.

Ans: B, LO 5, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. If a company sets its product or service price too high, it might cause
2. the demand to increase for the product.
3. customers to not purchase the product.
4. supply of the product or service to decline.
5. the market share of a competitor to decrease.

Ans: B, LO 5, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Price-dumping happens when
2. a U.S. firm unloads its products in a non-U.S. country for a significantly reduced price.
3. a smaller company sets it selling price lower than a competitor’s selling price in order to enter the market or increase its market share.
4. a foreign country sells a product in a U.S. domestic market at a price substantially below the domestic market price for the same product.
5. a U.S. company imports goods from a foreign country at a higher unit price than what it can obtain from a local, domestic distributor.

Ans: C, LO 5, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. If a company sets its price too low for a product or service, or reduces its unit selling price,
2. customers may not purchase the product or service due to perceived decrease in value.
3. demand and thus, sales of the product or service will increase immediately.
4. customers will most likely not be affected by a change in the unit selling price.
5. customers will purchase the product or service immediately assuming that the unit selling price cannot decline any further.

Ans: A, LO 5, Bloom: C, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Which of the following pricing behaviors is considered a criminal violation under the Sherman Antitrust Act?
2. Price fixing
3. Price discrimination
4. Peak-load pricing
5. Negotiated pricing

Ans: A, LO 5, Bloom: K, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Price fixing happens when
2. two or more companies collude to sell a product or provide a service for price higher than what is expected in the market.
3. a company decides to set its price to match its competitor’s price.
4. a company determines that in order to sell more of its product, it should lower its selling price.
5. demand exceeds supply for a company’s product, and the company in turn, increases its selling price.

Ans: A, LO 5, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Exelon charges its customers a higher rate for electricity during the day-time peak usage period than in the evening. This pricing practice is referred to as
2. price discrimination.
3. predatory pricing.
4. peak-load pricing.
5. price gouging.

Ans: C, LO 5, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Peak-load pricing occurs when a higher price is charged as
2. demand approaches the physical limit of the capacity to produce a product or provide a service.
3. supply approaches the physical limit of the capacity to produce a product or provide a service.
4. supply of a product or service exceeds the demand for the product or service.
5. demand is less than the supply of the product or service.

Ans: A, LO 5, Bloom: K, Difficulty: Medium, AACSB: none, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Pfizer Inc., Meridian Medical Technologies Inc., and King Pharmaceuticals LLC worked together in a 10-year period to increase the price of a single Epipen from $100 to over $600. This is an example of what pricing practice?
2. Price discrimination
3. Price fixing
4. Predatory pricing
5. Peak-load pricing

Ans: B, LO 5, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Ford offers a special $1,000 incentive to its loyal customers to be used toward the purchase or lease of any new Ford vehicle. This is an example of
2. price discrimination.
3. price fixing.
4. predatory pricing.
5. price gouging.

Ans: A, LO 5, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Which of the following statements is true regarding price discrimination?
2. Differential pricing due to race, religion, disability, or gender is legal.
3. Price discrimination that causes a competitive injury to another company is not illegal.
4. Price discrimination segments the market based on customers’ willingness to pay.
5. A company will most likely decrease its profits by having different prices.

Ans C, LO 5, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Collusive pricing is the same as
2. price gouging.
3. price fixing.
4. predatory pricing.
5. price discrimination.

Ans B, LO 5, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

BRIEF EXERCISES

1. Match the term listed on the left with the appropriate definition on the right.

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Decision Analysis.

Ans:

1. c 2. d 3. b 4. A

1. You are given the scenarios below. Select the appropriate effect based on the relationship between a product’s cost, price, and profit.

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Decision Analysis.

Ans:

1. b 2. c 3. a

1. Kringle Company produces holiday ornaments that it sells to its regular customers for $12 per unit. The cost to produce each unit is $9, of which $6 is variable per unit and $3 is fixed per unit. A local charity has asked Kringle Company to produce 1,000 ornaments for its annual charity fund raising event as a gift for each donation. The charity is asking for a special pricing offer at $8 per unit instead of the normal $12 per unit. The ornaments will not require any customization, and Kringle Company currently has sufficient excess operating capacity to manufacture the 1,000 special order ornaments. Should Kringle Company accept the special-order proposal from the local charity. (Show all computations to support your decision.)

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Kringle Company should accept the special order since it will generate $2,000 ($2/ornament x 1,000 special order units) of operating income.

Solution:

1. Stocks Cake Factory normally sells their specialty pound cake for $25. A special order to buy 100 pound cakes for $20 per pound cake was made by an organization hosting a charity event in Philadelphia. The variable cost per cake is $12 and the fixed cost per cake is $3. Assuming Stocks Cake Factory has sufficient excess capacity to fill the special order, determine the differential income or loss per cake from selling the pound cakes if Stocks were to accept this special order.

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Differential Income = $800

Solution:

1. Khan Manufacturing Company has the following unit manufacturing cost for products currently sold to outside customers:

Variable Cost $60

Fixed Cost $20

A special order for 3,000 units has been received from a foreign company. The unit price requested is $65. The normal unit price is $90. If the order is accepted, unit variable costs will increase by $2 for additional shipping costs. The company currently has excess operating capacity. If the order is accepted, what will the differential operating income or loss be?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Differential Income = $9,000

Solution:

1. Ghangi Manufacturing Company has the following unit manufacturing cost for products currently sold to outside customers:

Variable Cost $60

Fixed Cost $20

A special order for 3,000 units has been received from a foreign company. The unit price requested is $65. The normal unit price is $90. If the order is accepted, unit variable costs will increase by $2 for additional shipping costs and since the company currently does not have sufficient excess operating capacity, an additional fixed cost of $10,000 would have to be incurred to lease additional production space without affecting present sales to outside customers. If the order is accepted, what will the differential operating income or loss be?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Differential Loss = $(1,000)

Solution:

1. Millennial Manufacturing incurs $38 of variable costs and $22 of allocated fixed costs in the production of an ergonomic backpack that normally sells for $90. A buyer in Canada offers to purchase 5,000 units at $56 each. Millennial Manufacturing has excess capacity and can handle the additional production. What effect will acceptance of this offer have on the company’s operating income?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Differential Income = $90,000

Solution:

1. Sustainable Solutions, LLC makes bracelets from recycled plastic. Each bracelet costs $6 to produce, of which $4 is variable and $2 is fixed. If Sustainable Solutions applies a 30% markup to each bracelet, what is the selling price for a single bracelet?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: $7.80

Solution: Selling Price = Unit Cost + Markup = Unit Cost + (Unit Cost x Markup %) =

$6 + ($6 x 30%) = $6 + $1.80 = $7.80

1. Gizmos and Gadgets, Inc. produces and sells a mechanical model car kit that challenges young children to create a motorized model car. The cost associated with the parts for the car kit include variable costs of $18 and fixed costs of $7. If the company expects to recognize a profit based on a markup of 40%, what is the expected selling price for each car kit?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: $35.00

Solution: Selling Price = Unit Cost + Markup = Unit Cost + (Unit Cost x Markup %) =

[($18 + $7) + {($18 + $7) x 40%}] = $25 + $10 = $35

1. Lumina Industries produces and sells outdoor solar lighting fixtures. A solar spotlight has a total cost of $40 per unit, of which $30 is variable cost and $10 is fixed cost. The desired profit is $10 per unit. Determine the markup percentage on total cost.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: 25%

Solution: Desired Profit per Unit/ Total Unit Cost = Markup Percentage on Total Cost;

$10/$40 = 25%

1. Pignatello Products has a new product coming to market next year. The following projections for production and sales are for the upcoming year at given below.

Variable costs $200,000

Fixed costs $500,000

ROI 15%

Investment in assets $2,000,000

Sales 200,000 units

Using a cost-plus pricing approach, what is the expected selling price per unit?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: $5.00

Solution: (Investment in assets x ROI % = Desired $ ROI; Desired $ ROI / Sales units = Desired ROI per unit; (Variable Costs + Fixed Costs) / Sales = Cost per unit; Desired ROI per unit + Cost per unit = Expected Selling Price per Unit; $2,000,000 x 15% = $300,000; $300,000 ÷ 200,000 units = $1.50 per unit; ($200,000 + $500,000) ÷ 200,000 units = $3.50; $1.50 + $3.50 = $5.00.

1. Holiday Hosting Company has the following per unit information available for its new product:

Desired ROI $ 20

Fixed cost $ 40

Variable cost $ 60

Total cost $100

Selling price $140

What would Holiday Hosting Company’s markup percentage be using a cost-plus pricing

approach on total cost?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Markup Percentage = 40%

Solution: Selling Price – Total Cost = Profit per Unit; $140 - $100 = $40 Profit per Unit; Markup Percentage = Profit per Unit ÷ Total Cost = $40 ÷ $100 = 40%

1. Juanita Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $46 per unit. Juanita Company management has budgeted for operating income of $4 per unit at a volume of 10,000 units. Their current full cost per unit for the product is $43 per unit. What is the target cost of the Juanita Company’s product?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Target Cost Per Unit = $42

Solution: Target Cost Per Unit = Target Price per Unit – Budgeted Profit per Unit = $46 - $4 = $42.

1. Crescent Computers produces a combination wireless computer keyboard and mouse. The market for this product combination is very competitive. The current market price for a wireless computer keyboard and mouse is $30. If Crescent Computers desires to make a profit of $9 per unit of the wireless computer keyboard and mouse, what is the target cost to manufacture the wireless computer keyboard and mouse?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Target Cost Per Unit = $21

Solution: Target Cost Per Unit = Target Price per Unit – Budgeted Profit per Unit = $30 - $9 = $21.

1. Kissimee Corporation manufactures a high-performance product. It expects to produce and sell 50,000 of these products in the upcoming year. It has invested $15,000,000 to make these products and has a desired return on investment (ROI) of 20%. If the current market price for similar high-performance products is $500, what is Kissimee Corporation’s target cost for the product?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Target Cost Per Unit = $440

Solution: ROI per Unit = (Invested Assets x ROI %) ÷ Sales Volume = ($15,000,000 x 20%) ÷ 50,000 = $60; Target Cost Per Unit = Target Price per Unit – ROI per Unit = $500 - $60 = $440.

1. Nissan uses target costing. Assume that the company expects the market selling price for a compact sedan model is going to be $27,000 for the upcoming year and expects to sell 5,000 of this model. If Nissan has invested assets of $100,000,000 with a ROI required of 12%, what is the target cost for a Nissan compact sedan model for the upcoming year?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Target Cost Per Unit = $24,600

Solution: ROI per Unit = (Invested Assets x ROI %) ÷ Sales Volume = ($100,000,000 x 12%) ÷ 5,000 = $2,400; Target Cost Per Unit = Target Price per Unit – ROI per Unit = $27,000 - $2,400 = $24,600.

1. Sports Fanatics, Inc. is interested in selling Tampa Bay Buccaneers NFL logo key rings. Market research indicates that that 10,000 units can be sold if the price is no more than $8 per key ring, due to its Superbowl win last year. If Sports Fanatics, Inc. decides to produce the key rings, it will need to invest $200,000 in new production equipment. If Sports Fanatics, Inc. desires to earn a minimum rate of return of 15%, what is the target cost for each key ring?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Target Cost Per Unit = $5

Solution: ROI per Unit = (Invested Assets x ROI %) ÷ Sales Volume = ($200,000 x 15%) ÷ 10,000 = $3; Target Cost Per Unit = Target Price per Unit – ROI per Unit = $8 - $3 = $5.

1. Given below are business practices related to pricing situations:

____ 1. Taking advantage of consumers in need by charging them excessively high prices

for necessities or basic items.

____ 2. Selling products at a lower price internationally than in the home country.

____ 3. Charging a higher price for a product/service when there is limited availability of the

product/service (demand is greater than supply)

____ 4. Intentionally selling products at prices that are lower than their costs to drive out

competition.

____ 5. Charging a different price to different consumer segments for the same

product/service.

____ 6. When two or more competitors agree to set prices at a given level, usually higher

than the equilibrium price.

Instructions: Match the descriptions given above with the appropriate pricing term by writing the letter of the term on the line before each description.

a. Price discrimination d. Price fixing

b. Peak-load pricing e. Dumping

c. Price gouging f. Predatory pricing

Ans: N/A, LO 5, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. c 4. f

2. e 5. a

3. b 6. d

EXERCISES

1. MEX Company manufactures a product with a cost of $52 per unit ($30 variable and $22 fixed). This product normally sells to customers for $60 per unit. Ixtapa Industries, a foreign company, offers to purchase 5,000 units at $42 each. MEX Company would incur $4 of special packaging and shipping costs if the order is accepted. MEX Company has sufficient unused capacity to produce the 5,000 special-order units. If the special order is accepted, what will the effect be on MEX Company’s income?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. Canine Creations Company produces dog toys with a cost of $9 per unit ($6 variable and $3 fixed). This product normally sells to customers for $13 per unit. Chihuahua Inc., a foreign company, offers to purchase 3,000 units at $7 each. Canine Creations Company would incur $1.50 of special packaging and shipping costs if the order is accepted. Canine Creations Company has sufficient unused capacity to produce the 3,000 special-order units. If the special order is accepted, what will the effect be on the company’s income?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. Philly Pretzels produces specialty pretzels which it normally sells as a box of a dozen pretzels. The cost per box of 12 pretzels is normally $6, of which $4.50 is variable and $1.50 is fixed. A local charity has requested to purchase 500 boxes at $4 per box. Philly Pretzels has sufficient unused capacity to produce the 500 special-order units. If the special order is accepted, what will the effect be on the income of Philly Pretzels?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. Darjeeling Co. produces a single product. Its normal selling price is $32.00 per unit. The variable costs are $21.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. The company has received a request for a special order that would not interfere with normal sales. The order is for 1,500 units and a special price of $19.00 per unit. Darjeeling Co. has the capacity to handle the special order and, for this order, a variable selling cost of $1.00 per unit would be eliminated. If the special order is accepted, what will the effect be on Darjeeling Co.’s income?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. Magnacom Inc. produces a product, with a normal selling price of $35.00 per unit. The variable costs are $22.00 per unit. Fixed costs are $40,000 for a normal production run of 10,000 units per month. The company has received a request for a special order that would not interfere with normal sales. The order is for 3,500 units and a special price of $24.00 per unit. Magnacom Inc. has the capacity to handle the special order and, for this order, a variable selling cost of $2.00 per unit would be eliminated. If the special order is accepted, what will the effect be on Magnacom Inc.’s income?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. Cannon Corporation uses a cost-plus pricing model based on full cost. Below is cost information for the production and sale of 50,000 units of its sole product.

Cannon desires a profit equal to a 20% return on invested assets of $700,000.

1. What is the total cost per unit per unit for the company's product?
2. What is the ROI or desired profit per unit for the company’s product?
3. What is the markup percentage for this product? (round to 2 decimal places)
4. What is the expected selling price for the company’s product?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: a. $13.90 b. $2.80 c. 20.14% d. $16.70

Solution:

1. Total cost per unit per unit = Variable Unit Costs + Fixed Unit Costs = ($5.00 + $1.50 + $1.80 + $4.70) + ($35,000 + $10,000)/50,000 units = $13.90
2. ROI or desired profit per unit = Investment in assets x ROI % = Desired $ ROI; Desired $ ROI / Sales units = Desired ROI per unit; ($700,000 x 20%)/50,000 units = $2.80
3. Markup percentage = ROI per unit/Unit Selling Price = $2.80/$13.90 = 20.14%
4. Expected selling price = Desired ROI per unit + Cost per unit; $13.90 + $2.80 = $16.70; or Cost per Unit + (Cost per Unit x Markup percentage) = $13.90 + ($13.90 x 20.14%) = $16.70
5. Tetrus Corporation uses a cost-plus pricing model based on full cost. The following cost

information is available for the production and sale of 10,000 units of its sole product:

Tetrus desires a profit equal to a 30% return on invested assets of $20,000.

1. What is the total cost per unit per unit for the company's product?
2. What is the ROI or desired profit per unit for the company’s product?
3. What is the markup percentage for this product? (round to 2 decimal places)
4. What is the expected selling price for the company’s product?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: a. $9.40 b. $0.60 c. 6.38% d. $10.00

Solution:

1. Total cost per unit per unit = Variable Unit Costs + Fixed Unit Costs = ($2.30 + $1.25 + $1.75 + $2.70) + ($12,000 + $2,000)/10,000 units = $9.40
2. ROI or desired profit per unit = Investment in assets x ROI % = Desired $ ROI; Desired $ ROI / Sales units = Desired ROI per unit; ($20,000 x 30%)/10,000 units = $0.60
3. Markup percentage = ROI per unit/Unit Selling Price = $0.60/$9.40 = 6.38%
4. Expected selling price = Desired ROI per unit + Cost per unit; $9.40 + $0.60 = $10.00; or Cost per Unit + (Cost per Unit x Markup percentage) = $9.40 + ($9.40 x 6.38%) = $10.00
5. Tri-Valley Corporation uses a cost-plus pricing model based on full cost. Below is cost

information for the production and sale of 20,000 units of its sole product.

1. What is the total cost per unit per unit for the company's product?
2. If the company’s markup percentage is 25%, what is the ROI or desired profit per unit?
3. What is the expected selling price for the company’s product?
4. If Tri-Valley decides to increase its markup percentage to 30%, what is the new expected selling price for the company’s product?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: a. $29.00 b. $7.25 c. $36.25 d. $37.70

Solution:

1. Total cost per unit per unit = Variable Unit Costs + Fixed Unit Costs = ($10.00 + $5.50 + $2.80 + $5.70) + ($42,000 + $58,000)/20,000 units = $29.00
2. ROI or desired profit per unit = Total cost per unit x Markup percentage = $29.00 x 25% = $7.25
3. Expected selling price = Cost per unit + Desired ROI per unit; $29.00 + $7.25 = $36.25
4. Expected selling price = Cost per unit + Desired ROI per unit = Cost per Unit + (Cost per Unit x Markup percentage) = $29.00 + ($29.00 x 30%) = $29.00 + $8.70 = $37.70
5. Kiddie City is studying the costs of its most popular toy for the upcoming holiday season.

It currently costs $50 to purchase from a supplier and sells for $75. The company is contemplating adding another toy which is very similar to the most popular one, but it will cost Kiddie City $65 from the supplier. The cost per toy is expected to decrease after the holiday season and will be more in line with the most popular toy at $50 in January. Regardless of which toy it sells, Kiddie City incurs variable selling and administrative costs of $5 per toy.

1. What is the current markup percentage that Kiddie City is using for its most popular toy?
2. If the company uses the same markup percentage for the new toy as it is using for the current popular toy, what is the expected selling price, markup in dollars and as a percentage?
3. Assume that the operating assets attributable to the most popular toy product line amount to $50,000 and that the company’s target ROI is 20%. Will Kiddie City meet the target ROI goal if it plans to sell 1,000 toys for this holiday season?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: a. $50% b. $97.50; $32.50; 50% c. ROI = $10 per toy

Solution:

1. Current markup percentage = (Unit selling price – Unit cost)/Unit cost = ($75 - $50)/$50 = $25/$50 = 50%
2. Expected selling price (new product) = $65 + ($65 x 50%) = $65 + $32.50 = $97.50; Markup in dollars = $65 x 50% = $32.50; Markup percentage = $32.50/$65 = 50%
3. ROI = (Invested Assets x ROI %)/Sales Volume = ($50,000 x 20%)/1,000 toys = $10 per toy. Kiddie City will meet the target ROI since it currently makes $25 per toy for the most popular toy and expects to make $32.50 per toy with the newer toy.
4. Xavier Company sells a product in a competitive marketplace. Market analysis indicates

that their product would probably sell at $50 per unit. Xavier Company management

desires a 18% profit margin on sales. Their current full cost per unit for the product is

$44 per unit.

1. What is the desired profit per unit for Agway Company?
2. What is the expected selling price for Agway Company using a target costing approach?
3. What is the target cost per unit for Agway Company?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: a. $9 per unit b. $50 per unit c. $21 per unit

Solution:

1. Desired profit per unit = Unit Selling Price x Profit Margin % = $50 x 18% = $9 per unit
2. Expected selling price = Market Price = $50 per unit
3. Target cost per unit = Expected (Market) Selling Price – Desired Profit per Unit = $50 - $9 = $41 per unit
4. Summer Splash wants to produce and sell a new fruit-flavored soda. To enter the

market, the soda will have to sell at $1.75 per 12 oz. can. The data below has been collected.

Expected annual sales 50,000

Projected selling and administrative costs $9,000

Desired profit $60,000

1. What is the target cost per can of soda?
2. If expected annual sales were to decrease from 50,000 to 48,000 cans, what would the new target cost be?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: a. $0.55 per unit b. $0.50 per unit

Solution:

1. Desired profit ÷ Expected annual sales = $60,000 ÷ 50,000 units = $1.20 per unit; Target cost = Market price – Desired profit per unit = $1.75 - $1.20 = $0.55 per unit
2. Desired profit ÷ Expected annual sales = $60,000 ÷ 48,000 units = $1.25 per unit; Target cost = Market price – Desired profit per unit = $1.75 - $1.25 = $0.50 per unit
3. Quigley, Inc. is introducing a new product. Since the market for this product is very

competitive, the company plans to use a target cost approach. Projected sales revenue is

$950,000 ($95 per unit) and target costs are $700,000.

1. What is the desired profit per unit?
2. What is the target cost for the product?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: a. $25 per unit b. $70 per unit

Solution:

1. Desired profit per unit = (Projected Sales Revenue – Target Costs) / (Projected Sales Revenue ÷ Unit Selling Price) = ($950,000 - $700,000) / ($950,000 ÷ $95 per unit) = $250,000 / 10,000 units = $25 per unit
2. Target cost per unit = Target costs / (Projected Sales Revenue ÷ Unit Selling Price) = $700,000 / ($950,000 ÷ $95 per unit) = $700,000 / 10,000 units = $70 per unit; or Expected Unit Selling Price – Desired profit per unit (per a) = $95 - $25 = $70 per unit
3. Agway Company sells a product in a competitive marketplace. Market analysis indicates

that their product would probably sell at $28.00 per unit. Agway Company management desires a profit equal to a 25% rate of return on invested assets of $1,400,000. They anticipate selling 50,000 units. Its current full cost per unit for the product is $25 per unit.

1. What is the desired profit per unit for Agway Company?
2. What is the expected selling price for Agway Company using a target costing approach?
3. What is the target cost per unit for Agway Company?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: a. $7 per unit b. $28 per unit c. $21 per unit

Solution:

1. Desired profit per unit = (Invested Assets x ROI %)/Sales Volume = ($1,400,000 x 25%)/50,000 units = $7 per unit
2. Expected selling price = Market Price = $28 per unit
3. Target cost per unit = Expected (Market) Selling Price – Desired Profit per Unit = $28 - $7 = $21 per unit
4. Two competitors, Sirius Satellite Radio and XM Satellite Radio own the market for

satellite radio. They are constantly trying to one-up the other by creating new listening options for users. Recently, some newcomers to the market are eroding their combined market share. Despite their differences, these two companies feel that they could be stronger if they worked together on a project. The decide to set subscription prices for their services extremely low while still offering all options that customers have come to appreciate. What pricing tactic are these two companies employing?

Ans: N/A, LO 5, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Price fixing or collusive pricing

1. Omar just purchased his first fully-electric automobile. He installed a level-2 charger in

his home to charge the battery daily for the new auto. When he contacted his electricity provider, he was informed of a program where he could be charged a lower rate per KWH if he charges the auto overnight instead of during the daytime. What pricing tactic is being used in this situation?

Ans: N/A, LO 5, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans: Peak load pricing

PROBLEMS

1. Mambo Manufacturing Company has a normal production capacity of 40,000 units per

month. Because of an excess amount of inventory on hand, it expects to produce only 30,000 units in July. Monthly fixed costs and expenses are $120,000 ($3 per unit at normal plant capacity) and variable costs and expenses are $8.75 per unit. The present selling price is $14.75 per unit. The company has an opportunity to sell 8,500 additional units at $9.50 per unit to a company who plans to market the product under its own brand name in a foreign market. The additional business will not affect the regular selling price or quantity of sales of Mambo Manufacturing Company.

1. Prepare a differential analysis for the proposal to sell at the special price.

Ans: N/A, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. Time After Time, Inc. produces several models of clocks. Each clock consists of $10 of

variable costs and $3 of fixed costs, and currently sells for $20. A foreign wholesaler offers to buy 5,000 clocks at $11 each, which Time After Time has the sufficient capacity to produce without affecting its current production and sales within the domestic market. Time after Time, however, would incur an additional $2 of shipping costs per clock to ship overseas.

Instructions:

1. Determine the incremental income or loss that Time After Time would realize by accepting this special order.
2. What is the lowest acceptable special-order price that Time After Time would be willing to accept in order to accept the special order?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Solution:

1. Solution: The lowest acceptable price that Time After Time would be willing to accept is equal to the total variable cost per unit for the special order, which is the $10 + $2 = $12. Any price in equal to or greater than the $12 per unit would be acceptable in the short-term for this special order.
2. MCG Manufacturing Company has a normal plant capacity of 27,000 units per month.

Because of an excess quantity of inventory on hand, it expects to produce only 20,000 units in October. Monthly fixed costs and expenses are $108,000 ($4 per unit at normal plant capacity) and variable costs and expenses are $12.00 per unit. The present selling price is $28.00 per unit. Consider each of the following independent assumptions and prepare a differential analysis for each to determine if the special order should be accepted.

1. The company has an opportunity to sell 7,000 additional units at $20.00 per unit to a business that plans to market the product under its own brand in a foreign market. Determine the incremental income or loss MCG Manufacturing could realize by accepting this special order.
2. Now assume that the company has an opportunity to sell 7,000 additional units at $20.00 per unit to a business that plans to market the product under its own brand in a foreign market. Now, though, the special-order request includes customization which will add $3 of variable costs per unit. Determine the incremental income or loss MCG Manufacturing could realize by accepting this special order.
3. Assume that the company has an opportunity to sell 6,000 additional units at $15.00 per unit to a business that plans to market the product under its own brand in a foreign market. Now, though, the special-order request includes additional shipping overseas which will add $4.50 of variable costs per unit. Determine the incremental income or loss MCG Manufacturing could realize by accepting this special order.

Ans: N/A, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

1. Solution:

1. Solution:

1. Solution:

1. Timberland Boot Company has the following information concerning its work-boots:

Variable manufacturing costs $140,000

Variable selling and administrative costs $ 80,000

Fixed manufacturing costs $150,000

Fixed selling and administrative costs $130,000

Investment $1,500,000

ROI 15%

Planned production and sales 10,000 units

1. What is the total cost per pair of work boots?
2. What is the ROI per pair of work boots?
3. What is the markup percentage per pair of work boots?
4. What is the selling price per pair of work boots assuming Timberland uses a cost-plus pricing model?
5. If the current market price per pair of work boots is $70, what is the target cost for Timberland Boot Company?

Ans: N/A, LO 3 and 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. Total cost per pair of work boots =

Variable manufacturing costs $140,000 ÷ 10,000 units = $14

Variable selling and administrative costs $80,000 ÷ 10,000 units = $8

Fixed manufacturing costs $150,000 ÷ 10,000 units = $15

Fixed selling and administrative costs $130,000 ÷ 10,000 units = $13

Total Cost per unit (pair of boots) $50

1. ROI per pair of work boots = (Investment x ROI) ÷ Planned production/sales = ($1,500,000 x 15%) ÷ 10,000 units = $22.50
2. Markup percentage per pair of work boots = ROI per pair of work boots ÷ Total Cost per unit (pair of boots) = $22.50 ÷ $50 = 45%
3. Selling price per pair of works boot (cost-plus pricing) = Total Cost per unit (pair of boots), $50 + ROI per pair of work-boots, $22.50 = $72.50; or Total Cost per unit (pair of boots), $50 + Markup (Total Cost per unit, $50 x Markup percentage, 45%) = $50 + $22.50 = $72.50.
4. Target Cost = Current market price per pair of work boots, $70, - ROI per pair of work-boots, $22.50 = $47.50.
5. Mandela Corporation has collected the following data concerning one of its products:

Unit sales price $145

Total sales 20,000 units

Unit cost $125

Total investment $2,000,000

1. What is the ROI percentage for Mandela Corporation?
2. What is the markup percentage per unit for Mandela Corporation?
3. If the current market price per unit is $140, what is the target cost for Mandela Corporation?

Ans: N/A, LO 3 and 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. ROI percentage per unit = (Investment x ROI) ÷ Planned production/sales = [($145 - $125) x 20,000 units] ÷ $2,000,000 = 20%
2. Markup percentage unit = Profit Per Unit ÷ Total Cost per Unit = ($145 - $125) = $20 Profit per Unit; $20 ÷ $125 = 16%
3. Target cost = Current market price – ROI (Profit) per unit = $140 - $20 = $120
4. Sylvia Strohm has decided to open her own dog grooming service, Puppy Scrub. She is

trying to decide whether she wants to offer services doing mobile grooming or have a set location for the dog grooming business. She has analyzed cost and pricing information for both options and has arrived at the following financial data:

Ans: N/A, LO 3 and 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Instructions: Students should prepare responses for the following questions:

1. What is the total cost per dog-grooming service under the Mobile Option?
2. What is the total cost per dog-grooming service under the Set Location Option?
3. What is the ROI per dog-grooming service under the Mobile Option?
4. What is the ROI per dog-grooming service under the Set Location Option?
5. What is the markup percentage per dog-grooming service under the Mobile Option?
6. What is the markup percentage per dog-grooming service under the Set Location Option?
7. What is the selling price per dog-grooming service under the Mobile Option assuming Sylvia uses a cost-plus pricing model?
8. What is the selling price per dog-grooming service under the Set Location Option assuming Sylvia uses a cost-plus pricing model?
9. Using the current market price per dog-grooming service for the Mobile Option, what is the target cost for Puppy Scrub?
10. Using the current market price per dog-grooming service for the Set Location Option, what is the target cost for Puppy Scrub?
11. Which option would you recommend to Sylvia for opening her new dog-grooming business? Explain why.

Solution:

1. Diamond Corporation uses the total cost concept of product pricing. Cost information for

the production and sale of 35,000 units of its single product is presented below. Diamond desires a profit equal to a 15% return on invested assets of $280,000.

Instructions: Students should compute the following items for Diamond Corporation:

1. Total cost per unit
2. ROI (profit) per unit
3. Markup percentage (round to 2 decimal places)
4. Expected selling price per unit

Ans: N/A, LO 3 and 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Ans:

1. Total cost per unit = $15.20 per unit
2. ROI (profit) per unit = $1.20 per unit
3. Markup percentage = 7.89%
4. Expected selling price per unit = $16.40

Solution:

1. Total cost per unit = Variable DM + Variable DL + Variable MOH + Variable SG&A + Fixed MOH + Fixed SG&A = $4.30 + $5.25 + $.90 + $.75 + ($105,000 ÷ 35,000 units) + ($35,000 ÷ 35,000 units) = $15.20
2. ROI (profit) per unit = (Invested assets x ROI %) ÷ Sales Volume = ($280,000 x 15%) ÷ 35,000 units = $1.20 per unit
3. Markup percentage = ROI per unit ÷ Total Cost per Unit = $1.20 ÷ $15.20 = 7.89%
4. Expected selling price per unit = Total Cost per Unit + ROI per Unit = $15.20 + $1.20 = $16.40; or Total Cost per Unit + Markup (Total Cost per Unit x Markup Percentage) = $15.20 + ($15.20 x 7.89%) = $16.40

SHORT ANSWER

1. Explain what a “price taker” is and how unit prices are determined for a price taker.

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: A “price taker” is found in highly competitive markets, which are comprised of many buyers and sellers, have undifferentiated products, and no one producer dictates the operation of the market. The price is thus, determined by the market at the prevailing market price, and will only change based on the amount of the quantity supplied and demanded.

1. What is a “price maker” and how are unit prices determined for a price maker.

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: A “price maker,” as opposed to a “price taker,” normally sells a product which is perceived as distinct in the market, and therefore, determines its own unit price as a function of cost and desired profit.

1. What four factors must management consider when making pricing decisions? Briefly

discuss each factor.

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. Context – are you a price taker in a competitive market where the market determines the price or are you a price maker where you can decide the price to charge for your product or service, typically using a cost-plus pricing model.
2. Customers – understanding your customers motivations and to what kind of pricing they respond. Different pricing strategies might be used to attract different types of customers.
3. Costs – cost structure and required profit must be accounted for since they are closely linked to pricing decisions.
4. Competitors – your competition wants to attract and secure the same customers and market share as you, so it is important to do research of their products and strategies.

1. How is a special order different from a regular order for a product or service?

Ans: N/A, LO 2, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Special-order pricing decisions allow decision-makers to think in a short-term mindset, whereas regular-order pricing uses a long-term mindset. In order to consider a special order, management must address capacity and relevant cost information. Where normal orders typically are evaluated based on operating income, if sufficient excess capacity exists, a special order will be evaluated strictly on its variable costs. However, management must be aware that this approach could lead to underpricing in the long run since fixed costs are not included in the analysis.

1. What costs and revenues are relevant in special-order decisions?

Ans: N/A, LO 2, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: The costs and revenues that are relevant in special-order decisions are the revenues associated with the special order (Special Order Unit Selling Price x Special Order Units) and the variable costs associated with the special order (Unit Variable Costs for Special Order x Special Order Units). This assumes that available capacity exists, and no additional fixed costs would need to be incurred to fulfill the special order. However, if the company does not have available capacity to fulfill the special order, and would need to incur additional fixed costs to meet the special order production, then the additional or incremental (differential) fixed costs incurred would also be relevant to the special-order decision.

1. How is a special-order price determined for a product or service?>

Ans: N/A, LO 2, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: A special-order price is determined in the short-term by first addressing whether the company has enough available capacity to produce the special-order units/services or whether it will need to incur additional costs in the production of the special order units/services. If sufficient capacity is available, and there are no additional fixed costs, the contribution margin of the special order is then computed (Special Order Unit Selling Price – Special Order Unit Variable Costs). If the contribution margin is positive, then consider qualitative factors before accepting the special order. If additional fixed costs will need to be incurred to fulfill the special order, then instead of using the contribution margin for the special order, then operating income of the special order will be computed. If it is positive, then consider qualitative factors before accepting the special order.

1. When is the cost-plus pricing method used by a company? Explain

Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: The cost-plus pricing method is used by a company where entities can set their own prices by differentiating their products or services. This is a cost-based approach instead of a market-based approach.

1. How is an expected selling price determined in a cost-plus pricing approach?
   
   Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: First, the business must determine the total per unit cost by adding together the per unit variable costs, and computing and adding the per unit fixed costs (total fixed costs divided by expected sales volume). Once the total cost is determined, a desired profit per unit is added to compute the expected unit selling price. The desired profit per unit may be computed by applying a markup percentage to the cost per unit. If the markup percentage is not given, then a desired ROI or profit per unit can be computed by multiplying the required ROI percentage by the invested assets for production and then dividing this result by the expected sales volume.

1. Explain what is included in the total cost when using a full cost approach for the cost-

plus pricing approach.

Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Total cost means all costs in a company’s value chain, not just product costs.

It includes the costs associated with all business functions in the value chain including both variable and fixed costs for such things as research and development, design, supply, production, marketing, distribution, and customer service.

1. Explain the difference between target costing and cost-plus pricing.

Ans: N/A, LO 4, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: In cost-plus pricing, an entity begins with a total per unit cost and then adds a desired profit per unit to arrive at an expected selling price. The company sets the price for the product. However, in a target costing approach, due to competition, the market establishes the unit selling price for the company’s product. Using the market price, then the company deducts its desired profit per unit to arrive at its target cost per unit.

1. What two question does a company need to address when using a target costing

approach?

Ans: N/A, LO 4, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Companies should ask the following 2 questions when using target costing:

1. Since customers in competitive markets are price-sensitive, and the market-place has already set a price ceiling, what must target costs be to earn the required ROI?
2. If a company’s current costs are higher than its target costs, how can current costs be reduced?
3. What is value engineering as it relates to target costing?

Ans: N/A, LO 4, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Value engineering is a systematic means of reviewing the identifiable processes within the value chain of a company to determine where unnecessary and non-value-added costs are being incurred. Ideally, the intent is not only to reduce costs, but to also make processes as efficient as possible, trimming all nonessential costs where possible, in order to achieve the desired target cost.

1. Explain the following statement: “Pricing relies heavily on perception.”

Ans: N/A, LO 5, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Pricing is not simply a science that is subject to set formulas. For example, if a price is set high, many consumers may relate higher price to higher quality, and by perceiving that the product is of higher quality, the consumer is willing to pay the higher price. However, when a company reduces the product’s price, the consumer may perceive the product to be inferior quality, defective or obsolete, and regardless of how low the price is, the customer may not wish to purchase the product due to inferior quality.

1. Explain the method of peak-load pricing, how does it differ from price discrimination, and

provide an example of its use.

Ans: N/A, LO 5, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: This type of pricing result within natural supply and demand relationships when demand is greater than supply. It aims to reduce strain on a necessary resource, such as electricity. Price discrimination, on the other hand, segments a market based on customers’ willingness to pay in an effort to maximize profits. An example of peak-load pricing relates to electric rates, where rates during the night tend to be lower per kilowatt hour (KWH) due to lower demand, and rates are higher during the daytime when the demand is higher.

1. What is the difference between price gouging and price fixing (collusive pricing)?

Ans: N/A, LO 5, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: AC, Measurement, Analysis,

and Interpretation, IMA: Strategy, Planning, and Performance: Strategic Cost Management and Decision Analysis.

Solution: Price gouging occurs when a business charges exorbitant prices for necessities during a time of emergency. Price fixing on the other hand, is a deal made among business rivals to set or fix a price at a given level, usually higher than the equilibrium price in competitive markets (but it can be lower to capture additional market share or to discourage entry by new players in the market.)