App A

Difficulty
T/F
T/F
T/F
T/F
T/F
T/F
T/F
T/F
T/F
10
T/F
11
T/F
12
T/F
13
T/F
14
T/F
15
T/F
AppA -1
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Professional exam adapted
Other topics
LO3: Target costing
LO2: Absorption costing approach
LO1: Economists' approach to pricing
Question Type
16
T/F
17
Conceptual M/C
18
Conceptual M/C
19
Conceptual M/C
20
Conceptual M/C
21
Conceptual M/C
22
Conceptual M/C
23
Conceptual M/C
24
Conceptual M/C
25
Single Part M/C
26
Single Part M/C
27
Single Part M/C
28
Single Part M/C
29
Single Part M/C
30
Single Part M/C
31
Single Part M/C
32
Single Part M/C
33
Single Part M/C
34
Single Part M/C
35
Single Part M/C
36
Single Part M/C
37
Single Part M/C
AppA -2
38
Single Part M/C
39
Single Part M/C
40
Single Part M/C
41
Single Part M/C
42
Single Part M/C
43
Single Part M/C
44
Single Part M/C
45
Single Part M/C
46
Single Part M/C
AppA-Ref1
47-48
Multipart M/C
AppA-Ref2
49-50
Multipart M/C
AppA-Ref3
51-52
Multipart M/C
AppA-Ref4
53-55
Multipart M/C
AppA-Ref5
56-57
Multipart M/C
M-H
AppA-Ref6
58-60
Multipart M/C
AppA-Ref7
61-62
Multipart M/C
AppA-Ref8
63-64
Multipart M/C
AppA-Ref9
65-66
Multipart M/C
AppA-Ref10
67-68
Multipart M/C
69
Problem
70
Problem
71
Problem
AppA -3
72
Problem
73
Problem
74
Problem
75
Problem
76
Problem
77
Problem
78
Problem
79
Problem
80
Problem
81
Problem
82
Problem
AppA -4
Appendix A
Pricing Products and Services
True / False Questions
1. If the unit sales for one product are more sensitive to price increases than another
product, then its markup over variable cost should be less than for the other product
if the company wants to maximize profit.
True
False
2. Price elasticity measures the degree to which consumers resent an increase in price.
True
False
3. If a product is price inelastic, then only a very large change in selling price will result
in a substantial change in the volume of units sold.
True
False
4. The price elasticity of demand is NOT used to determine the markup over cost when
computing the profit-maximizing price.
True
False
5. The price elasticity of demand is NOT used in the absorption costing approach to
cost-plus pricing to determine the markup over cost.
True
False
6. The markup over cost under the absorption costing approach would increase if selling
and administrative expenses increase, holding everything else constant.
True
False
7. The markup over cost under the absorption costing approach would increase if the
required rate of return increases, holding everything else constant.
True
False
AppA -5
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
8. In the absorption approach to cost-plus pricing, the anticipated markup in dollars is

NOT equal to the anticipated profit.
True
False
9. Under the absorption approach to costs-plus pricing described in the text, selling and
administrative costs are included in the cost base when computing a selling price.
True
False
10. If the formula for the markup percentage on absorption cost is used for setting prices,
then the company's desired return on investment (ROI) will not usually be attained
unless the assumed number of units sold is actually sold.
True
False
11. In target costing, the selling price is the starting point and the cost follows from the
selling price.
True
False
12. In target costing, effort is concentrated on effectively marketing the product to

maximize its selling price.
True
False
13. The formula for target cost is:

Target cost = Anticipated selling price + Desired profit
True
False
14. Target costing is the process of determining the maximum allowable cost for a new
product and then developing a prototype that can be profitably made for that
maximum cost figure.
True
False
15. Most of the opportunities to reduce the cost of a product come from designing the
product so that it is simple to make, uses inexpensive parts, and is robust and
reliable.
True
False
16. Pricing decisions are most difficult in those situations in which a company makes a
product that is in competition with other, identical products for which a market
already exists.
True
False
AppA -6
Multiple Choice Questions
17. Holding all other things constant, if the price elasticity of demand increases (i.e.,
becomes more negative), then the markup under the economists' approach to pricing
will:
A.
B.
C.
D.
increase.
decrease.
remain the same.
The effect cannot be determined.
18. Holding all other things constant, an increase in fixed production costs will affect:
A. the markup under the absorption costing approach to cost-plus pricing.

B. the markup used to compute the profit-maximizing price.
C. both the markup under the absorption costing approach to cost-plus pricing and
the markup used to compute profit-maximizing price.
D. neither the markup under the absorption costing approach to cost-plus pricing nor
19. Holding all other things constant, an increase in the company's required return on
investment (ROI) will affect:
A. the selling price under the absorption costing approach to cost-plus pricing.
B.
the profit-maximizing price.
C. both the selling price under the absorption costing approach to cost-plus pricing
and the profit-maximizing price.
D. neither the selling price under the absorption costing approach to cost-plus pricing
nor the profit-maximizing price.
20. Holding all other things constant, an increase in how sensitive customers are to price
would affect:

D. neither the markup under the absorption costing approach to cost-plus pricing nor
AppA -7
21. Holding all other things constant, an increase in variable selling costs will affect:
B.
D. neither the selling price under the absorption costing approach to cost-plus pricing
nor the profit-maximizing price.
22. Which of the following items are included in calculating the markup percentage under
the absorption approach to cost-plus pricing described in the text?
A.
B.
C.
D.
Option A
Option B
Option C
Option D
23. When using the absorption approach to cost-plus pricing described in the text:
A.
all costs are included in the cost base.
B. the "plus" or markup figure contains fixed costs and desired profit.
C. the cost base is made up of the unit product cost.
D. only selling and administrative expenses are included in the cost base.
24. The formula for target cost is:
A. Target cost = Anticipated selling price - Desired profit.

B. Target cost = Unit cost + (Markup percentage Unit cost)
C. Target cost = Units sold Unit cost traceable to product
D. Target cost = (Desired return on assets employed + Selling and administrative
expenses) (Units sold Unit product cost)
AppA -8
25. Ingham Corporation recently changed the selling price of one of its products. Data
concerning sales for comparable periods before and after the price change are
presented below.
The product's variable cost is $16.40 per unit.

According to the formula in the text, the product's profit-maximizing price is closest
to:
A.
B.
C.
D.
$35.82
$32.89
$35.23
$20.74
26. Hanson Corporation recently changed the selling price of one of its products. Data
presented below.
The product's price elasticity of demand as defined in the text is closest to:
A.
B.
C.
D.
-1.71
-1.65
-1.85
-2.45
27. Warvel Corporation's management has found that every 5% increase in the selling
price of one of the company's products leads to an 8% decrease in the product's total
unit sales. The variable production cost of the product is $18.00 per unit and the
variable selling and administrative cost is $12.00 per unit.
to:
A.
B.
C.
D.
$63.08
$72.31
$96.41
$58.67
AppA -9
28. Finn Corporation's management believes that every 5% increase in the selling price
of one of the company's products results in a 6% decrease in the product's total unit
sales. The variable production cost of this product is $38.30 per unit and the variable
selling and administrative cost is $1.00 per unit.
The product's profit-maximizing price according to the formula in the text is closest
to:
A.
B.
C.
D.
$43.62
$187.34
$41.55
$185.84
29. Gordy Corporation's management has found that every 3% increase in the selling
price of one of the company's products leads to a 6% decrease in the product's total
unit sales. The product's absorption costing unit product cost is $22.00. The variable
production cost of the product is $6.80 per unit and the variable selling and
administrative cost is $2.40 per unit.
to:
A.
B.
C.
D.
$17.77
$31.39
$17.61
$42.12
30. Erdahl Corporation's management believes that every 7% increase in the selling price
of one of the company's products leads to a 11% decrease in the product's total unit
sales. The product's price elasticity of demand as defined in the text is closest to:
A.
B.
C.
D.
-1.72
-1.84
-1.05
-2.05
AppA -10
31. Minden Corporation estimates that the following costs and activity would be
associated with the manufacture and sale of product A:
If the company uses the absorption costing approach to cost-plus pricing described in
the text and desires a 25% rate of return on investment (ROI), the required markup
on absorption cost for Product A would be closest to:
A.
B.
C.
D.
12%
15%
17%
25%
32. Perwin Corporation estimates that an investment of $400,000 would be needed to

produce and sell 30,000 units of Product B each year. At this level of activity, the unit
product cost would be $25. Selling and administrative expenses would total $350,000
each year. The company uses the absorption costing approach to cost-plus pricing
described in the text. If a 15% rate of return on investment is desired, then the
required markup for Product B would be closest to:
A.
B.
C.
D.
15%
49%
55%
58%
33. Lacy Corporation uses the absorption costing approach to cost-plus pricing described
in the text to set prices for its products. Based on budgeted sales of 86,000 units next
year, the unit product cost of a particular product is $81.60. The company's selling
and administrative expenses for this product are budgeted to be $1,247,000 in total
for the year. The company has invested $360,000 in this product and expects a
return on investment of 12%.
The markup on absorption cost for this product would be closest to:
A.
B.
C.
D.
12.0%
18.4%
29.8%
17.8%
AppA -11
34. Surent Corporation has the following information available on Product K:
The company uses the absorption costing approach to cost-plus pricing described in
the text and a 50% markup. Based on these data, the company's total selling and
administrative expenses associated with Product K each year are:
A.
B.
C.
D.
$80,000
$200,000
$920,000
$800,000
35. Magner, Inc., uses the absorption costing approach to cost-plus pricing described in
the text to set prices for its products. Based on budgeted sales of 34,000 units next
year, the unit product cost of a particular product is $61.80. The company's selling
and administrative expenses for this product are budgeted to be $809,200 in total for
the year. The company has invested $400,000 in this product and expects a return on
investment of 9%.
The selling price for this product based on the absorption costing approach would be
closest to:
A.
B.
C.
D.
$86.66
$120.03
$67.36
$85.60
AppA -12
36. Joeston Corporation makes a product with the following costs:
the text. The pricing calculations are based on budgeted production and sales of
14,000 units per year. The company has invested $540,000 in this product and
expects a return on investment of 10%. The markup on absorption cost would be
closest to:
A.
B.
C.
D.
27.1%
124.2%
34.2%
10.0%
37. Kircher, Inc., manufactures a product with the following costs:
81,000 units per year.
The company has invested $220,000 in this product and expects a return on
investment of 15%.
The selling price based on the absorption costing approach would be closest to:
A.
B.
C.
D.
$71.90
$72.31
$53.29
$93.67
AppA -13
38. The Sloan Corporation must invest $120,000 to produce and market 16,000 units of
Product X each year. The company uses the absorption costing approach to cost-plus
pricing described in the text to set prices for its products. Other cost information
regarding Product X is as follows:
If Sloan Corporation requires a 15% return on investment, then the markup

percentage on absorption cost for Product X (rounded to the nearest percent) would
be:
A.
B.
C.
D.
41%
16%
29%
22%
39. The following information is available on Browning Inc.'s Product A:
the text. Based on these data, the total selling and administrative expenses each
year are:
A.
B.
C.
D.
$720,000
$480,000
$640,000
$400,000
AppA -14
40. Simmons Corporation estimated that the following costs and activity would be
associated with Product T:
If the company uses the absorption costing approach to cost-plus pricing described in
the text and desires a 20% ROI, the selling price for Product T would be:
A.
B.
C.
D.
$37.25
$38.75
$42.00
$44.75
41. The management of Brockington Corporation is considering introducing a new

product--a compact barbecue. At a selling price of $80 per unit, management
projects sales of 70,000 units. Launching the barbecue as a new product would
require an investment of $400,000. The desired return on investment is 15%. The
target cost per barbecue is closest to:
A.
B.
C.
D.
$79.14
$92.00
$91.01
$80.00
42. Timax Corporation, a manufacturer of moderate-priced time pieces, would like to

introduce a new electronic watch. To compete effectively, the watch could not be
priced at more than $50. The company requires a return on investment of 25% on all
new products. The plan is to produce and sell 20,000 watches each year. This would
require a $500,000 investment. The target cost per watch would be:
A.
B.
C.
D.
$64.00
$25.00
$43.75
$39.00
AppA -15
43. Aldot Candy Corporation is implementing a target costing approach for its latest new
product, the "Big Glob" candy bar. The following information relates to the Big Glob:
Based on this information, what is Aldot's target selling price per bar for the Big
Glob?
A.
B.
C.
D.
$0.48
$0.50
$0.64
$0.70
44. Pedrotti Corporation would like to use target costing for a new product it is
considering introducing. At a selling price of $28 per unit, management projects sales
of 30,000 units. The new product would require an investment of $300,000. The
desired return on investment is 17%. The target cost per unit is closest to:
A.
B.
C.
D.
$32.76
$26.30
$28.00
$30.77
45. A new product, an automated crepe maker, is being introduced at Miyake

Corporation. At a selling price of $73 per unit, management projects sales of 20,000
units. Launching the crepe maker as a new product would require an investment of
$400,000. The desired return on investment is 17%. The target cost per crepe maker
is closest to:
A.
B.
C.
D.
$69.60
$85.41
$81.43
$73.00
AppA -16
46. Sawit Corporation, a manufacturer of woodworking tools, wants to introduce a new

power screwdriver. To compete effectively, the screwdriver cannot be priced at more
than $14. The company requires a 15% rate of return on investment on all new
products. In order to produce and sell 80,000 screwdrivers each year, the company
will need to make an investment of $800,000. The target cost per screwdriver would
be:
A.
B.
C.
D.
$15.50
$1.50
$14.00
$12.50
Bluhm Corporation's management believes that every 2% increase in the selling price
of one of the company's products would lead to a 4% decrease in the product's total
unit sales. The product's variable cost is $17.50 per unit.
47. The product's price elasticity of demand as defined in the text is closest to:
A.
B.
C.
D.
-1.75
-2.22
-2.06
-1.07
48. The product's profit-maximizing price according to the formula in the text is closest
to:
A.
B.
C.
D.
$259.84
$33.99
$40.89
$31.81
Clulow Corporation recently changed the selling price of one of its products. Data
presented below.
AppA -17
A.
B.
C.
D.
-3.19
-2.02
-2.70
-4.13
to:
A.
B.
C.
D.
$15.31
$16.67
$20.79
$13.86
Alley Corporation's vice president in charge of marketing believes that every 8%

increase in the selling price of one of the company's products would lead to a 13%
decrease in the product's total unit sales. The product's absorption costing unit
product cost is $17.40. The variable production cost is $4.10 per unit and the variable
selling and administrative cost is $4.80 per unit.
A.
B.
C.
D.
-2.13
-1.47
-1.57
-1.81
to:
A.
B.
C.
D.
$10.73
$38.89
$9.16
$19.89
AppA -18
Dickson Corporation makes a product with the following costs:
investment of 15%.
Direct labor is a variable cost in this company.
53. The markup on absorption cost is closest to:
A.
B.
C.
D.
96.5%
15.0%
31.2%
30.0%
54. The selling price based on the absorption costing approach is closest to:
A.
B.
C.
D.
$85.28
$84.50
$110.89
$56.95
55. If every 10% increase in price leads to a 14% decrease in quantity sold, the profitmaximizing price is closest to:
A.
B.
C.
D.
$84.50
$124.25
$120.90
$117.91
AppA -19
Eakins Corporation has just developed a new product. At an expected sales level of
60,000 units per year, the company anticipates that the following costs will be
incurred:
Eakins Corporation uses the absorption costing approach to cost-plus pricing as

described in the text.
56. The new product would require an investment of $1,200,000 on which the company
would like to earn a return of 22 percent. The markup using the absorption costing
approach would be:
A.
B.
C.
D.
93.8%
32.6%
71.3%
57.5%
57. Assume that after introducing the new product, the company finds that it has excess
capacity. A foreign dealer has offered to purchase 2,000 units at a special price of
$36 per unit. This sale would not disturb regular business. If the special price is
accepted on the 2,000 units, the company's overall net income for the year should:
A.
B.
C.
D.
decrease by $24,000
increase by $20,000
increase by $8,000
increase by $32,000
AppA -20
The management of Kizer Corporation would like to set the selling price on a new
product using the absorption costing approach to cost-plus pricing. The company's
accounting department has supplied the following estimates for the new product:
Management plans to produce and sell 8,000 units of the new product annually. The
new product would require an investment of $1,580,000 and has a required return on
investment of 10%.
58. The absorption costing unit product cost is:
A.
B.
C.
D.
$59
$86
$55
$75
59. The markup percentage on absorption cost is closest to:
A.
B.
C.
D.
25%
10%
15%
41%
60. The unit target selling price using the absorption costing approach is closest to:
A.
B.
C.
D.
$105.75
$83.33
$121.50
$86.00
Eckert Corporation uses the absorption costing approach to cost-plus pricing as

described in the text to set prices for its products. Based on budgeted sales of 18,000
units next year, the unit product cost of a particular product is $60.40. The
company's selling and administrative expenses for this product are budgeted to be
$370,800 in total for the year. The company has invested $260,000 in this product
and expects a return on investment of 11%.
AppA -21
61. The markup on absorption cost for this product would be closest to:
A.
B.
C.
D.
45.1%
36.7%
11.0%
34.1%
62. The selling price based on the absorption costing approach for this product would be
closest to:
A.
B.
C.
D.
$110.76
$81.00
$67.04
$82.59
Merced Corporation estimates that an investment of $600,000 would be necessary to

produce and sell 50,000 units of a new product each year. Other costs associated
with the new product would be:
The company requires a 15% return on the investment in all products. The company
uses the absorption costing approach costing to pricing as described in the text.
63. The markup percentage on the new product would be closest to:
A.
B.
C.
D.
15.0%
46.6%
31.6%
50.0%
64. The selling price would be closest to:
A.
B.
C.
D.
$28.71
$26.50
$22.00
$32.67
AppA -22
The management of Rispoli Corporation is considering introducing a new product--a

compact lawn blower. At a selling price of $38 per unit, management projects sales of
10,000 units. The lawn blower would require an investment of $700,000. The desired
return on investment is 11%.
65. The desired profit according to the target costing calculations is:
A.
B.
C.
D.
$380,000
$303,000
$41,800
$77,000
66. The target cost per lawn blower is closest to:
A.
B.
C.
D.
$33.63
$30.30
$38.00
$42.18
Samples Corporation would like to use target costing for a new product it is
considering introducing. At a selling price of $21 per unit, management projects sales
of 20,000 units. The new product would require an investment of $400,000. The
desired return on investment is 12%.
67. The desired profit according to the target costing calculations is:
A.
B.
C.
D.
$420,000
$50,400
$48,000
$372,000
68. The target cost per unit is closest to:
A.
B.
C.
D.
$21.00
$18.60
$23.52
$20.83
Essay Questions
AppA -23
69. Okamoto Corporation's management believes that every 7% increase in the selling
price of one of the company's products would lead to a 10% decrease in the product's
total unit sales. The variable cost per unit of this product is $69.20.
Required:
a. Compute the product's price elasticity of demand as defined in the text to two
decimal places.
b. Compute the product's profit-maximizing price according to the formula in the
text.
AppA -24
70. Pashicke Corporation recently changed the selling price of one of its products. Data
presented below.

Required:
a Compute the product's price elasticity of demand as defined in the text to two
decimal places.
text.
AppA -25
71. Gillis Corporation's marketing manager believes that every 10% increase in the
selling price of one of the company's products would lead to a 15% decrease in the
product's total unit sales. The product's absorption costing unit product cost is
$20.00. The variable production cost is $6.00 per unit and the variable selling and
administrative cost is $3.00. The fixed selling and administrative expense averages
$0.50 per unit.
Required:
decimal places.
text.
72. Nguyen Corporation's marketing manager believes that every 8% increase in the
administrative cost is $2.20.
Required:
decimal places.
text.
AppA -26
73. Qualls Corporation makes a product that has the following costs:
The company uses the absorption costing approach to cost-plus pricing as described
in the text. The pricing calculations are based on budgeted production and sales of
investment of 15%.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price of the product using the absorption costing approach.
c. Assume that every 10% increase in price leads to a 13% decrease in quantity sold.
Assuming no change in cost structure and that direct labor is a variable cost,
compute the profit-maximizing price.
AppA -27
74. Green Hornet Corporation is contemplating the introduction of a new product. The
company has gathered the following information concerning the product:
in the text.
Required:
b. Compute the selling price.
AppA -28
75. The management of Archut Corporation would like to set the selling price on a new
Management plans to produce and sell 9,000 units of the new product annually. The
new product would require an investment of $3,002,400 and has a required return on
investment of 10%.
Required:
a. Determine the unit product cost for the new product.
b. Determine the markup percentage on absorption cost for the new product.
c. Determine the selling price for the new product using the absorption costing
approach.
AppA -29
76. Trepan Corporation is contemplating the introduction of a new product. The company
has gathered the following information concerning the product:
in the text.
Required:
c. If the price computed in "b" above is charged, and costs turn out as projected, can
the company be assured that no loss will be sustained on the new product? Explain.
AppA -30
77. Ritchie Corporation manufactures a product that has the following costs:
expects a return on investment of 15%.
Required:
AppA -31
78. Desalvo Corporation is introducing a new product whose direct materials cost is $41
per unit, direct labor cost is $20 per unit, variable manufacturing overhead is $5 per
unit, and variable selling and administrative expense is $4 per unit. The annual fixed
manufacturing overhead associated with the product is $120,000 and its annual fixed
selling and administrative expense is $8,000. Management plans to produce and sell
8,000 units of the new product annually. The new product would require an
investment of $2,192,000 and has a required return on investment of 10%.
Management would like to set the selling price on a new product using the absorption
costing approach to cost-plus pricing.
Required:
approach.
79. The management of Featherston, Inc., is considering a new product that would have
a selling price of $77 per unit and projected sales of 50,000 units. The new product
would require an investment of $100,000. The desired return on investment is 20%.
Required:
Determine the target cost per unit for the new product.
AppA -32
80. Loyola International, Inc. is considering adding a portable CD player to its product
line. Management believes that in order to be competitive, the CD player cannot be
priced above $79. The company requires a minimum return of 20% on its
investments. Launching the new product would require an investment of
$20,000,000. Sales are expected to be 250,000 units of the CD player per year.
Required:
Compute the target cost of a CD player.
81. Hepler Corporation would like to use target costing for a new product that is under
consideration. At a selling price of $76 per unit, management projects sales of 50,000
units. The new product would require an investment of $400,000. The desired return
on investment is 12%.
Required:
AppA -33
82. Management of Daubert Corporation is considering a new product, an outdoor

speaker that would have a selling price of $43 per unit and projected sales of 60,000
units. Launching the new product would require an investment of $300,000. The
Required:
Determine the target cost per unit for the outdoor speaker.
AppA -34
Appendix A Pricing Products and Services Answer Key
True / False Questions
1.
If the unit sales for one product are more sensitive to price increases than another
product, then its markup over variable cost should be less than for the other
product if the company wants to maximize profit.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: AppA-01 Compute the profit-maximizing price of a product or service using the price
elasticity of demand and variable cost.
2.
Price elasticity measures the degree to which consumers resent an increase in

price.
FALSE
Blooms: Remember
Difficulty: 1 Easy
3.
If a product is price inelastic, then only a very large change in selling price will
result in a substantial change in the volume of units sold.
TRUE
Blooms: Understand
AppA -35
4.
The price elasticity of demand is NOT used to determine the markup over cost
when computing the profit-maximizing price.
FALSE
Blooms: Remember
Difficulty: 1 Easy
5.
The price elasticity of demand is NOT used in the absorption costing approach to
cost-plus pricing to determine the markup over cost.
TRUE
Blooms: Understand
Learning Objective: AppA-02 Compute the selling price of a product using the absorption costing approach.
6.
The markup over cost under the absorption costing approach would increase if
selling and administrative expenses increase, holding everything else constant.
TRUE
Blooms: Understand
7.
The markup over cost under the absorption costing approach would increase if the
required rate of return increases, holding everything else constant.
TRUE
Blooms: Understand
AppA -36
8.
In the absorption approach to cost-plus pricing, the anticipated markup in dollars is

NOT equal to the anticipated profit.
TRUE
Blooms: Understand
9.
Under the absorption approach to costs-plus pricing described in the text, selling
and administrative costs are included in the cost base when computing a selling
price.
FALSE
Blooms: Remember
10.
If the formula for the markup percentage on absorption cost is used for setting
prices, then the company's desired return on investment (ROI) will not usually be
attained unless the assumed number of units sold is actually sold.
TRUE
Blooms: Understand
11.
In target costing, the selling price is the starting point and the cost follows from
the selling price.
TRUE
Blooms: Understand
Learning Objective: AppA-03 Compute the target cost for a new product or service.
AppA -37
12.
In target costing, effort is concentrated on effectively marketing the product to

maximize its selling price.
FALSE
Blooms: Remember
Difficulty: 1 Easy
13.
The formula for target cost is:

Target cost = Anticipated selling price + Desired profit
FALSE
Blooms: Remember
Difficulty: 1 Easy
14.
Target costing is the process of determining the maximum allowable cost for a new
product and then developing a prototype that can be profitably made for that
maximum cost figure.
TRUE
Blooms: Remember
Difficulty: 1 Easy
15.
Most of the opportunities to reduce the cost of a product come from designing the
product so that it is simple to make, uses inexpensive parts, and is robust and
reliable.
TRUE
Blooms: Remember
Difficulty: 1 Easy
AppA -38
16.
Pricing decisions are most difficult in those situations in which a company makes a
product that is in competition with other, identical products for which a market
already exists.
FALSE
Blooms: Understand
Learning Objective: Other topics
Multiple Choice Questions
17.
Holding all other things constant, if the price elasticity of demand increases (i.e.,
becomes more negative), then the markup under the economists' approach to
pricing will:
A.
B.
C.
D.
increase.
decrease.
remain the same.
The effect cannot be determined.

Blooms: Understand
Difficulty: 3 Hard
18.
Holding all other things constant, an increase in fixed production costs will affect:

D. neither the markup under the absorption costing approach to cost-plus pricing
nor the markup used to compute profit-maximizing price.
Blooms: Understand
Difficulty: 3 Hard
AppA -39

19.
Holding all other things constant, an increase in the company's required return on
investment (ROI) will affect:
B.
D. neither the selling price under the absorption costing approach to cost-plus
pricing nor the profit-maximizing price.
Blooms: Understand
Difficulty: 3 Hard
20.
Holding all other things constant, an increase in how sensitive customers are to
price would affect:

D. neither the markup under the absorption costing approach to cost-plus pricing
nor the markup used to compute profit-maximizing price.
Blooms: Understand
Difficulty: 3 Hard
AppA -40
21.
Holding all other things constant, an increase in variable selling costs will affect:
B.
D. neither the selling price under the absorption costing approach to cost-plus
pricing nor the profit-maximizing price.
Blooms: Understand
22.
Which of the following items are included in calculating the markup percentage
under the absorption approach to cost-plus pricing described in the text?
A.
B.
C.
D.
Option A
Option B
Option C
Option D

Blooms: Understand
23.
When using the absorption approach to cost-plus pricing described in the text:
A.
all costs are included in the cost base.
B. the "plus" or markup figure contains fixed costs and desired profit.
C.
the cost base is made up of the unit product cost.
D. only selling and administrative expenses are included in the cost base.
AppA -41

Blooms: Understand
24.
The formula for target cost is:
A. Target cost = Anticipated selling price - Desired profit.

B. Target cost = Unit cost + (Markup percentage Unit cost)
C. Target cost = Units sold Unit cost traceable to product
D. Target cost = (Desired return on assets employed + Selling and administrative
expenses) (Units sold Unit product cost)
Blooms: Remember
Difficulty: 1 Easy
AppA -42
25.
Ingham Corporation recently changed the selling price of one of its products. Data
presented below.

According to the formula in the text, the product's profit-maximizing price is
closest to:
A.
B.
C.
D.
$35.82
$32.89
$35.23
$20.74
% change in quantity sold = (5,090 - 4,300)/4,300 = +18.37%

% change in price = ($11 - $12)/$12 = -8.11%
d = ln(1 + % change in quantity sold)/ln(1 + % change in price)
= ln(1 + (0.1837))/ln(1 + (-0.0811)) = -1.99
Profit-maximizing markup on variable cost = -1/(1 + d)
= -1/(1 + (-1.99)) = 1.01
Profit-maximizing price = (1 + Profit-maximizing markup on variable cost)
Variable cost per unit
= (1 + 1.01) $16.40 = $32.96 (the exact answer without rounding error is
$32.89)
AACSB: Analytic
Blooms: Apply
AppA -43
26.
Hanson Corporation recently changed the selling price of one of its products. Data
presented below.
A.
B.
C.
D.
-1.71
-1.65
-1.85
-2.45

= ln(1 + (5,000 - 5,200)/5,200)/ln(1 + ($63 - $62)/$62) = -2.45
AACSB: Analytic
Blooms: Apply
AppA -44
27.
Warvel Corporation's management has found that every 5% increase in the selling
price of one of the company's products leads to an 8% decrease in the product's
total unit sales. The variable production cost of the product is $18.00 per unit and
the variable selling and administrative cost is $12.00 per unit.
closest to:
A.
B.
C.
D.
$63.08
$72.31
$96.41
$58.67

= ln(1 + (-0.08))/ln(1 + 0.05) = -1.71
= -1/(1 + (-1.71)) = 1.41
= (1 + 1.41) ($18.00 + $12.00) = $72.30 (the answer is $72.31 without
rounding error)
AACSB: Analytic
Blooms: Apply
AppA -45
28.
Finn Corporation's management believes that every 5% increase in the selling

price of one of the company's products results in a 6% decrease in the product's
total unit sales. The variable production cost of this product is $38.30 per unit and
the variable selling and administrative cost is $1.00 per unit.
to:
A.
B.
C.
D.
$43.62
$187.34
$41.55
$185.84

= ln(1 + (-0.06))/ln(1 + 0.05) = -1.27
= -1/(1 + (-1.27)) = 3.70
= (1 + 3.70) ($38.30 + $1.00) = $184.71 (the exact answer without rounding
error is $185.84)
AACSB: Analytic
Blooms: Apply
AppA -46
29.
Gordy Corporation's management has found that every 3% increase in the selling
price of one of the company's products leads to a 6% decrease in the product's
total unit sales. The product's absorption costing unit product cost is $22.00. The
variable production cost of the product is $6.80 per unit and the variable selling
and administrative cost is $2.40 per unit.
closest to:
A.
B.
C.
D.
$17.77
$31.39
$17.61
$42.12

= ln(1 + (-0.06))/ln(1 + 0.03) = -2.09
= -1/(1 + (-2.09)) = 0.92
= (1 + 0.92) ($6.80 + $2.40) = $17.66 (the exact answer without rounding error
is $17.61)
AACSB: Analytic
Blooms: Apply
30.
Erdahl Corporation's management believes that every 7% increase in the selling

price of one of the company's products leads to a 11% decrease in the product's
total unit sales. The product's price elasticity of demand as defined in the text is
closest to:
A.
B.
C.
D.
-1.72
-1.84
-1.05
-2.05

= ln(1 + (0.07))/ln(1 + (-0.11)) = -1.72
AACSB: Analytic
Blooms: Apply
AppA -47
Difficulty: 1 Easy
31.
Minden Corporation estimates that the following costs and activity would be
associated with the manufacture and sale of product A:
If the company uses the absorption costing approach to cost-plus pricing described
in the text and desires a 25% rate of return on investment (ROI), the required
markup on absorption cost for Product A would be closest to:
A.
B.
C.
D.
12%
15%
17%
25%
Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] (Unit product cost Unit sales)
= [(25% $400,000) + $300,000] ($30 per unit 80,000 units)
= [($100,000) + $300,000] $2,400,000
= $400,000 $2,400,000 = 17% (rounded)
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
AppA -48
32.
Perwin Corporation estimates that an investment of $400,000 would be needed to

produce and sell 30,000 units of Product B each year. At this level of activity, the
unit product cost would be $25. Selling and administrative expenses would total
$350,000 each year. The company uses the absorption costing approach to costplus pricing described in the text. If a 15% rate of return on investment is desired,
then the required markup for Product B would be closest to:
A.
B.
C.
D.
15%
49%
55%
58%

= [(15% $400,000) + $350,000] ($25 per unit 30,000 units)
= [($60,000) + $350,000] ($750,000)
= $410,000 $750,000 = 0.55 (rounded)
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
33.
Lacy Corporation uses the absorption costing approach to cost-plus pricing

described in the text to set prices for its products. Based on budgeted sales of
86,000 units next year, the unit product cost of a particular product is $81.60. The
$1,247,000 in total for the year. The company has invested $360,000 in this
product and expects a return on investment of 12%.
A.
B.
C.
D.
12.0%
18.4%
29.8%
17.8%

= [(12% $360,000) + $1,247,000] ($81.60 per unit 86,000 units)
= ($43,200 + $1,247,000) $7,017,600
= $1,290,200 $7,017,600 = 18.4% (rounded)
AACSB: Analytic
AppA -49

Blooms: Apply
Difficulty: 1 Easy
34.
Surent Corporation has the following information available on Product K:
The company uses the absorption costing approach to cost-plus pricing described
in the text and a 50% markup. Based on these data, the company's total selling
and administrative expenses associated with Product K each year are:
A.
B.
C.
D.
$80,000
$200,000
$920,000
$800,000

0.50 = [(20% $400,000) + Selling and administrative expenses] ($25 per unit
80,000 units)
0.50 = [($80,000) + Selling and administrative expenses] ($2,000,000)
($80,000) + Selling and administrative expenses = 0.50 $2,000,000
$80,000 + Selling and administrative expenses = $1,000,000
Selling and administrative expenses = $1,000,000 - $80,000 = $920,000
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
AppA -50
35.
Magner, Inc., uses the absorption costing approach to cost-plus pricing described
in the text to set prices for its products. Based on budgeted sales of 34,000 units
next year, the unit product cost of a particular product is $61.80. The company's
selling and administrative expenses for this product are budgeted to be $809,200
in total for the year. The company has invested $400,000 in this product and
expects a return on investment of 9%.
The selling price for this product based on the absorption costing approach would
be closest to:
A.
B.
C.
D.
$86.66
$120.03
$67.36
$85.60

= [(9% $400,000) + $809,200] ($61.80 per unit 34,000 units)
= [$36,000 + $809,200] $2,101,200
= $845,200 $2,101,200 = 40.22
Absorption cost based selling price = (1 + Markup percentage on absorption cost)
Unit product cost
= (1 + 0.4022) $61.80 = $86.66
AACSB: Analytic
Blooms: Apply
AppA -51
36.
Joeston Corporation makes a product with the following costs:
expects a return on investment of 10%. The markup on absorption cost would be
closest to:
A.
B.
C.
D.
27.1%
124.2%
34.2%
10.0%
Selling and administrative expenses = ($3.00 per unit 14,000 units) + $163,800
= $205,800

= [(10% $540,000) + $205,800] ($54.30 per unit 14,000 units)
= [$54,000 + $205,800] $760,200
= $259,800 $760,200 = 34.2% (rounded)
AACSB: Analytic
Blooms: Apply
AppA -52
37.
Kircher, Inc., manufactures a product with the following costs:
investment of 15%.
The selling price based on the absorption costing approach would be closest to:
A.
B.
C.
D.
$71.90
$72.31
$53.29
$93.67
Selling and administrative expenses = $2.00 per unit 81,000 units + $1,166,400
= $1,328,400
= [(15% $220,000) + $1,328,400] ($55.50 per unit 81,000 units)
= [$33,000 + $1,328,400] $4,495,500
= [$1,361,400] $4,495,500 = 30.28%
Unit product cost
= (1 + 0.3028) $55.50 = $72.31
AACSB: Analytic
Blooms: Apply
AppA -53
38.
The Sloan Corporation must invest $120,000 to produce and market 16,000 units
of Product X each year. The company uses the absorption costing approach to
cost-plus pricing described in the text to set prices for its products. Other cost
information regarding Product X is as follows:
If Sloan Corporation requires a 15% return on investment, then the markup

percentage on absorption cost for Product X (rounded to the nearest percent)
would be:
A.
B.
C.
D.
41%
16%
29%
22%
Selling and administrative expenses = ($3 per unit 16,000 units) + $72,000
= $48,000 + $72,000 = $120,000
= [(15% $120,000) + $120,000] ($21 per unit 16,000 units)
= [$18,000 + $120,000] $336,000
= $138,000 $336,000 = 41% (rounded)
AACSB: Analytic
Blooms: Apply
AppA -54
39.
The following information is available on Browning Inc.'s Product A:
in the text. Based on these data, the total selling and administrative expenses
each year are:
A.
B.
C.
D.
$720,000
$480,000
$640,000
$400,000

Unit product cost
$96 per unit = (1 + Markup percentage on absorption cost) $60 per unit
(1 + Markup percentage on absorption cost) = $96 per unit $60 per unit
(1 + Markup percentage on absorption cost) = 1.6
Markup percentage on absorption cost = 0.6
0.6 = [(16% $500,000) + Selling and administrative expenses] ($60 per unit
20,000 units)
0.6 = [($80,000) + Selling and administrative expenses] ($1,200,000)
[($80,000) + Selling and administrative expenses] = 0.6 $1,200,000
$80,000 + Selling and administrative expenses = $720,000
Selling and administrative expenses = $720,000 - $80,000 = $640,000
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
AppA -55
40.
Simmons Corporation estimated that the following costs and activity would be
associated with Product T:
If the company uses the absorption costing approach to cost-plus pricing described
in the text and desires a 20% ROI, the selling price for Product T would be:
A.
B.
C.
D.
$37.25
$38.75
$42.00
$44.75

= [(20% $900,000) + $600,000] ($35 per unit 80,000 units)
= [$180,000 + $600,000] ($2,800,000)
= 0.2786
Unit product cost
= (1 + 0.2786) $35 per unit = 1.2786 $35 per unit = $44.75 per unit
AACSB: Analytic
Blooms: Apply
AppA -56
41.
The management of Brockington Corporation is considering introducing a new

product--a compact barbecue. At a selling price of $80 per unit, management
projects sales of 70,000 units. Launching the barbecue as a new product would
require an investment of $400,000. The desired return on investment is 15%. The
target cost per barbecue is closest to:
A.
B.
C.
D.
$79.14
$92.00
$91.01
$80.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
42.
Timax Corporation, a manufacturer of moderate-priced time pieces, would like to

introduce a new electronic watch. To compete effectively, the watch could not be
priced at more than $50. The company requires a return on investment of 25% on
all new products. The plan is to produce and sell 20,000 watches each year. This
would require a $500,000 investment. The target cost per watch would be:
A.
B.
C.
D.
$64.00
$25.00
$43.75
$39.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
AppA -57
43.
Aldot Candy Corporation is implementing a target costing approach for its latest
new product, the "Big Glob" candy bar. The following information relates to the Big
Glob:
Based on this information, what is Aldot's target selling price per bar for the Big
Glob?
A.
B.
C.
D.
$0.48
$0.50
$0.64
$0.70
$0.40 per unit = (500,000X - $120,000) 500,000 units

(500,000X - $120,000) = $0.40 per unit 500,000 units
500,000X - $120,000 = $200,000
500,000X = $200,000 + $120,000
500,000X = $320,000
X = $320,000 500,000
X = $0.64
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
AppA -58
44.
Pedrotti Corporation would like to use target costing for a new product it is
considering introducing. At a selling price of $28 per unit, management projects
sales of 30,000 units. The new product would require an investment of $300,000.
The desired return on investment is 17%. The target cost per unit is closest to:
A.
B.
C.
D.
$32.76
$26.30
$28.00
$30.77
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
45.
A new product, an automated crepe maker, is being introduced at Miyake

Corporation. At a selling price of $73 per unit, management projects sales of
20,000 units. Launching the crepe maker as a new product would require an
investment of $400,000. The desired return on investment is 17%. The target cost
per crepe maker is closest to:
A.
B.
C.
D.
$69.60
$85.41
$81.43
$73.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
AppA -59
46.
Sawit Corporation, a manufacturer of woodworking tools, wants to introduce a new

power screwdriver. To compete effectively, the screwdriver cannot be priced at
more than $14. The company requires a 15% rate of return on investment on all
new products. In order to produce and sell 80,000 screwdrivers each year, the
company will need to make an investment of $800,000. The target cost per
screwdriver would be:
A.
B.
C.
D.
$15.50
$1.50
$14.00
$12.50
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Bluhm Corporation's management believes that every 2% increase in the selling

price of one of the company's products would lead to a 4% decrease in the
product's total unit sales. The product's variable cost is $17.50 per unit.
47.
A.
B.
C.
D.
-1.75
-2.22
-2.06
-1.07

= ln(1 + (-0.04))/ln(1 + (+0.02)) = -2.06
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
AppA -60
48.
to:
A.
B.
C.
D.
$259.84
$33.99
$40.89
$31.81

= ln(1 + (-0.04))/ln(1 + (+0.02)) = -2.06
Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-2.06)) = 0.94
= (1 + 0.94) $17.50 = $33.95 (the exact answer, without rounding error, is
$33.99)
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Clulow Corporation recently changed the selling price of one of its products. Data
presented below.
AppA -61
49.
A.
B.
C.
D.
-3.19
-2.02
-2.70
-4.13
% change in price = ($31 - $34)/$34 = -8.82%

% change in quantity sold = (10,010 - 7,800)/7,800 = 28.33%
= ln(1 + (+0.2083))/ln(1 + (-0.0882)) = -2.70
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
50.
to:
A.
B.
C.
D.
$15.31
$16.67
$20.79
$13.86
% change in price = ($31 - $34)/$34 = -8.82%

% change in quantity sold = (10,010 - 7,800)/7,800 = 28.33%
= ln(1 + (+0.2083))/ln(1 + (-0.0882)) = -2.70
= (1 + 0.59) $10.50 = $16.70 (the exact answer, without rounding error, is
$16.67)
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
AppA -62
Alley Corporation's vice president in charge of marketing believes that every 8%

increase in the selling price of one of the company's products would lead to a 13%
decrease in the product's total unit sales. The product's absorption costing unit
product cost is $17.40. The variable production cost is $4.10 per unit and the
variable selling and administrative cost is $4.80 per unit.
51.
A.
B.
C.
D.
-2.13
-1.47
-1.57
-1.81

= ln(1 + (-0.13))/ln(1 + (+0.08)) = -1.81
AACSB: Analytic
Blooms: Apply
52.
to:
A.
B.
C.
D.
$10.73
$38.89
$9.16
$19.89

= ln(1 + (-0.13))/ln(1 + (+0.08)) = -1.81
= (1 + 1.23) ($4.10 + $4.80) = $19.85 (the exact answer, without rounding
error, is $19.89)
AACSB: Analytic
AppA -63

Blooms: Apply
Dickson Corporation makes a product with the following costs:
investment of 15%.
Direct labor is a variable cost in this company.
53.
The markup on absorption cost is closest to:
A.
B.
C.
D.
96.5%
15.0%
31.2%
30.0%
Selling and administrative expenses = ($1.10 per unit 60,000 units) +

$1,104,000 = $1,170,000
= [(15% $320,000) + $1,170,000] ($65.00 per unit 60,000 units)
= [($48,000) + $1,170,000] ($3,900,000)
= [$1,218,000] $3,900,000 = 31.2%
AACSB: Analytic
AppA -64

Blooms: Apply
54.
The selling price based on the absorption costing approach is closest to:
A.
B.
C.
D.
$85.28
$84.50
$110.89
$56.95
Selling and administrative expenses = $1.10 per unit 60,000 units + $1,104,000
= $1,170,000
= [(15% $320,000) + $1,170,000] ($65.00 per unit 60,000 units)
= [($48,000) + $1,170,000] ($3,900,000)
= [$1,218,000] $3,900,000 = 31.2%
Absorption cost based selling price = (1 + 0.312) $65.00 = $85.28
AACSB: Analytic
Blooms: Apply
AppA -65
55.
If every 10% increase in price leads to a 14% decrease in quantity sold, the profitmaximizing price is closest to:
A.
B.
C.
D.
$84.50
$124.25
$120.90
$117.91

= ln(1 + (-0.14))/ln(1 + (+0.10)) = -1.58

= (1 + 1.72) ($44.50) = $121.04 (the exact answer, without rounding error, is
$120.90)
AACSB: Analytic
Blooms: Apply
Eakins Corporation has just developed a new product. At an expected sales level of
60,000 units per year, the company anticipates that the following costs will be
incurred:
Eakins Corporation uses the absorption costing approach to cost-plus pricing as

AppA -66
56.
The new product would require an investment of $1,200,000 on which the

company would like to earn a return of 22 percent. The markup using the
absorption costing approach would be:
A.
B.
C.
D.
93.8%
32.6%
71.3%
57.5%
Selling and administrative expenses = ($6 per unit 60,000 units) + $480,000 =
$840,000
= [(22% $1,200,000) + $840,000] ($32 per unit 60,000 units)
= [($264,000) + $840,000] ($1,920,000)
= [$1,104,000] $1,920,000 = 57.5%
AACSB: Analytic
Blooms: Apply
AppA -67
57.
Assume that after introducing the new product, the company finds that it has
excess capacity. A foreign dealer has offered to purchase 2,000 units at a special
price of $36 per unit. This sale would not disturb regular business. If the special
price is accepted on the 2,000 units, the company's overall net income for the year
should:
A.
B.
C.
D.
decrease by $24,000
increase by $20,000
increase by $8,000
increase by $32,000
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
The management of Kizer Corporation would like to set the selling price on a new
Management plans to produce and sell 8,000 units of the new product annually.
The new product would require an investment of $1,580,000 and has a required
AppA -68
58.
The absorption costing unit product cost is:
A.
B.
C.
D.
$59
$86
$55
$75
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
59.
The markup percentage on absorption cost is closest to:
A.
B.
C.
D.
25%
10%
15%
41%
Selling and administrative expenses = $4 per unit 8,000 units + $56,000 =

$88,000
= [(10% $1,580,000) + $88,000] ($75 per unit 8,000 units)
= [($158,000) + $88,000] ($600,000)
= [$246,000] $600,000 = 41%
AACSB: Analytic
Blooms: Apply
AppA -69
Difficulty: 1 Easy
60.
The unit target selling price using the absorption costing approach is closest to:
A.
B.
C.
D.
$105.75
$83.33
$121.50
$86.00
Selling and administrative expenses = $4 per unit 8,000 units + $56,000 =

$88,000
= [(10% $1,580,000) + $88,000] ($75 per unit 8,000 units)
= [($158,000) + $88,000] ($600,000)
= [$246,000] $600,000 = 41%
Unit product cost
= (1 + 0.41) $75 = $105.75
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Eckert Corporation uses the absorption costing approach to cost-plus pricing as

described in the text to set prices for its products. Based on budgeted sales of
18,000 units next year, the unit product cost of a particular product is $60.40. The
$370,800 in total for the year. The company has invested $260,000 in this product
and expects a return on investment of 11%.
AppA -70
61.
A.
B.
C.
D.
45.1%
36.7%
11.0%
34.1%

= [(11% $260,000) + $370,800] ($60.40 18,000 units)
= [($28,600) + $370,800] ($1,087,200)
= [$399,400] $1,087,200 = 36.7% (rounded)
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
62.
The selling price based on the absorption costing approach for this product would
be closest to:
A.
B.
C.
D.
$110.76
$81.00
$67.04
$82.59

= [(11% $260,000) + $370,800] ($60.40 18,000 units)
= [($28,600) + $370,800] ($1,087,200)
= [$399,400] $1,087,200 = 36.7% (rounded)
Unit product cost
= (1 + 1.367) $60.40 = $82.59 (rounded)
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
AppA -71
Merced Corporation estimates that an investment of $600,000 would be necessary

to produce and sell 50,000 units of a new product each year. Other costs
associated with the new product would be:
The company requires a 15% return on the investment in all products. The
company uses the absorption costing approach costing to pricing as described in
the text.
63.
The markup percentage on the new product would be closest to:
A.
B.
C.
D.
15.0%
46.6%
31.6%
50.0%
$400,000
= [(15% $600,000) + $400,000] ($31.00 per unit 50,000 units)
= [($90,000) + $400,000] ($1,550,000)
= [$490,000] $1,550,000 = 31.6% (rounded)
AACSB: Analytic
Blooms: Apply
AppA -72
64.
The selling price would be closest to:
A.
B.
C.
D.
$28.71
$26.50
$22.00
$32.67
$400,000
= [(15% $600,000) + $400,000] ($31.00 per unit 50,000 units)
= [($90,000) + $400,000] ($1,550,000)
= [$490,000] $1,550,000 = 31.6% (rounded)
Unit product cost
= (1 + 0.316) $31.00 = $48.80 (rounded)
AACSB: Analytic
Blooms: Apply
The management of Rispoli Corporation is considering introducing a new product-a compact lawn blower. At a selling price of $38 per unit, management projects
sales of 10,000 units. The lawn blower would require an investment of $700,000.
The desired return on investment is 11%.
AppA -73
65.
The desired profit according to the target costing calculations is:
A.
B.
C.
D.
$380,000
$303,000
$41,800
$77,000
Desired profit = 11% $700,000 = $77,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
66.
The target cost per lawn blower is closest to:
A.
B.
C.
D.
$33.63
$30.30
$38.00
$42.18
Target cost = Anticipated selling price - Desired profit

= $38.00 per unit - ($77,000 10,000 units)
= $38.00 per unit - $7.70 per unit = $30.30 per unit
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Samples Corporation would like to use target costing for a new product it is
considering introducing. At a selling price of $21 per unit, management projects
sales of 20,000 units. The new product would require an investment of $400,000.
The desired return on investment is 12%.
AppA -74
67.
The desired profit according to the target costing calculations is:
A.
B.
C.
D.
$420,000
$50,400
$48,000
$372,000
Desired profit = 12% $400,000 = $48,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
68.
The target cost per unit is closest to:
A.
B.
C.
D.
$21.00
$18.60
$23.52
$20.83
Target cost = Anticipated selling price - Desired profit

= $21.00 per unit - ($48,000 20,000 units)
= $21.00 per unit - $2.40 per unit = $18.60 per unit
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Essay Questions
AppA -75
69.
Okamoto Corporation's management believes that every 7% increase in the selling

price of one of the company's products would lead to a 10% decrease in the
product's total unit sales. The variable cost per unit of this product is $69.20.
Required:
decimal places.
text.
a. d= ln(1 + % change in quantity sold)/ln(1 + % change in price)

= ln(1 + (-10%))/ln(1 + 7%) = -1.56
b. Profit-maximizing markup on variable cost = -1/(1 + d) = -1/(1 + (-1.56)) =
1.79
= (1 + 1.79) $69.20 = (2.79) $69.20 = $193.07 (The answer without rounding
error is $193.38.)
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
AppA -76
70.
Pashicke Corporation recently changed the selling price of one of its products. Data
presented below.

Required:
a Compute the product's price elasticity of demand as defined in the text to two
decimal places.
text.
a. % change in quantity = (7,840 - 7,300) 7,300 = 7.40%

% change in price = ($44 - $46) $46 = -4.35%
= ln(1 + 7.40%)/ln(1 + (-4.35%)) = -1.61
1.64
= (1 + 1.64) $17.10 = (2.64) $17.10 = $45.14 (The answer without rounding
error is $45.34.)
AACSB: Analytic
Blooms: Apply
AppA -77
71.
Gillis Corporation's marketing manager believes that every 10% increase in the
administrative cost is $3.00. The fixed selling and administrative expense
averages $0.50 per unit.
Required:
decimal places.
text.

= ln(1 + (-15%))/ln(1 + 10%) = -1.71
1.41
= (1 + 1.41) ($6.00 +$3.00) = (2.41) $9.00 = $21.69 (The answer without
rounding error is $21.76.)
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
AppA -78
72.
Nguyen Corporation's marketing manager believes that every 8% increase in the

administrative cost is $2.20.
Required:
decimal places.
text.

= ln(1 + (-15%))/ln(1 + 8%) = -2.11
0.90
= (1 + 0.90) ($2.20 +$5.40) = (1.90) $7.60 = $14.44
AACSB: Analytic
Blooms: Apply
AppA -79
AppA -80
73.
Qualls Corporation makes a product that has the following costs:
The company uses the absorption costing approach to cost-plus pricing as

described in the text. The pricing calculations are based on budgeted production
and sales of 48,000 units per year.
investment of 15%.
Required:
c. Assume that every 10% increase in price leads to a 13% decrease in quantity
sold. Assuming no change in cost structure and that direct labor is a variable cost,
compute the profit-maximizing price.
a.
Selling and administrative expenses = ($2.00 48,000) + $907,200 = $1,003,200

= [(15% $360,000) + $1,003,200] (48,000 $53.50)
= [($54,000) + $1,003,200] $2,568,000
= 41.17%
b. Absorption cost based selling price = (1 + Markup percentage on absorption
cost) Unit product cost
AppA -81
= (1 + 0.4117) $53.50 = $75.53

c. d = ln(1 + % change in quantity sold)/ln(1 + % change in price)
= ln(1 + (-13%))/ln(1 + 10%) = -1.46
= (1 + 2.17) $36.40 = (3.17) $36.40 = $115.33
AACSB: Analytic
Blooms: Apply
AppA -82
74.
Green Hornet Corporation is contemplating the introduction of a new product. The


Required:
a. Markup percentage on absorption cost = [(Required ROI Investment) + Selling

= [(Required ROI Investment) + Selling and administrative expenses] [Unit
product cost Unit sales]
= [(20% $400,000) + $100,000] [$30 16,000]
= $180,000 $480,000 = 37.5%
b.
AACSB: Analytic
Blooms: Apply
AppA -83
AppA -84
75.
The management of Archut Corporation would like to set the selling price on a new
Management plans to produce and sell 9,000 units of the new product annually.
The new product would require an investment of $3,002,400 and has a required
Required:
approach.
a. The unit product cost is:
b. Selling and administrative expenses = ($1.00 9,000) + $63,000 = $72,000

and administrative expenses] [Unit product cost Units sales]
= [(10% $3,002,400) + ($72,000)] [9,000 $88]
= [$300,240 + $72,000] [$792,000]
= $372,240 $792,000
= 47%
c. The selling price is determined as follows:
AppA -85
AACSB: Analytic
Blooms: Apply
AppA -86
76.
Trepan Corporation is contemplating the introduction of a new product. The


Required:
c. If the price computed in "b" above is charged, and costs turn out as projected,
can the company be assured that no loss will be sustained on the new product?
Explain.
a. Markup percentage on absorption cost = [(Required ROI Investment) + Selling

and administrative expenses] [Unit product cost Unit sales]
= [(20% $300,000) + $90,000] [$30 25,000]
= $150,000 $750,000 = 20%
b.
c. No, sales volume may be less than the 25,000 units projected annually, resulting
in inadequate contribution margin to cover fixed costs, and a consequent loss for
the company on the product.
AACSB: Analytic
Blooms: Apply
AppA -87
77.
Ritchie Corporation manufactures a product that has the following costs:

described in the text. The pricing calculations are based on budgeted production
and sales of 37,000 units per year. The company has invested $160,000 in this
product and expects a return on investment of 15%.
Required:
a.

= [(15% $160,000) + ($4.10 37,000 + $691,900)] (37,000 $57.80)
= [($24,000) + ($843,600)] $2,138,600 = 40.57%
b. Absorption cost based selling price = (1 + Markup percentage on absorption
= (1 + 0.4057) $57.80 = $81.25
AACSB: Analytic
Blooms: Apply
AppA -88
78.
Desalvo Corporation is introducing a new product whose direct materials cost is

$41 per unit, direct labor cost is $20 per unit, variable manufacturing overhead is
$5 per unit, and variable selling and administrative expense is $4 per unit. The
annual fixed manufacturing overhead associated with the product is $120,000 and
its annual fixed selling and administrative expense is $8,000. Management plans
to produce and sell 8,000 units of the new product annually. The new product
would require an investment of $2,192,000 and has a required return on
investment of 10%. Management would like to set the selling price on a new
product using the absorption costing approach to cost-plus pricing.
Required:
approach.
a. The unit product cost is:
b. Selling and administrative expenses = ($4.00 8,000) + $8,000 = $40,000

and administrative expenses] [Unit product cost Units sales]
= [(10% $2,192,000) + ($40,000)] [$81 8,000]
= [$219,200 + $40,000] [$648,000]
= $259,200 $648,000
= 40%
c. Absorption cost based selling price = (1 + Markup percentage on absorption
= (1 + 0.40) $81 = $113.40
AACSB: Analytic
Blooms: Apply
AppA -89
79.
The management of Featherston, Inc., is considering a new product that would

have a selling price of $77 per unit and projected sales of 50,000 units. The new
product would require an investment of $100,000. The desired return on
investment is 20%.
Required:
Target cost per unit ($3,830,000 50,000 units) = $76.60 per unit
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
80.
Loyola International, Inc. is considering adding a portable CD player to its product

line. Management believes that in order to be competitive, the CD player cannot
be priced above $79. The company requires a minimum return of 20% on its
investments. Launching the new product would require an investment of
$20,000,000. Sales are expected to be 250,000 units of the CD player per year.
Required:
Compute the target cost of a CD player.
Target cost per unit = $15,750,000 250,000 units = $63 per unit
AACSB: Analytic
Blooms: Apply
AppA -90
81.
Hepler Corporation would like to use target costing for a new product that is under
consideration. At a selling price of $76 per unit, management projects sales of
50,000 units. The new product would require an investment of $400,000. The
Required:
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
82.
Management of Daubert Corporation is considering a new product, an outdoor

speaker that would have a selling price of $43 per unit and projected sales of
60,000 units. Launching the new product would require an investment of
$300,000. The desired return on investment is 13%.
Required:
Determine the target cost per unit for the outdoor speaker.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
AppA -91
AppA -92

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Professional exam adapted

LO3: Target costing

LO2: Absorption costing approach

LO1: Economists' approach to pricing

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True / False Questions

8. In the absorption approach to cost-plus pricing, the anticipated markup in dollars is

12. In target costing, effort is concentrated on effectively marketing the product to

13. The formula for target cost is:

Multiple Choice Questions

A. the markup under the absorption costing approach to cost-plus pricing.

A. the markup under the absorption costing approach to cost-plus pricing.

A. Target cost = Anticipated selling price - Desired profit.

The product's variable cost is $16.40 per unit.

32. Perwin Corporation estimates that an investment of $400,000 would be needed to

34. Surent Corporation has the following information available on Product K:

36. Joeston Corporation makes a product with the following costs:

37. Kircher, Inc., manufactures a product with the following costs:

If Sloan Corporation requires a 15% return on investment, then the markup

39. The following information is available on Browning Inc.'s Product A:

41. The management of Brockington Corporation is considering introducing a new

42. Timax Corporation, a manufacturer of moderate-priced time pieces, would like to

45. A new product, an automated crepe maker, is being introduced at Miyake

46. Sawit Corporation, a manufacturer of woodworking tools, wants to introduce a new

The product's variable cost is $10.50 per unit.

Alley Corporation's vice president in charge of marketing believes that every 8%

Dickson Corporation makes a product with the following costs:

Eakins Corporation uses the absorption costing approach to cost-plus pricing as

59. The markup percentage on absorption cost is closest to:

Eckert Corporation uses the absorption costing approach to cost-plus pricing as

Merced Corporation estimates that an investment of $600,000 would be necessary to

64. The selling price would be closest to:

The management of Rispoli Corporation is considering introducing a new product--a

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

68. The target cost per unit is closest to:

The product's variable cost is $17.10 per unit.

82. Management of Daubert Corporation is considering a new product, an outdoor

Appendix A Pricing Products and Services Answer Key

True / False Questions

Price elasticity measures the degree to which consumers resent an increase in

In the absorption approach to cost-plus pricing, the anticipated markup in dollars is