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Exam 18: Pricing Decisions

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Question 31

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Seamons 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 40% markup. Based on these data, the company's total selling and administrative expenses associated with Product K each year are:

A) $132,000
B) $852,000
C) $528,000
D) $172,800

E) C) and D)
F) A) and B)

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Question 32

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Kinsley Corporation manufactures numerous products, one of which is called Kappa03. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Kinsley increases the price of Kappa03 to $38.52, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $36.00? (Your answer should be rounded to the nearest 0.1%.)

A) -6.0%
B) -24.9%
C) -10.0%
D) -20.1%

E) B) and C)
F) A) and C)

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Question 33

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The management of Rademacher Corporation is considering introducing a new product--a compact lawn blower. At a selling price of $24 per unit, management projects sales of 30,000 units. The lawn blower would require an investment of $200,000. The desired return on investment is 12%. The desired profit according to the target costing calculations is:

Boggess Corporation manufactures numerous products, one of which is called Alpha-41. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. How many units of product Alpha-41 would Boggess need to sell at a price of $94.60 to earn the same net operating income that it currently earns at a price of $86.00? (Round your answer up to the nearest whole number.)

Hilfiger Industries Inc. has developed a new forklift, model UH-40, that is designed to offer superior performance to a comparable forklift sold by Hilfiger's main competitor. The competing forklift sells for $96,000 and needs to be replaced after 1,000 hours of use. It also requires $9,000 of preventive maintenance during its useful life. Model UH-40's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $13,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what is model UH-40's economic value to the customer over its 2,000 hour life?

Cabebe Corporation manufactures numerous products, one of which is called Omicron55. The company has provided the following data about this product: Required: a. Management is considering decreasing the price of Omicron55 by 4%, from $54.00 to $51.84. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 140,000 units to 154,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Omicron55 earn at a price of $51.84 if this sales forecast is correct? b. Assuming that the total traceable fixed expense does not change, if Cabebe decreases the price of Omicron55 to $51.84, what percentage change in unit sales would provide the same net operating income that it currently earns at a price of $54.00? (Round your answer to the nearest one-tenth of a percent.)

Secore Robotics Corporation has developed a new robot-model TR-53-that has been designed to outperform a competitor's best-selling robot. The competitor's product has a useful life of 20,000 hours of service, has operating costs that average $1.30 per hour, and sells for $109,000. In contrast, model TR-53 has a useful life of 100,000 hours of service and its operating cost is $0.80 per hour. Secore has not yet established a selling price for model TR-53. From a value-based pricing standpoint what is the reference value that Secore should consider when pricing model TR-53?

Rapson Pure Water Solutions Corporation has developed a new water purification system-model EN-78-that has been designed to outperform a competitor's best-selling water purification system. Model EN-78 has a useful life of 120,000 hours of service and its operating cost is $0.70 per hour. In contrast, the competitor's product has a useful life of 40,000 hours of service and has operating costs that average $1.20 per hour. The competitor's water purification system sells for $149,000. Rapson has not yet established a selling price for model EN-78. From a value-based pricing standpoint what range of possible prices should Rapson consider when setting a price for EN-78?

Wyler Logistic Solutions Corporation has developed a new forklift-model IM-40-that has been designed to outperform a competitor's best-selling forklift. The competitor's product has a useful life of 40,000 hours of service, has operating costs that average $1.30 per hour, and sells for $139,000. In contrast, model IM-40 has a useful life of 120,000 hours of service and its operating cost is $0.80 per hour. Wyler has not yet established a selling price for model IM-40. Required: From a value-based pricing standpoint what is the differentiation value offered by model IM-40 relative to the competitor's offering for each 120,000 hours of service?

Herrell Corporation manufactures numerous products, one of which is called Delta-11. The company has provided the following data about this product: Assume that the total traceable fixed expense does not change. If Herrell increases the price of Delta-11 to $30.45, what percentage change in unit sales would provide the same net operating income as is currently being earned at a price of $29.00? (Your answer should be rounded to the nearest 0.1%.)

The target costing approach was developed in recognition of two important characteristics of markets and costs. First, many companies have less control over price than they like to think. Second, most of a product's cost is determined when it is designed.

Montecalvo Logistic Solutions Corporation has developed a new forklift-model PI-28-that has been designed to outperform a competitor's best-selling forklift. The competitor's product has a useful life of 10,000 hours of service, has operating costs that average $9.70 per hour, and sells for $139,000. In contrast, model PI-28 has a useful life of 20,000 hours of service and its operating cost is $5.50 per hour. Montecalvo has not yet established a selling price for model PI-28. From a value-based pricing standpoint what is the differentiation value offered by PI-28 relative to the competitor's offering for each 20,000 hours of service?

Morr Logistic Solutions Corporation has developed a new forklift-model QY-49-that has been designed to out perform a competitor's best-selling forklift. The competitor's product has a useful life of 10,000 hours of service, has operating costs that average $3.70 per hour, and sells for $109,000. In contrast, model QY-49 has a useful life of 40,000 hours of service and its operating cost is $2.10 per hour. Morr has not yet established a selling price for model QY-49. From a value-based pricing standpoint what is QY-49's economic value to the customer over its 40,000 hour useful life?

Yashinski Corporation manufactures numerous products, one of which is called Alpha46. The company has provided the following data about this product: Required: a. Management is considering increasing the price of Alpha46 by 15%, from $45.00 to $51.75. The company's marketing managers estimate that this price hike would decrease unit sales by 25%, from 110,000 units to 82,500 units. Assuming that the total traceable fixed expense does not change, what net operating income will Alpha46 earn at a price of $51.75 if this sales forecast is correct? b. Assuming that the total traceable fixed expense does not change, how many units of Alpha46 would Yashinski need to sell at a price of $51.75 to earn the same net operating income that it currently earns at a price of $45.00? (Round your answer up to the nearest whole number.)

Shoun Mechanical Corporation has developed a new industrial grinder-model QJ-47-that has been designed to outperform a competitor's best-selling industrial grinder. Model QJ-47 has a useful life of 120,000 hours of service and its operating cost is $0.60 per hour. In contrast, the competitor's product has a useful life of 30,000 hours of service and has operating costs that average $0.90 per hour. The competitor's industrial grinder sells for $129,000. Shoun has not yet established a selling price for model QJ-47. From a value-based pricing standpoint what is QJ-47's economic value to the customer over its 120,000 hour useful life?

All other things equal including costs, if customers are more sensitive to price for one product than another, then to maximize profit the first product should have a higher price.

The management of Musselman 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 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%. The markup percentage on absorption cost is closest to:

"Cost-plus" pricing means that all costs--manufacturing, selling, and administrative--are included in the cost base from which the target selling price is derived.

Algood Corporation manufactures numerous products, one of which is called Omicron09. The company has provided the following data about this product: Required: a. What net operating income is the company earning now on its sales of Omicron09? b. Management is considering decreasing the price of Omicron09 by 5%, from $19.00 to $18.05. The company's marketing managers estimate that this price reduction would increase unit sales by 15%, from 100,000 units to 115,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Omicron09 earn at a price of $18.05 if this sales forecast is correct? c. Assuming that the total traceable fixed expense does not change, how many units of Omicron09 would Algood need to sell at a price of $18.05 to earn the same net operating income that it currently earns at a price of $19.00? (Round your answer up to the nearest whole number.)

In value-based pricing, the economic value to the customer equals the reference value less the differentiation value.