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Exam 9: Differential Analysis and Product Pricing

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Question 81

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Airflow Company sells a product in a competitive marketplace. Market analysis indicates that their product would probably sell at $28.00 per unit. Airflow management desires a profit equal to a 20% rate of return on invested assets of $1,400,000. They anticipate selling 50,000 units. Their current full cost per unit for the product is $25 per unit. (1) What is the amount of profit per unit? (2) What is the target cost per unit if they meet the market dictated price and management's desired profit?

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(1) $28.00 - $25.00 = $3.00
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Question 82

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A practical approach which is frequently used by managers when setting normal long-run prices is the cost-plus approach.

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Question 83

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Which of the following would be considered a sunk cost?

When using the total cost concept of applying the cost-plus approach to product pricing, what is included in the markup?

Dotterel Corporation uses the variable cost concept of product pricing. Below is cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to a 11.2% rate of return on invested assets of $350,000. The unit selling price for the company's product is:

Assume that Penguin Co. is considering disposing of equipment that cost $50,000 and has $40,000 of accumulated depreciation to date. Penguin Co. can sell the equipment through a broker for $25,000 less 5% commission. Alternatively, Teal Co. has offered to lease the equipment for five years for a total of $48,750. Penguin will incur repair, insurance, and property tax expenses estimated at $10,000. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is:

Jamison Company produces and sells Product X at a total cost of $25 per unit, of which $15 is product cost and $10 is selling and administrative expenses. In addition, the total cost of $25 is made up of $14 variable cost and $11 fixed cost. The desired profit is $5 per unit. Determine the mark up percentage on total cost.

The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative is termed:

A business received an offer from an exporter for 30,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: What is the differential cost from the acceptance of the offer?

Rachel Cake Factory normally sells their specialty cake for $22. An offer to buy 100 cakes for $19 per cake was made by an organization hosting a national event in the city. The variable cost per cake is $11. A special decoration per cake will add another $1 to the cost. Determine the differential income or loss per cake from selling the cakes.

Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.

In using the total cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

A business is considering a cash outlay of $400,000 for the purchase of land, which it could lease for $40,000 per year. If alternative investments are available which yield a 21% return, the opportunity cost of the purchase of the land is:

Cost plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.

All of the following should be considered in a make or buy decision except

What cost concept used in applying the cost-plus approach to product pricing includes only desired profit in the "markup"?

The amount of income that would result from an alternative use of cash is called opportunity cost.

An employee of Morgan Corporation has found some partially completed units of Model X in a dusty corner of the warehouse. A job ticket attached to the units indicates that a total of $750 in manufacturing costs have been used to bring the materials to this point in the manufacturing process. The units can be sold in their current condition for $275 to a scrap metal dealer. If Morgan spends $250 to complete the units, they could be sold for $600. Required: A. Morgan should finish the units because the incremental revenue of $325 ($600 - $275) is greater than the incremental cost of $250. A. What should Morgan do? Why? B. Identify the sunk cost, if any. Answer B. The $750 in manufacturing cost that has already been incurred is sunk and not relevant.

What pricing concept considers the price that other providers charge for the same product?

A cost that will not be affected by later decisions is termed a(n) :