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Exam 8: Pricing Decisions

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Question 41

True/False

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Even though the same percentage markup may be applied to all customers, some customers may be more profitable than others.

A) True
B) False

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Question 42

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Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: $\begin{array} { c c } \text { Unit Price } & \text { Unit Demand } \\\$ 45 & 7,200 \\\$ 44 & 7,800 \\\$ 43 & 8,400 \\\$ 42 & 8,800\end{array}$ What price should Maker Sun Chairs charge in order to maximize its profit?

A) $45
B) $44
C) $43
D) $42

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

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Question 43

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A new product is being designed by an engineering team at Gray Security. Several managers and employees from the cost accounting department and the marketing department are also on the team to evaluate the product and determine the cost using a target costing methodology. An analysis of similar products on the market suggests a price of $135 per unit. The company requires a profit of 30% of selling price. How much is the target cost per unit?

The selling price that maximizes revenues is the price that will also maximize profit.

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: $\begin{array} { c c } \text { Unit Price } & \text { Unit Demand } \\\$ 45 & 7,200 \\\$ 44 & 7,800 \\\$ 43 & 8,400 \\\$ 42 & 8,800\end{array}$ What is the anticipated profit at a price of $43?

Rosetone Retail sells one product with a variable cost of $3.50 per unit. The demand at different prices to be charged is shown below: $\begin{array}{ll}\text { Units Demanded } & \text { Unit Price } \\10,000 & \$ 9 \\15,000 & \$ 8 \\20,000 & \$ 7 \\25,000 & \$ 6\end{array}$ If fixed costs are $42,000, what price should Rosetone charge in order to maximize profits?

Which of the following must be true for a company to accept a special order?

Which one of the following is a goal of activity-based pricing?

When order processing costs do not vary based on the size of the order, a customer who makes large, infrequent orders is generally more profitable than a customer who makes small, more frequent orders, for the same quantity and price.

What should be maximized when setting the price for a product?

The chief engineer at Wilson Electronics has proposed the production of a digipad to be sold at a 30 percent markup. Management estimates that the fixed costs per year will be $150,000 and the variable cost of the digipad will be $28 per unit. If Wilson sells 30,000 digipads, how much is the selling price of each digipad?

Ramsey Foods has analyzed its customer and order handling data for the past year and has determined the following costs: $\begin{array}{lr}\text { Order processing cost per order } & \$ 5.50 \\\text { Additional costs if order must be expedited (Per order) } & \$ 6.00 \\\text { Customer technical support calls (Per call) } & \$ 3.50 \\\text { Rel ationship management costs (Per customer per year) } & \$ 1,900\end{array}$ In addition to these costs, product costs amount to 75% of sales. In the prior year, Ramsey had the following experience with one of its customers, Turnkey Enterprises: $\begin{array} { l l } \text { Sales } & \$ 18,000 \\\text { Number of orders } & 28 \\\text { Percent of orders marked rush } & 25 \% \\\text { Calls to technical support } & 14\end{array}$ Calculate the profit earned on the Turnkey Enterprises account.

Which of the following statements about prices and profit is true?

DT Company uses cost-plus pricing and has $30 per unit in variable costs and $800,000 per year in fixed costs. Demand is estimated to be 200,000 units annually. What is the price if a markup of 30% on total cost is used to determine the price?

Which of the following lists the steps in the target costing process in the proper order?

A company should never price a product below full cost.

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Results for the year appear below: $\begin{array}{lrlr}\hline \text { Cost Pool } & \text { Cost } & \text { Cost Driver } & \text { Quantity } \\\hline \text { Processing electronic orders } & \$ 400,000 & \text { Number of orders } & 40,000 \\\text { Processing non-electronic orders } & 120,000 & \text { Number of orders } & 8,000 \\\text { Picking orders } & 240,000 & \text { Number of different products ordered } & 120,000 \\\text { Packaging orders } & 180,000 & \text { Number of items ordered } & 150,000 \\\text { Returns } & 15,000 & \text { Number of returns } & 3,000\end{array}$ One customer of First Décor placed 30 electronic orders with a total selling price of $25,400. The direct cost of these orders is $17,200. The orders consist of five different products with a total of 2,200 items, and two returns. Using an activity-based costing method, how much are the indirect costs associated with serving this customer?

Activity-based pricing

Harp Widgets determined each deluxe widget it produces has a unit variable cost of $15.00, with total fixed costs of $600,000 for the period. Harp expects to sell 60,000 deluxe widgets and has applied a markup percentage of 35%. What contribution margin will Harp earn from the sale of each deluxe widget?

The target costing process for a new product