CHAPTER 5 (12 in text book) Part 1

PRICING DECISIONS AND COST MANAGEMENT

Questions and Exercises from the Book
Part 1: Questions
Homework
12-1 What are the three major influences on pricing decisions?
12-2 “Relevant costs for pricing decisions are full costs of the product.” Do you agree? Explain.
12-3 Give two examples of pricing decisions with a short-run focus.
12-4 How is activity-based costing useful for pricing decisions?
12-5 Describe two alternative approaches to long-run pricing decisions.
12-6 What is a target cost per unit?
12-7 Describe value engineering and its role in target costing.
12-8 Give two examples of a value-added cost and two examples of a nonvalue-added cost.
12-9 “It is not important for a company to distinguish between cost incurrence and locked-in costs.”
Do you agree? Explain.
12-10 What is cost-plus pricing?
12-11 Describe three alternative cost-plus pricing methods.
12-12 Give two examples in which the difference in the costs of two products or services is much
smaller than the difference in their prices.

Answers

12-1 The three major influences on pricing decisions are

1. Customers
2. Competitors
3. Costs

12-2 Not necessarily. For a one-time-only special order, the relevant costs are only those costs
that will change as a result of accepting the order. In this case, full product costs will rarely be
relevant. It is more likely that full product costs will be relevant costs for long-run pricing decisions.

12-3 Two examples of pricing decisions with a short-run focus:

1. Pricing for a one-time-only special order with no long-term implications.
2. Adjusting product mix and volume in a competitive market.

12-4 Activity-based costing helps managers in pricing decisions in two ways.

1. It gives managers more accurate product-cost information for making pricing decisions.
2. It helps managers to manage costs during value engineering by identifying the cost impact
of eliminating, reducing, or changing various activities.

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12-5 Two alternative starting points for long-run pricing decisions are
1. Market-based pricing, an important form of which is target pricing. The market-based
approach asks, “Given what our customers want and how our competitors will react to what we do,
what price should we charge?”
2. Cost-based pricing which asks, “What does it cost us to make this product and, hence, what
price should we charge that will recoup our costs and achieve a target return on investment?”

12-6 A target cost per unit is the estimated long-run cost per unit of a product (or service) that,
when sold at the target price, enables the company to achieve the targeted operating income per
unit.
12-7 Value engineering is a systematic evaluation of all aspects of the value-chain business
functions, with the objective of reducing costs while satisfying customer needs. Value engineering
via improvement in product and process designs is a principal technique that companies use to
achieve target cost per unit.

12-8 A value-added cost is a cost that customers perceive as adding value, or utility, to a product
or service. Examples are costs of materials, direct labor, tools, and machinery. A nonvalue-added
cost is a cost that customers do not perceive as adding value, or utility, to a product or service.
Examples of nonvalue-added costs are costs of rework, scrap, expediting, and breakdown
maintenance.

12-9 No. It is important to distinguish between when costs are locked in and when costs are
incurred, because it is difficult to alter or reduce costs that have already been locked in.

12-10 Cost-plus pricing is a pricing approach in which managers add a markup to cost in order to
determine price.

12-11 Cost-plus pricing methods vary depending on the bases used to calculate prices. Examples
are (a) variable manufacturing costs; (b) manufacturing function costs; (c) variable product costs;
and (d) full product costs.

12-12 Two examples where the difference in the costs of two products or services is much smaller
than the differences in their prices follow:
1. The difference in prices charged for a telephone call, hotel room, or car rental during busy
versus slack periods is often much greater than the difference in costs to provide these services.
2. The difference in costs for an airplane seat sold to a passenger traveling on business or a
passenger traveling for pleasure is roughly the same. However, airline companies price
discriminate. They routinely charge business travelers––those who are likely to start and complete
their travel during the same week excluding the weekend––a much higher price than pleasure
travelers who generally stay at their destinations over at least one weekend.

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 Part 2: Exercises
12-16 Relevant-cost approach to pricing decisions, special order. The following financial data apply to
the DVD production plant of the Dill Company for October 2011:

Budgeted Manufacturing Cost per DVD Pack

Direct materials SR1.60
Direct manufacturing labor 0.90
Variable manufacturing overhead 0.70
Fixed manufacturing overhead 1.00
Total manufacturing cost SR4.20

Variable manufacturing overhead varies with the number of DVD packs produced. Fixed manufacturing
overhead of SR1 per pack is based on budgeted fixed manufacturing overhead of SR150,000 per month
and budgeted production of 150,000 packs per month. The Dill Company sells each pack for SR5.
Marketing costs have two components:
 Variable marketing costs (sales commissions) of 5% of revenues
 Fixed monthly costs of SR65,000
During October 2011, Lyn Randell, a Dill Company salesperson, asked the president for permission to sell
1,000 packs at SR4.00 per pack to a customer not in Dill’s normal marketing channels. The president
refused this special order because the selling price was below the total budgeted manufacturing cost.
Required:
1. What would have been the effect on monthly operating income of accepting the special order?
2. Comment on the president’s “below manufacturing costs” reasoning for rejecting the special order.
3. What other factors should the president consider before accepting or rejecting the special order?
Answer
1 Relevant revenues, SR4.00 1,000 SR4,000
Relevant costs
Direct materials, SR1.60 1,000 SR1,600
Direct manufacturing labor, SR0.90 1,000 900
Variable manufacturing overhead, SR0.70 1,000 700
Variable selling costs, 0.05 SR4,000 200
Total relevant costs 3400
Increase in operating income SR 600
This calculation assumes that:
a. The monthly fixed manufacturing overhead of SR150,000 and SR65,000 of monthly fixed marketing cos ts
will be unchanged by acceptance of the 1,000 unit order.
b. The price charged and the volumes sold to other customers are not affected by the special order.
2. The president’s reasoning is defective on at least two counts:
a. The inclusion of irrelevant costs––assuming the monthly fixed manufacturing overhead of SR150,000 will
be unchanged; it is irrelevant to the decision.
b. The exclusion of relevant costs––variable selling costs (5% of the selling price) are excluded.
3. Key issues are:
a. Will the existing customer base demand price reductions? If this 1,000-tape order is not independent of
other sales, cutting the price from SR5.00 to SR4.00 can have a large negative effect on total revenues.
b. Is the 1,000-tape order a one-time-only order, or is there the possibility of sales in subsequent mont hs?
The fact that the customer is not in Dill Company’s “normal marketing channels” does not necessarily
mean it is a one-time-only order. Indeed, the sale could well open a new marketing channel. Dill Company
should be reluctant to consider only short-run variable costs for pricing long-run business.

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 12-17 Relevant-cost approach to short-run pricing decisions. The San Carlos Company is an
electronics business with eight product lines. Income data for one of the products (XT-107) for June 2011
are as follows:
Revenues, 200,000 units at average price of SR100 each SR20,000,000
Variable costs
Direct materials at SR35 per unit SR7,000,000
Direct manufacturing labor at SR10 per unit 2,000,000
Variable manufacturing overhead at SR6 per unit 1,200,000
Sales commissions at 15% of revenues 3,000,000
Other variable costs at SR5 per unit 1,000,000
Total variable costs 14,200,000
Contribution margin 5,800,000
Fixed costs 5,000,000
Operating income SR800,000
Abrams, Inc., an instruments company, has a problem with its preferred supplier of XT -107. This supplier
has had a three-week labor strike. Abrams approaches the San Carlos sales representative , Sarah Holtz,
about providing 3,000 units of XT-107 at a price of SR75 per unit. Holtz informs the XT-107 product
manager, Jim McMahon, that she would accept a flat commission of SR8,000 rather than the usual 15% of
revenues if this special order were accepted. San Carlos has the capacity to produce 300,000 units of XT -
107 each month, but demand has not exceeded 200,000 units in any month in the past year.
Required:
1. If the 3,000-unit order from Abrams is accepted, how much will operating income increase or decrease?
(Assume the same cost structure as in June 2011.)
2. McMahon ponders whether to accept the 3,000-unit special order. He is afraid of the precedent that might
be set by cutting the price. He says, “The price is below our full cost of SR96 per unit. I think we should
quote a full price, or Abrams will expect favored treatment again and again if we continue to do business
with it.” Do you agree with McMahon? Explain.
Answer
1. Analysis of special order:
Sales, 3,000 units SR75 SR225,000
Variable costs:
Direct materials, 3,000 units SR35 SR105,000
Direct manufacturing labor, 3,000 units SR10 30000
Variable manufacturing overhead, 3,000 units SR6 18000
Other variable costs, 3,000 units SR5 15000
Sales commission 8000
Total variable costs 176000
Contribution margin SR 49,000
Note that the variable costs, except for commissions, are affected by production volume, not sales dollars.
If the special order is accepted, operating income would be SR1,000,000 + SR49,000 = SR1,049,000.
2. Whether McMahon’s decision to quote full price is correct depends on many factors. He is incorrect if the
capacity would otherwise be idle and if his objective is to increase operating income in the short run. If the offer is
rejected, San Carlos, in effect, is willing to invest SR49,000 in immediate gains forgone (an opportunity cost) to
preserve the long-run selling-price structure. McMahon is correct if he thinks future competition or future price
concessions to customers will hurt San Carlos’s operating income by more than SR49,000.
There is also the possibility that Abrams could become a long-term customer. In this case, is a price that covers
only short-run variable costs adequate? Would Holtz be willing to accept a SR8,000 sales commission (as
distinguished from her regular SR33,750 = 15%  SR225,000) for every Abrams order of this size if Abrams bec omes
a long-term customer?
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12-18 Short-run pricing, capacity constraints. Colorado Mountains Dairy, maker of specialty
cheeses, produces a soft cheese from the milk of Holstein cows raised on a special corn-based
diet. One kilogram of soft cheese, which has a contribution margin of SR10, requires 4 liters of
milk. A well-known gourmet restaurant has asked Colorado Mountains to produce 2,600 kilograms
of a hard cheese from the same milk of Holstein cows. Knowing that the dairy has sufficient
unused capacity, Elise Princiotti, owner of Colorado Mountains, calculates the c osts of making one
kilogram of the desired hard cheese:

Milk (8 liters X SR2.00 per liter) SR16

Variable direct manufacturing labor 5
Variable manufacturing overhead 4
Fixed manufacturing cost allocated 6
Total manufacturing cost SR31

Required:

1. Suppose Colorado Mountains can acquire all the Holstein milk that it needs. What is the
minimum price per kilogram it should charge for the hard cheese?
2. Now suppose that the Holstein milk is in short supply. Every kilogram of hard cheese produced
by Colorado Mountains will reduce the quantity of soft cheese that it can make and sell. What is
the minimum price per kilogram it should charge to produce the hard cheese?

Answer

1. Per kilogram of hard cheese:

Milk (8 liters  SR2.00 per liter) SR16

Direct manufacturing labor 5
Variable manufacturing overhead 4
Fixed manufacturing cost allocated 6
Total manufacturing cost SR31

If Colorado Mountains Dairy can get all the Holstein milk it needs, and has sufficient production
capacity, then the minimum price per kilo it should charge for the hard cheese is the variable cost
per kilo = SR16 + SR5 + SR4 = SR25 per kilo.

2. If milk is in short supply, then each kilo of hard cheese displaces 2 kilos of soft cheese
(8 liters of milk per kilo of hard cheese versus 4 liters of milk per kilo of soft cheese). Then, for the
hard cheese, the minimum price Colorado Mountains should charge is the variable cost per kilo of
hard cheese plus the contribution margin from 2 kilos of soft cheese, or,

SR25 + (2  SR10 per kilo) = SR45 per kilo

That is, if milk is in short supply, Colorado Mountains should not agree to produce any hard cheese
unless the buyer is willing to pay at least SR45 per kilo.

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 12-23 Cost-plus target return on investment pricing. John Blodgett is the managing partner of a
business that has just finished building a 60-room motel. Blodgett anticipates that he will rent these rooms
for 15,000 nights next year (or 15,000 room-nights). All rooms are similar and will rent for the same price.
Blodgett estimates the following operating costs for next year:
Variable operating costs SR5 per room-night
Fixed costs:
Salaries and wages SR173,000
Maintenance of building and pool 52,000
Other operating and administration costs 150,000
Total fixed costs SR375,000
The capital invested in the motel is SR900,000. The partnership’s target return on investment is 25%.
Blodgett expects demand for rooms to be uniform throughout the year. He plans to price the rooms at full
cost plus a markup on full cost to earn the target return on investment.
Required:
1) What price should Ali charge for a room-night? What is the markup as a percentage of the full required
cost of a room-night?
2) Blodgett’s market research indicates that if the price of a room-night determined in requirement 1 is
reduced by 10%, the expected number of room-nights Blodgett could rent would increase by 10%. Should
Blodgett reduce prices by 10%? Show your calculations.
Answer: Target operating income = target return on investment invested capital
Target operating income (25% of SR900,000) SR225,000
Total fixed costs 375,000
Target contribution margin SR600,000
Target contribution per room-night, (SR600,000 ÷ 15,000) SR40
Add variable costs per room-night 5
Price to be charged per room-night SR45
Proof
Total room revenues (SR40.5 16,500 room-nights) SR668,250
Total costs:
Variable costs (SR5 16,500) SR 82,500
Fixed costs 375,000
Total costs 457,500
Operating income SR210,750
The full cost of a room = variable cost per room + fixed cost per room
The full cost of a room = SR5 + (SR375,000 ÷ 15,000) = SR5 + SR25 = SR30
Markup per room = Rental price per room – Full cost of a room
= SR45 – SR30 = SR15
Markup percentage as a fraction of full cost = SR15 ÷ SR30 = 50%
2. If price is reduced by 10%, the number of rooms Beck could rent would increase by 10%.
The new price per room would be 90% of SR45 SR 40.50
The number of rooms Beck expects to rent is 110% of 15,000 16,500
The contribution margin per room would be SR40.50 – SR5 SR 35.50
Contribution margin (SR35.50  16,500) SR585,750
Because the contribution margin of SR585,750 at the reduced price of SR40.50 is less than the
contribution margin of SR600,000 at a price of SR45, Blodgett should not reduce the price of the rooms.
Note that the fixed costs of SR375,000 will be the same under the SR45 and the SR40.50 p rice alternatives
and hence, are irrelevant to the analysis.
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 12-32 Cost-plus and market-based pricing. Florida Temps, a large labor contractor, supplies
contract labor to building-construction companies. For 2012, Florida Temps has budgeted to
supply 84,000 hours of contract labor. Its variable costs are SR13 per hour, and its fixed costs are
SR168,000. Roger Mason, the general manager, has proposed a cost-plus approach for pricing
labor at full cost plus 20%.
Required:
1. Calculate the price per hour that Florida Temps should charge based on Mason’s proposal.
Required
2. The marketing manager supplies the following information on demand levels at different prices:

Price per Hour Demand (Hours)

SR16 124,000
17 104,000
18 84,000
19 74,000
20 61,000
Florida Temps can meet any of these demand levels. Fixed costs will remain unchanged for all the
demand levels. On the basis of this additional information, calculate the price per hour that Florida
Temps should charge to maximize operating income.

3. Comment on your answers to requirements 1 and 2. Why are they the same or different?

Answer
1. California Temps’ full cost per hour of supplying contract labor is
Variable costs SR13
Fixed costs (SR168,000 ÷ 84,000 hours) 2
Full cost per hour SR15
Price per hour at full cost plus 20% = SR15  1.20 = SR18 per hour.
2. Contribution margins for different prices and demand realizations are as follows:
Price per Hour Variable Cost per Hour Contribution Margin per Hour Demand in Hours Total Contribution
(1) (2) (3) = (1) – (2) (4) (5) = (3) × (4)
SR16 SR13 SR3 124,000 SR372,000
17 13 4 104,000 416,000
18 13 5 84,000 420,000
19 13 6 74,000 444,000
20 13 7 61,000 427,000
Fixed costs will remain the same regardless of the demand realizations. Fixed costs are, therefore, irrelevant s ince
they do not differ among the alternatives.
The table above indicates that California Temps can maximize contribution margin (SR444,000) and operating
income by charging a price of SR19 per hour.
3. The cost-plus approach to pricing in requirement 1 does not explicitly consider the effect of prices on demand.
The approach in requirement 2 models the interaction between price and demand and determines the optimal level of
profitability using concepts of relevant costs. The two different approaches lead to two different prices in requirement s
1 and 2. As the chapter describes, pricing decisions should consider both demand or market considerations and
supply or cost factors. The approach in requirement 2 is the more balanced approach. In most cases, of course,
managers use the cost-plus method of requirement 1 as only a starting point. They then modify the cost -plus pric e on
the basis of market considerations—anticipated customer reaction to alternative price levels and the prices charged by
competitors for similar products.

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 CHAPTER 5 (12 in text book) Part 2
PRICING DECISIONS AND COST MANAGEMENT

True or False
1) The general formula for setting a cost-based selling price adds a markup component to the cost
base.
True or False

2) The higher the price a monopolist sets, the higher the demand for the monopolist's product as
customers seek substitute products or forgo buying the product.

True or False

Explanation: The higher the price a monopolist sets, the lower the demand for the monopolist's
product as customers seek substitute products or forgo buying the product.

3) Fluctuations in exchange rates between different countries' currencies never affect costs and
pricing decisions.
True or False

Explanation: Because competition spans international borders, fluctuations in exchange rates

between different countries' currencies affect costs and pricing decisions.

4) The lower the cost of producing a product, the lower the quantity of product the company is
willing to supply.
True or False

Explanation: The lower the cost of producing a product, the greater the quantity of product the
company is willing to supply.

5) Companies operating in competitive markets must not accept the prices set by the market.

True or False

Explanation: Companies operating in competitive markets must always accept the prices set by
the market. They use the market-based approach to costing products and services.

6) Companies operating in less competitive markets offer products or services that differ from
each other.

True or False

7) Target costs include all future costs, variable costs, and costs that are fixed in the short run.

True or False

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8) Value engineering entails improvements in product designs, changes in materials
specifications, and modifications in process methods.

True or False

9) A non-value-added-cost is a cost that, if eliminated, would reduce the actual or perceived value
or utility that customers gain from using the product or service.

True or False

Explanation: A non-value-added cost is a cost that, if eliminated, would not reduce the actual or
perceived value or utility customers gain from using the product or service.

10) Companies seek to minimize non-value added costs because they do not provide benefits to
customers.
True or False

11) Value engineering decreases both value-added costs and non-value-added costs.

True or False

12) Management of environmental costs is an example of life-cycle costing and value engineering.
True or False

13) A company engages in predatory pricing when it deliberately prices below its costs in an effort
to drive competitors out of the market and restrict supply, and then raises prices rather than
enlarge demand.
True or False

Multiple Choices
1) Which of the following is not true about pricing decisions?
A) Customers are an influence on demand and supply.
B) Competitors are an influence on demand and supply.
C) Costs are an influence on demand and supply.
D) Managers price products based on supply and demand.
E) Customers never have an influence on demand and supply.

2) Which of the following is not true about competitors?

A) Businesses do not operate in a vacuum.
B) Managers must be aware of the actions of their competitors.
C) Some companies have distinctive products and limited competition.
D) When there are competitors, managers try to learn about competitors' plant capacities.
E) It is not necessary for managers to learn about their competitors' technologies.

2
3) Which of the following is not true about international competition?
A) Competition spans international borders.
B) Fluctuations in exchange rates between different countries.
C) Different countries' currencies affect costs.
D) Fluctuations in exchange rates between different countries' currencies affect costs and
pricing decisions.
E) Different countries' currencies have no impact on pricing decisions.

4) The strategic decision designed to build long-run relationships with customers based on stable
and predictable prices is ________.
A) mid-run pricing
B) cost-run pricing
C) some-run pricing
D) short-run pricing
E) long-run pricing

5) To set long-run prices, managers calculate the ________ -cost of producing and selling a
product.
A) full
B) small
C) partial
D) initial
E) strategic

6) The cost-based approach is also called:

A) cost-plus.
B) direct-plus.
C) market-plus.
D) strategic-plus.
E) consumer-plus.

7) Companies operating in competitive markets use the:

A) cost-based approach.
B) direct-based approach.
C) market-based approach.
D) strategic-based approach.
E) consumer-based approach.
8) Accounting managers that start pricing decisions by asking "Given what our customers want
and how our competitors will react to what we do, what price should we charge" is most likely to
use:
A) cost-plus approach.
B) cost-based approach.
C) market-based approach.
D) strategic-based approach.
E) consumer-based approach.

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9) The estimated price for a product or service that customers are willing to pay is:
A) target price.
B) listing price.
C) selling price.
D) strategic price.
E) consumer price.
10) Market-based pricing starts with:
A) target price.
B) listing price.
C) selling price.
D) strategic price.
E) consumer price.
11) A systematic evaluation of all aspects of the value chain, with the objective of reducing costs
and achieving a quality level that satisfies customers is ________.
A) cost engineering
B) price engineering
C) value engineering
D) product engineering
E) promotion engineering
12) The cost that, if eliminated, would reduce actual or perceived value or utility customers
experience from using the product or service is ________.
A) value-added cost
B) locked-in cost
C) designed-in cost
D) conversion costs
E) non-value added costs
13) Costs that have not yet been incurred but will be incurred in the future based on decisions that
have already been made are:
A) value-added costs.
B) locked-in costs.
C) non-value-added costs.
D) targeted costs.
E) conversion costs.
14) Target annual operating income divided by invested capital is ________.
A) target price
B) locked in costs
C) target cost per unit
D) target operating income per unit
E) target rate of return on investment

15) The practice of charging different customers different prices for the same product or service is:
A) job costing.
B) product costing.
C) price discrimination.
D) product life-cycle.
E) customer life-cycle.

4
 Multiple Choices Calculations
16) To earn the target return on capital, the Moore Company needs to earn 12% operating income
per unit on the total units they need to sell. The managerial accountant reported that the target
price is SR750 per unit.

Required: Compute the target operating income per unit and the target cost per unit.

A) SR80 operating income per unit; SR650 per unit

B) SR90 operating income per unit; SR660 per unit
C) SR100 operating income per unit; SR670 per unit
D) SR110 operating income per unit; SR680 per unit
E) SR120 operating income per unit; SR690 per unit
Explanation: B) Target operating income per unit: [(12% × SR750)] = SR90
Target cost per unit: [(SR750 - SR90)] = SR660 per unit

17) The Coffee Distribution Company charges SR1,200 to distribute coffee to customers. The
managers at the company expect competitors to reduce prices to SR1,025. The managers at
the Coffee Distribution Company decide to remain competitive and reduce the cost of their
coffee by 20%.

Required:
1) Compute the new cost the Coffee Distribution Company will charge based on the 20% price
reduction.
2) As a result of the cost reduction, should the managerial accountants at the Coffee Distribution
forecast an increase or a decrease in annual sales per unit?

A) SR900; decrease
B) SR925; increase
C) SR960; increase
D) SR985; decrease
E) SR1,025; decrease
Explanation: C) [(SR1,200 × 20%)] = SR240
[(SR1,200 - SR240)] = SR960
The managers at the Coffee Distribution Company should forecast an increase in annual sales

18) Amarillo Manufacturing uses a 13% markup on the full unit cost of Product X to compute the
selling price. The full unit cost of Product X is SR850.

Required: Compute the markup component and the prospective selling price.

A) SR95.50; SR925.50
B) SR110.50; SR960.50
C) SR115.50; SR965.50
D) SR120.50; SR970.50
E) SR125.50; SR975.50
Explanation: B) Markup component: [(.13 × SR850)] = SR110.50 Prospective selling price:
[(SR850 + SR110.50)] = SR960.50

5
19) The Board Manufacturing Company reported investment capital of SR80,000,000 and a 16%
(pretax) target rate of return on the investment of 150,000 units of Product Y.

Required: Compute the targeted annual operating income and the target operating income per
unit of Product Y.

A) SR5 operating income; SR85.33 operating income per unit

B) SR12,000,000 operating income; SR85.33 operating income per unit
C) SR12,500,000 operating income; SR85.33 operating income per unit
D) SR12,800,000 operating income; SR85.33 operating income per unit
E) SR12,850,000 operating income; SR85.33 operating income per unit
Explanation: D) Targeted annual operating income: [(.16 × SR80,000,000)] = SR12,800,000
Targeted operating income per unit of Product Y: [(SR12,800,000 / 150,000)] = SR85.33

20) The Walter Foundation invested SR3,500,000 in a plant to remanufacture refrigerators. The
target operating income from the plant is SR250,000 annually. The company plans actual sales
of 800 refrigerators at SR1,100.00 each.

Required: Compute the target rate of return on the investment at the Walter Foundation.

A) 6.14 %
B) 7.14 %
C) 8.14 %
D) 9.14 %
E) 10.14 %
Explanation: B) [(SR250,000 / SR3,500,000)] = 7.14%

21) The Kensington Corporation invested SR2,500,000 in an operation to make wooden planks.
The target operating income desired at the plant is SR245,000 annually. The company plans
actual sales of 700 planks at SR500 each. The managerial accountant reported a target rate of
return on the investment of 15%.

Required: Compute the markup percentage as a percentage of the full cost for the Kensington
Corporation.
A) 2.00%
B) 2.13%
C) 2.33%
D) 2.43%
E) 2.53%
Explanation: C) SR245,000 / [(700 × SR500) - SR245,000] = 2.33%

22) Mark Manufacturing had a product design that resulted in a SR740 full cost of Product B.
Assuming a markup of 10%, what is the prospective price of Product B?
A) SR800
B) SR804
C) SR814
D) SR824
E) SR834
Explanation: C) [SR740 + (.10 × SR740)] = SR814

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23) The Heritage Foundation reported the following information:

Cost Base Estimated Markup Markup Prospective

Cost per Unit Percentage Component Selling Price
(1) (2) (3) (4)
Variable manufacturing cost SR425.00 60% ? ?
Variable cost of the product SR550 45% ? ?
Manufacturing cost SR520 50% ? ?
Full cost of the product SR710 10% ? ?

Required: Compute the markup component and the prospective selling price for each cost base at
the Heritage Foundation.

A) Markup components for each cost base: SR255; SR247.50;SR260; SR71

Prospective selling price for each cost base: SR680; SR797.50; SR780; SR781
B) Markup components for each cost base: SR260; SR257.50; SR270; SR481
Prospective selling price for each cost base: SR690; SR797.50; SR785; SR785
C) Markup components for each cost base: SR265; SR262.50; SR275; SR491
Prospective selling price for each cost base: SR700; SR825.50; SR795; SR790
D) Markup components for each cost base: SR270; SR262.50; SR280; SR495
Prospective selling price for each cost base: SR705: SR830.50; SR800; SR795
E) Markup components for each cost base: SR275; SR267.50; SR285; SR500
Prospective selling price for each cost base: SR710; SR835.50; SR805; SR800
Answer: A
Explanation: A)
Markup component:
Variable manufacturing cost: [(SR425 × .60)] = SR255
Variable cost of the product: [(SR550 × .45)] = SR247.50
Manufacturing cost: [(SR520 × .50)] = SR260
Full cost of the product: [(SR710 × .10)] = SR71
Prospective selling price:
Variable manufacturing cost: [(SR425 + SR255)] = SR680
Variable cost of the product: [(SR550 + SR247.50)] = SR797.50
Manufacturing Cost: [(SR520 + SR260)] = SR780
Full cost of the product: [(SR710 + SR71)] = SR781