MULTIPLE CHOICE

1. When a company's goal is to distinguish a product or service it offers from those of its competitors, the
company is most likely pursuing a:
a. focusing strategy.
b. product differentiation strategy.
c. value-added strategy.
d. cost leadership strategy.

2. When increases or decreases in price affect the demand for a product, the product is described as
being:
a. competitive.
b. elastic.
c. inelastic.
d. predatory.

3. Which type of pricing is a company using when a desired markup is added to the product's base cost to
determine the sales price?
a. Target pricing
b. Cost-plus pricing
c. Penetration pricing
d. Value Pricing

4. Which of the following pricing strategies is used most often in service industries in which labor is the
primary cost incurred?
a. Time and material pricing
b. Cost-plus pricing
c. Target pricing
d. Value pricing

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 PROBLEM

5. A manufacturer is developing a new board game geared towards children. To be competitive with other
board games, the company has set a target price of $25 for the game. The company likes to maintain a
target profit equal to 35 percent of the product's cost.

Required: Calculate the target cost of the product.

X + .35x=25
X=$18.51

6. .Justin Manufacturing Inc. has begun production on a new product. The primary cost of the product is
direct materials with a cost of $80. Direct labor is estimated to be $25 per unit, overhead is estimated
to be $8 per unit, and selling and administrative expenses are estimated to be $5 per unit.

Justin desires a profit of $40 per unit.

Required:

A. What is the required markup percentage on direct materials in order to achieve the
desired profit? Round the percentage to two decimal places.

Total Cost = $80 + $25 + $8 + $5 = $118 per unit

B. What will be the sales price of the new product?

Sales Price = $118 + $40 = $158

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 7. Montana Fishing Equipment Company (MFEC) manufactures a variety of fly-fishing equipment,
including fly-fishing rods and reels. The company would like to develop a unified approach to pricing
its product line for next year using cost-plus pricing but does not know what cost base should be used.
Last year, MFEC earned $140,000 of profit from sales of its products and would like to earn
$200,000 next year. Last year, the company incurred the following costs:

Manufacturing Costs

Variable $250,000

Fixed $150,000

Selling and Administrative Costs

Variable $100,000

Fixed $200,000

Required

A. Calculate the markup percentage for each of the following cost bases:
a. Full costs, including all manufacturing and selling and administrative costs
b. Cost of goods sold
c. Total variable costs
d. Variable manufacturing costs
B. Explain why the markup percentage calculated in question A is lower when using full costs as the base
than when using variable manufacturing costs as the base.
C. MFEC’s best fly rod (the Trout Catcher model) costs $150 to manufacture and includes $90 of variable
manufacturing costs and $60 of fixed overhead costs. Assuming the company uses a markup on variable
manufacturing costs (calculated from A.d.), what is the recommended sales price of the rod?
D. Competitors sell comparable fly rods for $299. Based on this information, should MFEC price the Trout
Catcher model by using a cost-plus approach of a different approach?

1.
A. Full Costs = $200,000 / $700,000 = 28.57%
B. Cost of Goods Sold = $500,000/$400,000 = 125%
C. Total Variable Costs = $550,000 / $350,000 = 157.14%
D. Variable Manufacturing Costs = $650,000 / $250,000 = 260%

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 2. The markup percentage is lower when using full cost because the markup must be sufficient to
cover the expected profit. All other costs are covered in the base cost. When variable
manufacturing costs are used as the base cost, the markup must cover fixed manufacturing
costs, all selling and administrative costs.
3. Based on the markup percentage on variable costs calculated in requirement A of 260
percent, the Trout Catcher model will be priced at $324 ($90 variable cost + markup of
$234).
4. If competitors are selling similar rods for $299, MFEC may need to reduce the price
of the Trout Catcher accordingly. Matching the competitor’s price will still provide
MFEC with a markup on variable costs of 232 percent.

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