Using the Following Information:
Drill Quest, Inc $Q = 1,200 - 0.05 P$

question 44

Multiple Choice

Using the following information:
Drill Quest, Inc. manufactures drill bits for the oil industry. Drill Quest uses cost-plus pricing to set the price of its bits. Currently Drill Quest applies a 50 percent markup on average total cost. Average variable cost of producing bits is constant and equal to $6,000 per bit. Total fixed cost at Drill Quest is $550,000. DrillQuest currently produces 690 bits. Statistical estimation of demand for Drill Quest brand bits produces the following linear demand equation (where Q is the number of bits demanded and P is the price of bits) :
$Q = 1,200 - 0.05 P$
-Using the cost-plus price in question 2, Drill Quest earns profit of (approximately) $___________ by selling 690 bits.

• A) $2,895,000
• B) $2,345,000
• C) $3,500,000
• D) $3,895,000
• E) $4,895,000

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Definitions:

Cost-plus Pricing

A pricing strategy where a fixed percentage or markup is added to the total cost of producing a product or service to determine its selling price.

Return on Investment

A measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments, calculated by dividing the benefit (return) of an investment by the cost of the investment.

Markup

An enhancement on the fundamental price of goods designed to absorb administrative expenses and yield profit.

Absorption Costing

This method in accounting ensures the total cost of producing a product encompasses expenses on direct materials, direct labor, and all overhead costs, both variable and fixed.