Ch14 Pricing Decisions – Test Bank | 17th Global Ed

View Product website:

https://selldocx.com/docx/ch14-pricing-decisions-test-bank-17th-global-ed-1554

Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 14 Pricing Decisions and Cost Management

Objective 14.1

1) In setting prices for products and services, managers may attempt to charge what the customer is willing to pay however, too high a price may:

A) deter a customer from purchasing a product and seek alternatives

B) increase demand and demand for the product

C) indicate supply is too plentiful

D) decrease a competitor's market share

Diff: 1

Objective: 1

AACSB: Analytical thinking

2) Companies must always examine their pricing:

A) based on the supply of the product

B) based on the full cost of producing the product and price to make a profit

C) through the eyes of their customers and then manage costs to produce a profit

D) based on the GAAP cost of producing the product and then add a mark-up

Diff: 2

Objective: 1

AACSB: Analytical thinking

3) Which of the following statements is true about the factors that affect pricing decisions?

A) Information about competitors' technologies is not useful for pricing decisions.

B) Information about a competitor in a perfect market affects pricing decisions.

C) Increase in price of a substitute product does not affect pricing decisions.

D) Managers must always be aware of the competition when pricing their products

Diff: 3

Objective: 1

AACSB: Analytical thinking

4) In a perfectly competitive market, which of the following is a primary factor influencing pricing decisions?

A) cost of production

B) availability of raw materials in the market

C) information on competitor's cost structure

D) value customers place on product

Diff: 3

Objective: 1

AACSB: Analytical thinking

5) Which of the following statements is true of the cost of producing a product?

A) It controls pricing in highly competitive markets.

B) It affects the willingness of a company to supply a product.

C) It includes manufacturing costs, but not product design costs for pricing decisions.

D) It is not a factor to be taken into account while pricing a product.

Diff: 3

Objective: 1

AACSB: Analytical thinking

6) In a noncompetitive environment, the key factor affecting pricing decisions is the:

A) customer's willingness to pay

B) price charged for alternative products

C) information on competitor's cost structure

D) minimum price acceptable to the firm

Diff: 3

Objective: 1

AACSB: Analytical thinking

7) Which of the following statements is true of costs and pricing decisions?

A) Companies get profit from selling products only when they are the price makers.

B) Companies supply products as long as the price the customer is willing to pay for its products exceeds the price that is charged by the competitor.

C) Companies supply products as long as there is a demand for the product in the market regardless of the price at which the products are sold.

D) Companies supply products as long as the revenues from selling the additional units exceed the cost of producing them.

Diff: 3

Objective: 1

AACSB: Analytical thinking

8) Three major influences on pricing decisions are:

A) competition, costs, and customers

B) competition, demand, and production efficiency

C) continuous improvement, customer satisfaction, and supply

D) variable costs, fixed costs, and mixed costs

Diff: 1

Objective: 1

AACSB: Analytical thinking

9) Cost of product is a major influence on prices set by most manufacturers.

Diff: 1

Objective: 1

AACSB: Analytical thinking

10) Three equally weighted factors that most companies use to set prices for their products and services are competition, costs, and customers.

Diff: 1

Objective: 1

AACSB: Analytical thinking

11) Monopolists can charge prices without limitations as there is no competition for the product or service the monopolist provides.

Diff: 2

Objective: 1

AACSB: Analytical thinking

12) A company operating in a perfectly competitive market has more leeway to set higher prices than a firm that is a monopolist.

Diff: 2

Objective: 1

AACSB: Analytical thinking

13) For a company operating in a perfectly competitive market, cost information affects the pricing decisions of the company.

Diff: 3

Objective: 1

AACSB: Analytical thinking

14) Fluctuations in exchange rates between different countries' currencies affect costs and pricing decisions of a company.

Diff: 2

Objective: 1

AACSB: Analytical thinking

15) In markets with little or no competition, the key factor affecting price is the cost of production to the company.

Diff: 2

Objective: 1

AACSB: Analytical thinking

16) The value customers place on a product and the prices charged for competing products affect demand and the cost of producing and delivering the product affect supply.

Diff: 2

Objective: 1

AACSB: Analytical thinking

17) If U.S dollar strengthens against the Japanese Yen, Japanese producers selling goods in U.S markets will have to increase the prices of products to recover the extra cost arising from currency fluctuation.

Diff: 3

Objective: 1

AACSB: Analytical thinking

18) Claudia Geer, controller, discusses the pricing of a new product with the sales manager, James Nolan. What major influences must Claudia and James consider in pricing the new product? Discuss each briefly.

Customers: Managers must always examine pricing problems through the eyes of their customers. A price increase may cause customers to reject a company's product and choose a competing or substitute product.

Competitors: Competitors' reactions influence pricing decisions. At one extreme, a rival's prices and products may force a business to lower its prices to be competitive. At the other extreme, a business without a rival in a given situation can set higher prices. A business with knowledge of its rivals' technology, plant capacity, and operating policies is able to estimate its rivals' costs, which is valuable information in setting competitive prices.

Costs: Companies price products to exceed the costs of making them. The study of cost-behavior patterns gives insight into the income that results from different combinations of price and output quantities sold for a particular product.

Diff: 2

Objective: 1

AACSB: Analytical thinking

19) Provide a counter argument to the following statement made by a manger of a company that sells a one of a kind product and is the only producer: "We control the market and therefore we can set the product price at just about any level."

Diff: 2

Objective: 1

AACSB: Analytical thinking

Objective 14.2

1) Which of the following examples would have as its purpose the allocation of costs to motivate employees?

A) deciding on a selling price for a product

B) encouraging sales representatives to emphasize high-margin products

C) to cost products a "fair" price under a government contract

D) to cost inventories for reporting to external parties

Diff: 2

Objective: 2

AACSB: Analytical thinking

2) Which of the following are true regarding long-run pricing decisions?

A) they result in maximizing return on investment

B) they include adjusting product mix in a competitive environment

C) the price needs to be sufficient enough to break-even

D) use prices that include a reasonable return on invested capital

Diff: 2

Objective: 2

AACSB: Analytical thinking

3) Which of the following is true of long-run pricing?

A) It is fixed at a level that recovers the variable cost of the company and a pre-determined profit markup.

B) It is generally a function of the market factors and the cost involved in production is generally not a consideration.

C) It is a strategic decision designed to build long-run relationships with customers based on stable and predictable prices.

D) It is based only on internal requirements like cost and estimated rate of return as in the long run these requirements are the driving factors of any organization.

Diff: 3

Objective: 2

AACSB: Analytical thinking

4) For long-run pricing decisions, using stable prices has the advantage of:

A) minimizing the need to monitor competitor's prices frequently

B) reducing the need to change cost structures frequently

C) reducing competition

D) helping to build buyer-seller relationships

Diff: 1

Objective: 2

AACSB: Analytical thinking

5) Jack's Back Porch manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $270 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Jack's Back Porch's policy to add a 60% markup to full costs.

A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Jack's Back Porch is invited to submit a bid to the hotel chain. What per unit price will Jack's Back Porch most likely bid on this long-term order?

A) $86.40 per unit

B) $162.00 per unit

C) $345.60 per unit

D) $432.00 per unit

Diff: 2

Objective: 2

AACSB: Application of knowledge

6) Zolas' Heaters is approached by Ms. Leila, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Zolas' Heaters has excess capacity. The following per unit data apply for sales to regular customers:

If Ms. Leila wanted a long-term commitment, and not a one-time-special order, for supplying this product, calculate the most likely price to be quoted assuming the markup remains the same?

A) $860

B) $640

C) $590

D) $946

Diff: 2

Objective: 2

AACSB: Application of knowledge

7) Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Golden Generator Supply has excess capacity. The following per unit data apply for sales to regular customers:

If Mr. Stephen wanted a long-term commitment, and not a one-time-only special order, for supplying this product, calculate the most likely price to be quoted assuming the markup remains the same?

A) $640

B) $770

C) $847

D) $370

Diff: 2

Objective: 2

AACSB: Application of knowledge

8) Gracius Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Gracius Manufacturing has a policy of adding a 20% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:

If the European customer wanted a long-term commitment, and not a one-time-only special order, for supplying this product, calculate the most likely price to be quoted assuming the markup remains the same?

A) $130

B) $280

C) $336

D) $196

Diff: 2

Objective: 2

AACSB: Application of knowledge

9) Grounded Coffee Products manufactures coffee tables. Grounded Coffee Products has a policy of adding a 10% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

For long-run pricing of the coffee tables, what price will most likely be used by Grounded Coffee? (Round all calculations to the nearest cent.)

A) $104.50

B) $125.00

C) $229.50

D) $252.45

Diff: 3

Objective: 2

AACSB: Application of knowledge

10) Quick Connect manufactures high-tech cell phones. Quick Connect has a policy of adding a 10% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

For long-run pricing of the cell phones, what price will most likely be used by Quick Connect? (Round all calculations to the nearest cent.)

A) $36.75

B) $119.00

C) $155.75

D) $171.33

Diff: 3

Objective: 2

AACSB: Application of knowledge

11) Which one of the following activities would most likely be considered a long-run pricing decision?

A) one-time-only special order pricing that would result in achieving the break-even point

B) product mix adjustments in a competitive market

C) setting prices to generate a reasonable rate of return on investment

D) changing prices in response to weak demand

Diff: 2

Objective: 2

AACSB: Analytical thinking

12) Which of the following statements about pricing is true?

A) pricing for products sold to the federal government can be priced to include all costs of the product including marketing costs

B) companies that sell commodity-like items usually use the cost-plus approach to pricing

C) companies in competitive markets use the market approach to pricing

D) regulators will intervene in noncompetitive industries and markets but usually will not regulate company pricing policies in competitive industries

Diff: 3

Objective: 2

AACSB: Analytical thinking

13) Which of the following is regarded as a purpose of cost allocation?

A) It helps in identifying the potential customers for a product.

B) It provides the profit margin earned.

C) It helps in maintaining decorum among managers.

D) It provides information for economic decisions.

Diff: 2

Objective: 2

AACSB: Analytical thinking

14) Which of the following is true of price bidding with the federal government?

A) the price can only cover direct costs

B) the price can only cover direct costs and marketing costs

C) the price is based on costs that include fully allocated manufacturing and design costs but not include marketing costs

D) the price can include only fixed manufacturing costs and design costs but not include marketing costs

Diff: 2

Objective: 2

AACSB: Analytical thinking

15) Which of the following actions might prompt a product redesign?

A) identifying all costs of purchasing and ordering and allocating those to specific products

B) offering a higher commission on certain high profit margin products

C) utilizing absorption costing

D) careful consideration of supply and demand forces when setting prices

Diff: 2

Objective: 2

AACSB: Analytical thinking

16) In a long-run, it is worthwhile to sell a product only if the selling price exceeds:

A) the total of all the direct costs of the product

B) the total manufacturing costs of the product

C) the total of the fixed costs of the value chain

D) full cost of the product and a markup that provides an adequate return on capital

Diff: 2

Objective: 2

AACSB: Analytical thinking

17) Jack's Back Porch manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $300 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Jack's Back Porch's policy to add a 70% markup to full costs.

Jack's Back Porch is invited to bid on a one-time-only special order to supply 150 rustic tables. What is the lowest price Jack's Back Porch should bid on this special order?

A) $45,000

B) $18,000

C) $27,000

D) $76,500

Diff: 2

Objective: 2

AACSB: Application of knowledge

18) Cool Air Inc., manufactures single room sized air conditioners. The cost accounting system estimates manufacturing costs to be $230 per air conditioner, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Cool Air Inc.'s policy to add a 30% markup to full costs.

Cool Air Inc., is invited to bid on a one-time-only special order to supply 110 air conditioners. What is the lowest price Cool Air Inc. should bid on this special order?

A) $15,180

B) $25,300

C) $35,420

D) $32,890

Diff: 2

Objective: 2

AACSB: Application of knowledge

19) Cool Air Inc., manufactures single room sized air conditioners. The cost accounting system estimates manufacturing costs to be $250 per air conditioner, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Cool Air Inc.'s policy to add a 30% markup to full costs.

A medium sized motel chain is currently expanding and has decided to create more rooms and air condition all of its rooms, which are currently not air conditioned. Cool Air Inc. is invited to submit a bid to the motel chain. What per unit price will Cool Air Inc. most likely bid for this special order of 200 units? Assume that the price is being fixed for a long-term commitment.

A) $250.00 per unit

B) $200.00 per unit

C) $325.00 per unit

D) $300.00 per unit

Diff: 2

Objective: 2

AACSB: Application of knowledge

20) Zolas' Heaters is approached by Ms. Leila, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Zolas' Heaters has excess capacity. The following per unit data apply for sales to regular customers:

For Zolas' Heaters, what is the minimum acceptable price of this one-time-only special order?

A) $650.00

B) $880.00

C) $580.00

D) $1,188.00

Diff: 2

Objective: 2

AACSB: Application of knowledge

21) Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Golden Generator Supply has excess capacity. The following per unit data apply for sales to regular customers:

For Golden Generator Supply, what is the minimum acceptable price of this one-time-only special order?

A) $2,210.00

B) $2,460.00

C) $2,620.00

D) $3,275.00

Diff: 2

Objective: 2

AACSB: Application of knowledge

22) Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Golden Generator Supply has excess capacity. The following per unit data apply for sales to regular customers:

If Golden Generator Supply accepts the order at $2,790, what is the amount contributed towards fixed costs and profit on a sales order of 1,800 units?

A) $702,000

B) $990,000

C) $1,800,000

D) $1,422,000

Diff: 2

Objective: 2

AACSB: Application of knowledge

23) Gracius Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Gracius Manufacturing has a policy of adding a 10% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:

For Gracius Manufacturing, what is the minimum acceptable price of this one-time-only special order?

A) $120

B) $160

C) $190

D) $380

Diff: 2

Objective: 2

AACSB: Application of knowledge

24) Gracius Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Gracius Manufacturing has a policy of adding a 20% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:

What is the full cost of the product per unit for Gracius Manufacturing?

A) $90

B) $140

C) $360

D) $432

Diff: 1

Objective: 2

AACSB: Application of knowledge

25) Grounded Coffee Products manufactures coffee tables. Grounded Coffee Products has a policy of adding a 10% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

Grounded Coffee Products is approached by an overseas customer to fulfill a one-time-only special order for 5000 units. All cost relationships remain the same except for a one-time setup charge of $60,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order? (Round your final answer to the nearest cent.)

A) $184.00

B) $484.00

C) $172.00

D) $238.00

Diff: 3

Objective: 2

AACSB: Application of knowledge

26) Quick Connect manufactures high-tech cell phones. Quick Connect has a policy of adding a 25% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

Quick Connect Products is approached by an overseas customer to fulfill a one-time-only special order for 150 units. All cost relationships remain the same except for a one-time setup charge of $2025. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order?

A) $30.20

B) $173.20

C) $186.70

D) $188.50

Diff: 3

Objective: 2

AACSB: Application of knowledge

27) Which of the following explains the cost-plus approach to pricing decisions?

A) arriving at a price for the product based on the competitive pricing prevalent in the market

B) arriving at a price based on the perceived value to a customer given the cost of design and added features

C) arriving at a price based on the demand and supply trends in the market

D) arriving at a price that earns a target return on investment

Diff: 1

Objective: 2

AACSB: Analytical thinking

28) Cost allocation is not required to cost inventories for reporting to external parties.

Diff: 3

Objective: 2

AACSB: Analytical thinking

29) An example of why a manager would perform cost allocations for economic decisions would be to cost inventories for reporting to the tax authorities.

Diff: 2

Objective: 2

AACSB: Analytical thinking

30) One purpose of cost allocations is to justify costs to establish a "fair" price, often required by law and government contracts.

Diff: 3

Objective: 2

AACSB: Analytical thinking

31) Two different approaches to pricing decisions are market based and cost-plus.

Diff: 3

Objective: 2

AACSB: Analytical thinking

32) Long-run pricing is an operational decision and not a strategic decision as perceived by many.

Diff: 3

Objective: 2

AACSB: Analytical thinking

33) Long-run pricing is a strategic decision designed to build relationships with customers based on stable and predictable prices.

Diff: 2

Objective: 2

AACSB: Analytical thinking

34) In long-run pricing, decisions should consider all manufacturing and non-manufacturing costs but should consider all future direct and indirect costs as irrelevant.

Diff: 3

Objective: 2

AACSB: Analytical thinking

35) Cost allocation data could be a valuable input to encourage design of products that are simpler to manufacture and less costly to service.

Diff: 2

Objective: 2

AACSB: Analytical thinking

36) Companies operating in competitive markets generally use the cost-plus approach to price products.

Diff: 2

Objective: 2

AACSB: Analytical thinking

37) Companies operating in competitive markets should ideally use cost-plus approach to pricing.

Diff: 2

Objective: 2

AACSB: Analytical thinking

38) The cost-based (cost-plus) approach computes price based a price that is influenced on what the market will bear and therefore forces the producer to manage costs to achieve the target profit per unit.

Diff: 2

Objective: 2

AACSB: Analytical thinking

39) Companies operating in competitive markets use the market-based approach whereas companies operating in noncompetitive markets favor the cost-based approach.

Diff: 1

Objective: 2

AACSB: Analytical thinking

40) Greentree Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $120 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Greentree's policy to add a 30% markup to full costs.

a. Greentree Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Greentree should bid on this one-time-only special order?

b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Greentree Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Greentree should bid on this long-term order?

a. The lowest price on the one-time special order = $120 × .60 × 100 tables = $7,200.

In other words, Greentreeʹs bid should allow for recovery of its variable costs at a minimum.

b. The lowest price on the long-term hotel chain order is = $120 + (30% × $120) = $156.

In other words, on this long-term order, Greentree should target obtaining a price which achieves

their policy of adding a 30% markup to full costs.

Diff: 2

Objective: 2

AACSB: Application of knowledge

41) Longball Company manufactures basketball backboards. The following information pertains to the company's normal operations per month:

Output units 15,000 boards

Machine-hours 4,000 hours

Direct manufacturing labor-hours 5,000 hours

Direct manufacturing labor per hour $12

Direct materials per unit $100

Variable manufacturing overhead costs $150,000

Fixed manufacturing overhead costs $300,000

Product and process design costs $200,000

Marketing and distribution costs $250,000

Required:

a. For long-run pricing, what is the full-cost base per unit?

b. Longball Company is approached by an overseas city to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for an additional one-time setup charge of $40,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order?

a. Direct materials $100.00

Direct manufacturing labor ($12 × 5,000)/15,000 4.00

Variable manufacturing ($150,000/15,000) 10.00

Fixed manufacturing ($300,000/15,000) 20.00

Marketing and distribution ($250,000/15,000) 16.67

Research and development ($200,000/15,000) 13.33

Total $164.00

b. Direct materials $100.00

Direct manufacturing labor 4.00

Variable manufacturing 10.00

Setup ($40,000 / 1,000) 40.00

Total $154.00

Diff: 2

Objective: 2

AACSB: Application of knowledge

42) Explain the differences between short-run pricing decisions and long-run pricing decisions.

1. Fixed costs are often irrelevant for the short-run and are generally relevant in the long-run because they can be altered in the long-run.

2. Profit Margins in the long-run pricing decisions are often set to earn a reasonable return on investment. Short-run pricing decisions is more opportunistic. Prices are decreased when demand is weak and increased when demand is strong.

Diff: 2

Objective: 2

AACSB: Analytical thinking

Objective 14.3

1) Which of the following is true of target pricing?

A) It is used for short-term pricing decisions.

B) It is one form of cost-based pricing.

C) A price is an estimate of customers' perceived value of the product.

D) A price is calculated by adding a markup component to the cost base.

Diff: 2

Objective: 3

AACSB: Analytical thinking

2) Which of the following is true of value engineering?

A) It is the process of building a new product by first determining the selling price of the product.

B) It is the process by which a company analyzes its own process to reduce cost.

C) It is the process by which a systematic evaluation of all aspects of the value chain, with the objective of reducing costs and achieving a predetermined quality level.

D) It is the process by which the competitor's products are disassembled and analyzed.

Diff: 2

Objective: 3

AACSB: Analytical thinking

3) Short-run prices should at least recover:

A) full cost of producing a product

B) fixed manufacturing overhead

C) variable cost of producing a product

D) variable and fixed manufacturing overhead

Diff: 3

Objective: 2

AACSB: Analytical thinking

4) Relevant costs for target pricing are:

A) variable manufacturing costs

B) variable manufacturing and variable nonmanufacturing costs

C) all fixed costs

D) all future costs, both variable and fixed

Diff: 2

Objective: 3

AACSB: Analytical thinking

5) Place the following steps for the implementation of target costing in order:

A = Derive a target cost

B = Develop a target price

C = Perform value engineering

D = Determine target operating income

A) B D A C

B) B A D C

C) A D B C

D) A B C D

Diff: 2

Objective: 3

AACSB: Analytical thinking

6) Which of the following is an objective of value engineering?

A) to reduce cost by eliminating all value-added activities

B) to streamline and add non-value added activities

C) to reduce the total cost of the product

D) to understand competitors' product design

Diff: 3

Objective: 3

AACSB: Analytical thinking

7) Managers need to understand customers because:

A) they are the key in influencing the board decisions and help in formulating policies with the suppliers

B) they guide the managers to formulate pricing policies

C) they are more knowledgeable as they easy access to price and other information online

D) they influence the costing decisions of the product

Diff: 2

Objective: 3

AACSB: Analytical thinking

8) Which of the following identifies an estimated price that customers are willing to pay and then computes the cost to be achieved to earn the desired profit?

A) cost-plus pricing

B) target costing

C) kaizen costing

D) peak-load costing

Diff: 1

Objective: 3

AACSB: Analytical thinking

9) Which of the following is true of target costing?

A) the target cost is the target price minus the target operating income per unit

B) the target cost includes all past costs to produce the product

C) input from suppliers and distributors are not relevant

D) a key goal is to minimize value added activities of a product

Diff: 3

Objective: 3

AACSB: Analytical thinking

10) In relation to target costing, which of the following best describes target cost per unit?

A) It is the targeted cost of producing one unit to achieve the current year's budgeted profit.

B) It is the estimated long-run cost of a product that enables the company to achieve its target operating income.

C) It is the cost that can be achieved by ensuring that the company produced its products at maximum efficiency.

D) It is the budgeted cost that the company estimates in producing a unit in the current budget period.

Diff: 3

Objective: 3

AACSB: Analytical thinking

11) When target costing and target pricing are used together:

A) the target cost is established first, then the target price

B) the target cost is the estimated long-run cost that enables a product or service to achieve a desired profit

C) the focus of target pricing is to undercut the competition

D) target costs are generally higher than current costs

Diff: 3

Objective: 3

AACSB: Analytical thinking

12) The product strategy in which companies first determine the price at which they can sell a new product and then design a product that can be produced at a low enough cost to provide adequate operating income is referred to as:

A) cost-plus pricing

B) target costing

C) kaizen costing

D) full costing

Diff: 1

Objective: 3

AACSB: Analytical thinking

13) After conducting a market research study, Magnificent Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $270. The annual target sales volume for interior doors is 29,000. Magnificent has target operating income of 40% of sales.

What are target sales revenues?

A) $3,132,000

B) $4,698,000

C) $7,830,000

D) $10,962,000

Diff: 1

Objective: 3

AACSB: Application of knowledge

14) After conducting a market research study, Magnificent Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $250. The annual target sales volume for interior doors is 28,000. Magnificent has target operating income of 40% of sales.

What is the target operating income?

A) $2,800,000

B) $4,200,000

C) $7,000,000

D) $9,800,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

15) After conducting a market research study, Magnificent Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $240. The annual target sales volume for interior doors is 21,000. Magnificent has target operating income of 20% of sales.

What is the target cost?

A) $6,048,000

B) $5,040,000

C) $4,032,000

D) $1,008,000

Diff: 2

Objective: 3

AACSB: Analytical thinking

16) After conducting a market research study, Magnificent Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $260. The annual target sales volume for interior doors is 20,000. Magnificent has target operating income of 40% of sales.

What is the target cost for each interior door?

A) $364

B) $260

C) $156

D) $104

Diff: 2

Objective: 3

AACSB: Analytical thinking

17) Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $440 as opposed to the current market price charged of $540 per unit. Granite City Products Inc. has decided to revise its sales price to $440. The annual sales target volume of the product after price revision is 260 units. Granite City Products Inc. wants to earn 30% on its sales amount.

What are the target sales revenues?

A) $148,720

B) $114,400

C) $80,080

D) $42,120

Diff: 2

Objective: 3

AACSB: Application of knowledge

18) Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $420 as opposed to the current market price charged of $520 per unit. Granite City Products Inc. has decided to revise its sales price to $420. The annual sales target volume of the product after price revision is 280 units. Granite City Products Inc. wants to earn 30% on its sales amount.

What is the target operating income?

A) $82,320

B) $35,280

C) $117,600

D) $152,880

Diff: 2

Objective: 3

AACSB: Application of knowledge

19) Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $500 as opposed to the current market price charged of $600 per unit. Granite City Products Inc. has decided to revise its sales price to $500. The annual sales target volume of the product after price revision is 200 units. Granite City Products Inc. wants to earn 40% on its sales amount.

What is the total target cost?

A) $140,000

B) $60,000

C) $100,000

D) $40,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

20) Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $480 as opposed to the current market price charged of $580 per unit. Granite City Products Inc. has decided to revise its sales price to $480. The annual sales target volume of the product after price revision is 280 units. Granite City Products Inc. wants to earn 30% on its sales amount.

What is the target cost per unit?

A) $625.00

B) $336.00

C) $480.00

D) $145.00

Diff: 2

Objective: 3

AACSB: Application of knowledge

21) Block Island TV currently sells large televisions for $380. It has costs of $290. A competitor is bringing a new large television to market that will sell for $310. Management believes it must lower the price to $310 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 110,000 televisions per year.

What is the target cost per unit if target operating income is 35% of sales?

A) $108.50

B) $133.00

C) $201.50

D) $247.00

Diff: 2

Objective: 3

AACSB: Application of knowledge

22) Block Island TV currently sells large televisions for $380. It has costs of $320. A competitor is bringing a new large television to market that will sell for $360. Management believes it must lower the price to $360 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 150,000 televisions per year.

What is the change in operating income if marketing is correct and only the sales price is changed?

A) $6,600,000

B) $3,000,000

C) $(6,600,000)

D) ($2,400,000)

Diff: 3

Objective: 3

AACSB: Application of knowledge

23) Block Island TV currently sells large televisions for $380. It has costs of $290. A competitor is bringing a new large television to market that will sell for $320. Management believes it must lower the price to $320 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 120,000 televisions per year.

What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)?

A) $224.00

B) $238.18

C) $230.00

D) $290.00

Diff: 3

Objective: 3

AACSB: Application of knowledge

24) Twenty Technologies, currently sells 17" monitors for $280. It has costs of $220. A competitor is bringing a new 17" monitor to market that will sell for $230. Management believes it must lower the price to $230 to compete in the market for 17" monitors. Twenty Technologies believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Twenty Technologies' sales are currently 5100 monitors per year.

What is the target cost if the target operating income is 25% of sales?

A) $230.00

B) $210.00

C) $172.50

D) $165.00

Diff: 2

Objective: 3

AACSB: Application of knowledge

25) Twenty Technologies, currently sells 17" monitors for $270. It has costs of $230. A competitor is bringing a new 17" monitor to market that will sell for $245. Management believes it must lower the price to $245 to compete in the market for 17" monitors. Twenty Technologies believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Twenty Technologies's sales are currently 5200 monitors per year.

What is the change in operating income if marketing manager is correct and only the sales price is changed?

A) $130,000

B) $122,200

C) ($122,200)

D) ($130,000)

Diff: 3

Objective: 3

AACSB: Application of knowledge

26) All of the following are typical results of value engineering except:

A) assembling and analyzing competitor's product.

B) setting the target cost and then designing the product.

C) changes in material specifications to reduce costs

D) modifications in process methods

Diff: 3

Objective: 3

AACSB: Analytical thinking

27) When the firm uses the target-costing approach to pricing, the target cost per unit is the difference between the per unit target price and the per unit target:

A) contribution margin

B) operating income

C) cost of goods sold

D) gross margin

Diff: 2

Objective: 3

AACSB: Analytical thinking

28) Xtech Games Inc. has a new video game cassette for the upcoming holiday season. It is trying to determine the target cost for the game if the selling price per unit will be set at $70, the going price for video games, and the firm wants to earn a target operating income of 30% of sales. What will be the target cost per unit for the new game?

A) $70

B) $49

C) $30

D) $21

Diff: 2

Objective: 3

AACSB: Application of knowledge

29) Bouchard Company manufactures a product that currently has a full cost of $700. Its target operating income per unit is $80 and management's budgets assume that same target operating income per unit for the foreseeable future. To stay competitive, Bouchard management believes it must cut its price by 25%. What will be its new target cost?

A) $700

B) $505.00

C) $585.00

D) $80

Diff: 2

Objective: 3

AACSB: Application of knowledge

30) Bouchard Company manufactures a product that currently has a full cost of $700. Its target operating income per unit is $50 and management's budgets assume that same target operating income per unit for the foreseeable future. To stay competitive, Bouchard management believes it must cut its price by 15%. What will be its new target price?

A) $700

B) $587.50

C) $637.50

D) $50

Diff: 2

Objective: 3

AACSB: Application of knowledge

31) A target price is all of the following EXCEPT:

A) an estimate of what customers are willing to pay

B) based in customers' perception of value

C) developed with an accurate current cost to produce as the primary factor

D) takes into consideration how the competition currently prices and will price its product

Diff: 2

Objective: 3

AACSB: Application of knowledge

32) In case of pricing for special orders, managers include all future costs, variable costs, and costs that are fixed in the short run.

Diff: 2

Objective: 3

AACSB: Analytical thinking

33) Reverse engineering has the objective of reducing costs while still satisfying customer needs.

Diff: 1

Objective: 3

AACSB: Analytical thinking

34) Rework is an example of a value-added cost.

Diff: 1

Objective: 3

AACSB: Analytical thinking

35) A value-added cost is a cost that, if eliminated,would increase the actual or perceived value or utility (usefulness) customers experience from using the product or service.

Diff: 2

Objective: 3

AACSB: Analytical thinking

36) Value engineering seeks to reduce value-added costs as well as nonvalue-added costs.

Diff: 3

Objective: 3

AACSB: Analytical thinking

37) Value engineering entails improvements in product designs, and changes in materials specifications.

Diff: 2

Objective: 3

AACSB: Analytical thinking

38) Value engineering involves a detailed evaluation focused on the production "link" in the value chain, with the objective of reducing costs while still achieving a quality level that satisfies customers.

Diff: 2

Objective: 3

AACSB: Analytical thinking

39) Market research can be an effective tool in understanding the features customers value.

Diff: 3

Objective: 3

AACSB: Analytical thinking

40) Target cost per unit is arrived at by adding the target operating income to the target price of the product.

Diff: 2

Objective: 3

AACSB: Analytical thinking

41) Reverse engineering can be used to analyze competitors' products to determine product designs and materials and to understand the technologies competitors use.

Diff: 1

Objective: 3

AACSB: Analytical thinking

42) Whether the firm uses the market-based approach or the cost-based approach for pricing decisions, the market forces must be considered.

Diff: 2

Objective: 3

AACSB: Analytical thinking

43) Developing a product that satisfies the need of the potential customers is the first step in implementing target pricing and target costing.

Diff: 1

Objective: 3

AACSB: Analytical thinking

44) Fairhaven Composite Poles manufactures fishing poles that have a price of $125.00. It has costs of $90. A competitor is introducing a new fishing pole that will sell for $115.00. Management believes it must lower the price to $110.00 to compete in the highly cost-conscious fishing pole market. Marketing department believes that the new price will allow Carbon to maintain the current sales level of 200,000 poles per year.

Required:

a. What is the target cost for the new price if target operating income is 25% of sales?

b. What is the change in operating income for the year if only the selling price is changed and costs remain the same?

c. What is the target cost per unit if the selling price is reduced to $110.00 and the company wants to maintain its same income level?

a. Target cost = $115 - ($115 × 25%) = $86.25.

b. Change in operating income = [200,000 × ($125 -$90)] - [200,000 × ($115 - 90)] = − $2,000,000.

c. Current operating income = [200,000 × (125 - 90)] = $7,000,000

Estimated sales revenue = 200,000 × $115 = 23,000,000

Target cost per unit = [($23,000,000 - $7,000,000) / 200,000] = $80.

Diff: 2

Objective: 3

AACSB: Analytical thinking

45) Julian Pharma manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,650 and fixed costs of $1,200 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds.

A competitor is introducing a new hospital bed similar to Deluxe that will sell for $3,800. Management believes it must lower the price to compete. The marketing department believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Deluxe beds it can produce.

Required:

a. What is the annual operating income from Deluxe at the current price of $5,000?

b. What is the annual operating income from Deluxe if the price is reduced to $3,800 and sales in units increase by 25%?

c. What is the target cost per unit for the new price if target operating income is 30% of sales?

a.

Sales (20,000 × $5,000) 100,000,000

Costs:

Variable costs ($2,650 × 20,000) 53,000,000

Fixed costs ($1,200 × 20,000) 24,000,000

Setup costs ($400,000 × 4) 1,600,000 78,600,000

Annual operating income 21,400,000

b.

Current Sales (5,000 × 4) 20,000

Increased sales [20,000 × (1+.25)] 25,000

Sales (25,000 × $3,800) 95,000,000

Costs:

Variable costs ($2,650 × 25,000) 66,250,000

Fixed costs (same as before) 24,000,000

Setup costs ($400,000 × 5) 2,000,000 92,250,000

Annual operating income 2,750,000

c.

New selling price $3,800

Target profit $1,140

Target cost per unit $2,660

Diff: 2

Objective: 3

AACSB: Application of knowledge

46) Marcon Tech Corp., currently sells radios for $7,000. It has costs of $5,400. A competitor is bringing a new radio to market that will sell for $6,850. Management believes it must lower the price to $6,850 to compete in the market for radios. The marketing department believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Marcon's sales are currently 1,000 radios per year.

Required:

a. What is the target cost for the new target price if target operating income is 20% of sales?

b. What is the change in operating income if marketing department is correct and only the sales price is changed?

c. What is the target cost if the company wants to maintain its same income level, and marketing department is correct in its estimation?

a.

Target cost = $6,850 - ($6,850 × 0.20) = $5,480.

b.

Old operating income [1,000 × ($7,000 - $5,400)] $1,600,000.00

New operating income [(1,000 × 1.10) ×($6,850 - $5,400] 1,595,000

Change in operating income ($5,000)

c.

Current income = 1,000 × ($7,000 - $5,400) = $1,600,000

Target cost y: $1,600,000 = (1,100 × $6,850) - 1,100y

y = $5,935,000/1,100

y = $4395.45

Diff: 3

Objective: 3

AACSB: Application of knowledge

47) Sail Safe currently sells motor boats for $60,000. It has costs of $46,500. A competitor is bringing a new motor boat to the market that will sell for $55,000. Management believes it must lower the price to $55,000 to compete in the market for motor boats. The marketing department believes that the new price will cause sales to increase by 12.5%, even with a new competitor in the market. Sail Safe's sales are currently 2,000 motor boats per year. 3

Required:

a. What is the target cost for the new target price if target operating income is 20% of sales?

b. What is the change in operating income if marketing department is correct and only the sales price is changed?

c. What is the target cost if the company wants to maintain its same income level, and marketing department is correct?

a. Target cost = $55,000 - ($55,000 × 0.20) = $44,000

b.

Old operating income [2,000 × ($60,000 - $46,500] $27,000,000.00

New operating income [(2,000 × 1.125) × ($55,000 - $46,500)] $19,125,000.00

Change in operating income ($7,875,000.00)

c.

Current income = 2,000 × ($60,000 - $46,500) = $27,000,000

Target cost y: $27,000,000 = (2,250 × $55,000) - 2250y

y = $96,750,000/2,250

y = $43,000

Diff: 3

Objective: 3

AACSB: Application of knowledge

48) What are the five steps that are followed while implementing target pricing and target costing?

1) Develop a product that satisfies the needs of potential customers.

2) Choose a target price.

3) Derive a target cost per unit by subtracting target operating income per unit from the target price.

4) Perform cost analysis.

5) Perform value engineering to achieve target cost.

Diff: 2

Objective: 3

AACSB: Analytical thinking

49) What is the primary reason a firm would adopt target costing?

Diff: 2

Objective: 3

AACSB: Analytical thinking

Objective 14.4

1) Which of the following is a cost that, if eliminated, would reduce the actual or perceived value or utility (usefulness) customers experience from using the product or service?

A) non-value-added cost

B) discretionary cost

C) value-added cost

D) committed cost

Diff: 2

Objective: 4

AACSB: Analytical thinking

2) At what point are direct material costs per unit "locked in"?

A) designed

B) assembled

C) sold

D) delivered

Diff: 2

Objective: 4

AACSB: Analytical thinking

3) When materials and supplies are used in a production facility to assemble and finish a product that will be sold to customers, the usage of the materials and supplies is described as:

A) cost incurrence

B) locked-in cost

C) opportunity cost

D) designed-in cost

Diff: 3

Objective: 4

AACSB: Analytical thinking

4) Making design decisions is an example of managing costs:

A) during planning phase; before they are incurred but are "locked in"

B) during the production phase; when they are incurred

C) after the production phase; after they are locked in

D) after they are committed to during the budgeting phase

Diff: 2

Objective: 4

AACSB: Analytical thinking

5) Which of the following is NOT a step of value-engineering?

A) understanding customer requirements and value-added and non-value added costs

B) set a price using the market approach

C) anticipating how costs are locked in before they are incurred

D) using cross-functional teams to redesign products and process to reduce costs while meeting customer needs

Diff: 3

Objective: 4

AACSB: Analytical thinking

6) Which of the following methods focuses on reducing costs during the manufacturing stage?

A) target costing

B) kaizen costing

C) cost-plus pricing

D) life-cycle costing

Diff: 1

Objective: 4

AACSB: Analytical thinking

7) Which of the following is an example of value added cost?

A) cost of machine breakdown

B) cost of defective products

C) rework costs

D) direct machining costs

Diff: 3

Objective: 4

AACSB: Analytical thinking

8) In some industries, such as legal and consulting, most costs are locked in:

A) when they are incurred

B) during the design stage

C) during the customer-service stage

D) during the marketing stage

Diff: 2

Objective: 4

AACSB: Analytical thinking

9) Which of the following costs can be classified into both value-added and non-value-added costs?

A) production control costs

B) machine breakdown costs

C) rework costs

D) direct material costs

Diff: 2

Objective: 4

AACSB: Analytical thinking

10) A graph comparing locked-in costs with incurred costs will have:

A) locked-in costs rising much faster initially, but dropping to zero after the product is manufactured

B) the two cost lines running parallel until the end of the process, when they join

C) locked-in costs rising much faster initially than the incurred cost, but joining the incurred cost line at the completion of the value-chain functions

D) no differences unless the product is manufactured inefficiently

Diff: 2

Objective: 4

AACSB: Analytical thinking

11) Which of the following is true of locked-in costs?

A) Locked-in costs are the same as sunk costs.

B) Locked-in costs are always fixed costs.

C) Locked-in costs are incurred costs.

D) Locked-in costs are also called designed-in costs.

Diff: 2

Objective: 4

AACSB: Analytical thinking

12) Costing systems measure:

A) locked in costs

B) sunk costs

C) cost incurrence

D) out of pocked costs

Diff: 3

Objective: 4

AACSB: Analytical thinking

13) A locked-in cost is a(n):

A) opportunity cost that is fixed in the short run

B) cost that can be changed in the short run

C) cost that has not yet been incurred, but based on decisions that have already been made, will be incurred in the future

D) cost that has been incurred, but based on decisions that have already been made, will be not incurred in the future

Diff: 2

Objective: 4

AACSB: Analytical thinking

14) Value engineering cannot decrease value-added costs.

Diff: 3

Objective: 4

AACSB: Analytical thinking

15) All costs are locked in at the design stage itself.

Diff: 2

Objective: 4

AACSB: Analytical thinking

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

Diff: 2

Objective: 4

AACSB: Analytical thinking

17) A re-design of a product so that it requires fewer components to decrease ordering, receiving, testing, and inspection costs is an example of value-engineering.

Diff: 2

Objective: 4

AACSB: Analytical thinking

18) Value engineering can have undesirable effects if the product remains in development for a long time as the reengineering team repeatedly evaluates alternative designs.

Diff: 1

Objective: 4

AACSB: Analytical thinking

19) Supervision costs can have both value-added and non-value-added components.

Diff: 1

Objective: 4

AACSB: Analytical thinking

20) Locked-in costs are costs that have already been incurred, based on decisions that have already been made and will impact future costs.

Diff: 2

Objective: 4

AACSB: Analytical thinking

21) What are the undesirable effects of value engineering and target costing? How can these be reduced?

(1) Employees may feel frustrated if they fail to attain target costs.

(2) The cross-functional team may add too many features just to accommodate the different wishes of team members.

(3) A product may be in development for a long time as the team repeatedly evaluates alternative designs.

(4) Organizational conflicts may develop as the burden of cutting costs falls unequally on different business functions in the company's value chain, for example, more on manufacturing than on marketing.

To avoid these pitfalls, target-costing efforts should always

(1) encourage employee participation and celebrate small improvements toward achieving the target cost,

(2) focus on the customer,

(3) pay attention to schedules, and

(4) set cost-cutting targets for all value-chain functions to encourage a culture of teamwork and cooperation.

Diff: 3

Objective: 4

AACSB: Analytical thinking

22) Explain the difference between locked in costs and costs incurred. Which of these types of costs does a traditional accounting system emphasize? At which stage of the value chain are most costs locked-in? At which stage of the value chain are most costs incurred? What implication does this have for good cost management?

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 14.5

1) The cost-plus pricing approach is generally in the form:

A) Cost base + Markup component = Prospective selling price

B) Prospective selling price - Cost base = Markup component

C) Cost base + Gross margin = Prospective selling price

D) Variable cost + Fixed cost + Contribution margin = Prospective selling price

Diff: 1

Objective: 5

AACSB: Analytical thinking

2) A product costs $100 to manufacture and $40 to market and $20 to distribute (ship to customers.) R&D costs are allocated at $30 per unit. Based on a targeted rate of return, manager uses a mark-up of 60%. What is the markup component based on a Cost-Plus pricing approach?

A) $60

B) $84

C) $96

D) $114

Diff: 2

Objective: 5

AACSB: Analytical thinking

3) The production costs of X7101 are $180 to manufacture and the commission paid to a salesman is 5%. It costs $11 to distribute (ship to customers.); paid for by the customer. R&D costs are allocated at $8 per unit. Based on a targeted rate of return, manager uses a mark-up of 65% on full cost. What is the markup component based on a Cost-Plus pricing approach?

A) $19.00

B) $122.20

C) $128.05

D) $135.20

Diff: 2

Objective: 5

AACSB: Analytical thinking

4) Which of the following can be used to determine markup percentage in the case of cost-plus pricing?

A) Target annual operating income / Invested capital

B) Estimated annual dividend / Invested capital

C) Target sales revenue / Target annual operating income

D) Estimated annual dividend / Target annual operating income

Diff: 2

Objective: 5

AACSB: Analytical thinking

5) A product costs $600 to manufacture and $20 to market and $10 to distribute (ship to customers.) R&D costs are allocated at $40 per unit. Based on a targeted rate of return, manager uses a mark-up of 30%. What is the prospective selling price based on a Cost-Plus pricing approach?

A) $780

B) $806

C) $819

D) $871

Diff: 2

Objective: 5

AACSB: Analytical thinking

6) Samuels Company is considering pricing its 10,000-gallon petroleum tanks using either variable manufacturing or full product costs as the base. The variable cost base provides a prospective price of $6,000 and the full cost base provides a prospective price of $6,100. Which of the following explains the difference in the two prices?

A) the estimated amount of profit

B) the variable cost base estimates fixed costs in the markup percentage while the full cost base includes an amount for fixed costs

C) there is no explanation since this is known as price discrimination

D) the difference is caused by the inability to estimate fixed cost per unit with any degree of reliability

Diff: 2

Objective: 5

AACSB: Analytical thinking

7) A company's invested capital is $13,000,000 and management has determined that the target rate of return on investment is 10%. Last year, the company produced 131,313 units and this year expects to units sales to be 10% above last year. The cost of the product is estimated to be $13 per unit. What is the target operating income per unit? (Round any intermediary calculations to the nearest unit and your final answer to the nearest cent.)

A) $9.00

B) $9.90

C) $13.00

D) $6.50

Diff: 3

Objective: 5

AACSB: Analytical thinking

8) The amount of a markup percentage that customers are willing to pay is usually higher when which of the following conditions exist?

A) there is idle capacity

B) demand is strong

C) competition is intense

D) demand is elastic

Diff: 2

Objective: 5

AACSB: Analytical thinking

9) When making pricing decisions managers should include fixed cost per unit in the cost because:

A) it leads to reporting higher operating income for the period

B) it allows managers to report positive contribution as long as prices are above variable costs

C) in the long run, the price of a product must exceed the full cost of the product

D) it requires the management accountant to perform a detailed analysis of cost-behavior patterns to separate product costs into variable and fixed components

Diff: 3

Objective: 5

AACSB: Analytical thinking

10) Which of the following statements is true regarding cost-plus pricing?

A) It starts with a target price which is the estimated price for a product.

B) A company uses a markup percentage that estimates a product price that covers full product costs and earns the required return on investment.

C) It first determines product characteristics and target price on the basis of customer preferences and then computes a target cost.

D) The cost-plus price chosen has already been studied for customer reaction to the price.

Diff: 3

Objective: 5

AACSB: Analytical thinking

11) Which of the following is an advantage of using full cost of the product as the cost base?

A) Managers are informed regarding the minimum long-run cost they need to recover to stay in business.

B) Using the full cost of the product as a basis for pricing increases the temptation to cut prices below full costs.

C) Fixed cost allocations can be arbitrary while using full cost of the product as the cost base.

D) It requires a detailed analysis of cost behavior for computations and hence promotes a better understanding of the cost behavior.

Diff: 3

Objective: 5

AACSB: Analytical thinking

12) Real Wood Structures Company has invested $1,040,000 in a plant to build small tool sheds. The target operating income desired from the plant is $156,000 annually. The company plans annual sales of 1200 sheds at a selling price of $1100 each.

What is the target rate of return on investment for Real Wood Structures Company?

A) 18.0%

B) 15.0%

C) 11.8%

D) 85.0%

Diff: 2

Objective: 5

AACSB: Application of knowledge

13) Ocean Grove Vending Company has invested $1,450,000 in a plant to make vending machines. The target operating income desired from the plant is $362,500 annually. The company plans annual sales of 1500 vending machines at a selling price of $1000 each.

What is the markup percentage as a percentage of cost for Ocean Grove Vending Company?

A) 24.17%

B) 31.87%

C) 75.83%

D) 25.00%

Diff: 2

Objective: 5

AACSB: Application of knowledge

14) Ocean Grove Vending Company has invested $980,000 in a plant to make vending machines. The target operating income desired from the plant is $196,000 annually. The company plans annual sales of 1600 vending machines at a selling price of $1100 each.

What is the cost base of each vending machine for Ocean Grove Vending Company?

A) $1100

B) $1422

C) $978

D) $613

Diff: 3

Objective: 5

AACSB: Application of knowledge

15) Crimpson Company has invested $2,100,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $305,000 annually. The company plans annual sales of 7400 juicer machines at a selling price of $600 each.

What is the target rate of return on investment for Crimpson Company?

A) 6.9%

B) 7.4%

C) 14.5%

D) 12.5%

Diff: 2

Objective: 5

AACSB: Application of knowledge

16) Crimpson Company has invested $2,200,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $303,000 annually. The company plans annual sales of 7000 juicer machines at a selling price of $500 each.

What is the markup percentage as a percentage of cost for Crimpson Company?

A) 8.7%

B) 13.8%

C) 9.5%

D) 0.9%

Diff: 2

Objective: 5

AACSB: Application of knowledge

17) Crimpson Company has invested $2,200,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $306,000 annually. The company plans annual sales of 7700 juicer machines at a selling price of $300 each.

What is the cost base of each juicer machine for Crimpson Company?

A) $260.26

B) $39.74

C) $300.00

D) $285.71

Diff: 3

Objective: 5

AACSB: Application of knowledge

18) Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year:

Wilde has an annual target operating income of $980,000.

The markup percentage for setting prices as a percentage of total manufacturing costs is:

A) 53.9%

B) 80.4%

C) 209.2%

D) 43.2%

Diff: 3

Objective: 5

AACSB: Application of knowledge

19) Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year:

Wilde has an annual target operating income of $920,000.

The markup percentage for setting prices as a percentage of variable manufacturing costs is:

A) 52.83%

B) 89.73%

C) 65.31%

D) 21.17%

Diff: 3

Objective: 5

AACSB: Application of knowledge

20) Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year:

Wilde has an annual target operating income of $910,000.

The markup percentage for setting prices as a percentage of the variable cost of the product is:

A) 44.1%

B) 36.5%

C) 26.7%

D) 65.2%

Diff: 3

Objective: 5

AACSB: Application of knowledge

21) Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year:

Wilde has an annual target operating income of $990,000.

The markup percentage for setting prices as a percentage of the full cost of the product is:

A) 31.9%

B) 36.3%

C) 45.8%

D) 22.7%

Diff: 3

Objective: 5

AACSB: Application of knowledge

22) Sandra Clothing Company has invested $51,000,000 in its business. The target rate of return for the company is 12%. It has long-term assets of $23,000,000. Cost of debt for the company is 8%. It expects to sell 12,000 units in the upcoming year. What will be the target operating income per unit for Sandra Clothing Company?

A) $153

B) $230

C) $340

D) $510

Diff: 3

Objective: 5

AACSB: Application of knowledge

23) In cost-plus pricing, the markup definitively determines the actual selling price.

Diff: 2

Objective: 5

AACSB: Analytical thinking

24) Using the cost-plus approach eliminates the need to consider other factors of pricing such as customers and competition.

Diff: 2

Objective: 5

AACSB: Analytical thinking

25) The target rate of return on investment the percentage used to markup the cost to an acceptable selling price.

Diff: 2

Objective: 5

AACSB: Analytical thinking

26) Selling prices computed under cost-plus pricing are prospective prices that may or may not actually be charged to customers.

Diff: 2

Objective: 5

AACSB: Analytical thinking

27) Markups tend to be higher in more competitive markets.

Diff: 2

Objective: 5

AACSB: Analytical thinking

28) One of the risks of using only the variable cost as a base may tempt managers to cut prices as long as prices are above variable cost.

Diff: 2

Objective: 5

AACSB: Analytical thinking

29) A full-cost formula for pricing does requires that the management accountant performs a detailed analysis of cost-behavior patterns to separate product costs into variable and fixed components.

Diff: 2

Objective: 5

AACSB: Analytical thinking

30) There are alternative ways of measuring the cost base when applying a cost-plus method to pricing but research shows that many managers prefer to use full cost as the cost base.

Diff: 2

Objective: 5

AACSB: Analytical thinking

31) A full-cost formula for pricing does not require the management accountant to perform a detailed analysis of cost-behavior patterns.

Diff: 2

Objective: 5

AACSB: Analytical thinking

32) The Big Tool Company has budgeted sales of $300,000 with the following budgeted costs:

Direct materials $60,000

Direct manufacturing labor 35,000

Factory overhead

Variable 30,000

Fixed 45,000

Selling and administrative expenses

Variable 20,000

Fixed 25,000

Compute the average markup percentage for setting prices as a percentage of:

a. The full cost of the product

b. The variable cost of the product

c. Variable manufacturing costs

d. Total manufacturing costs

a. $60,000 + $35,000 + $30,000 + $45,000 + $20,000 + $25,000 = $215,000

($300,000 - $215,000)/$215,000 = 39.5%

b. $60,000 + $35,000 + $30,000 + $20,000 = $145,000

($300,000 - $145,000)/$145,000 = 106.8%

c. $60,000 + $35,000 + $30,000 = $125,000

($300,000 - $125,000)/$125,000 = 140%

d. $60,000 + $35,000 + $30,000 + $45,000 = $170,000

($300,000 - $170,000)/$170,000 = 76.5%

Diff: 2

Objective: 5

AACSB: Analytical thinking

33) Jackson Company has budgeted sales of $810,000 with the following budgeted costs:

Direct materials $168,000

Direct manufacturing labor 140,000

Factory overhead

Variable 98,000

Fixed 108,000

Selling and administrative expenses

Variable 72,000

Fixed 100,000

Compute the average markup percentage for setting prices as a percentage of:

a. Total manufacturing costs

b. The variable cost of the product

c. The full cost of the product

d. Variable manufacturing costs

a. $168,000 + $140,000 + $98,000 + $108,000 = $514,000

($810,000 - $514,000)/$514,000 = 57.6%

b. $168,000 + $140,000 + $98,000 + $72,000 = $478,000

($810,000 - $478,000)/$478,000 = 69.4%

c. $168,000 + $140,000 + $98,000 + $108,000 + $72,000 + $100,000 = $686,000

($810,000 - $686,000)/$686,000 = 18.07%

d. $168,000 + $140,000 + $98,000 = $406,000

($810,000 - $406,000)/$406,000 = 99.5%

Diff: 2

Objective: 5

AACSB: Analytical thinking

34) Some companies use a method of pricing called the time-and-materials method. Explain what this means and use at least two examples.

Diff: 2

Objective: 5

AACSB: Analytical thinking

Objective 14.6

1) Life-cycle costing is best described by which of the following?

A) it is a method of cost planning to reduce manufacturing costs to targeted levels

B) it is the process of tracking and accumulating costs that are incurred within the manufacturing and distribution links of the value chain

C) it is the process of tacking and accumulating business function costs across the entire value chain

D) it is a costing system that focuses on reducing costs during the manufacturing cycle

Diff: 2

Objective: 6

AACSB: Analytical thinking

2) An understanding of life-cycle costs can lead to which of the following?

A) additional costs during the manufacturing cycle

B) less need for evaluation of the competition

C) the accumulation of information for strategically evaluating pricing decisions

D) mutually beneficial relationships between buyers and sellers

Diff: 2

Objective: 6

AACSB: Analytical thinking

3) Which of the following best defines the term: product life cycle?

A) the time span between when the company begins the initial R&D on a product till the time when the first unit is sold

B) the span of time from initial R&D on a product to when the customer service and support for the product is no longer offered

C) the time span between when the company begins the initial R&D on a product till the time when the last unit is sold

D) the span of time from when the first unit of the product is sold until the last unit of the product is sold

Diff: 3

Objective: 6

AACSB: Analytical thinking

4) Life-cycle budgeting and life-cycle costing can help highlight which of the following measures?

A) an increase in customer-service costs due to using inferior materials

B) high production costs caused by a complex design

C) large ordering costs due to the great number of component parts used

D) an increase in annual operating income resulting from the new product

Diff: 3

Objective: 6

AACSB: Analytical thinking

5) Which of the following would make life-cycle budgeting particularly important to implement?

A) a very short R&D period with minimal costs but with an emphasis on speed to market

B) a product that will be brought to market very quickly and will only be offered for a limited time

C) the development period for a product is long and that the R&D needed and the design activities are costly

D) a service that will be offered once this year and then eliminated as a result of a proposed sale of a division

Diff: 2

Objective: 6

AACSB: Analytical thinking

6) Which of the following best describes customer life-cycle costs?

A) costs incurred by the selling company to satisfy the customer

B) costs to the customers for buying and using a product

C) same as the selling life-cycle prices

D) replacement costs of using a product or service

Diff: 1

Objective: 6

AACSB: Analytical thinking

7) Expo Manufacturing Inc., is in the process of evaluating a new product using the following information:

∙ A new transformer has three production runs each year, each with $14,000 in setup costs.

∙ The new transformer incurred $50,000 in development costs and is expected to be produced over the next three years.

∙ Direct costs of producing the transformers are $55,000 per run of 5100 transformers each.

∙ Indirect manufacturing costs charged to each run are $55,000.

∙ Destination charges for each transformer average $4.00.

∙ Customer service expenses average $0.20 per transformer.

∙ The transformers are selling for $40 the first year and will increase by $2 each year thereafter.

∙ Sales units equal production units each year.

What are estimated life-cycle revenues?

A) $612,000

B) $1,254,600

C) $1,897,200

D) $1,927,800

Diff: 2

Objective: 6

AACSB: Application of knowledge

8) Expo Manufacturing Inc., is in the process of evaluating a new product using the following information:

∙ A new transformer has three production runs each year, each with $15,000 in setup costs.

∙ The new transformer incurred $45,000 in development costs and is expected to be produced over the next three years.

∙ Direct costs of producing the transformers are $55,000 per run of 5000 transformers each.

∙ Indirect manufacturing costs charged to each run are $45,000.

∙ Destination charges for each transformer average $2.00.

∙ Customer service expenses average $0.40 per transformer.

∙ The transformers are selling for $20 the first year and will increase by $4 each year thereafter.

∙ Sales units equal production units each year.

What is the estimated life-cycle operating income for the first year?

A) (126,000)

B) 1,146,000

C) 1,596,000

D) 126,000

Diff: 3

Objective: 6

AACSB: Application of knowledge

9) Expo Manufacturing Inc., is in the process of evaluating a new product using the following information:

∙ A new transformer has three production runs each year, each with $15,000 in setup costs.

∙ The new transformer incurred $50,000 in development costs and is expected to be produced over the next three years.

∙ Direct costs of producing the transformers are $40,000 per run of 5700 transformers each.

∙ Indirect manufacturing costs charged to each run are $115,000.

∙ Destination charges for each transformer average $2.00.

∙ Customer service expenses average $0.70 per transformer.

∙ The transformers are selling for $35 the first year and will increase by $2 each year thereafter.

∙ Sales units equal production units each year.

What is the estimated life-cycle operating income for the first three years?

A) $556,170

B) $2,221,170

C) $179,590

D) $2,196,970

Diff: 3

Objective: 6

AACSB: Application of knowledge

10) Jamal, Kareem, Rashid and Associates are in the process of evaluating its new client services for the business consulting division.

∙ Estate Planning, a new service, incurred $150,000 in development costs and employee training.

∙ The direct costs of providing this service, which is all labor, averages $31 per hour.

∙ Other costs for this service are estimated at $440,000 per year.

∙ The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting.

∙ Customer service expenses average $99 per client, with each job lasting an average of 450 hours. The current staff expects to bill 54,000 hours for each of the two years the program is in effect. Billing averages $46 per hour.

What are estimated life-cycle revenues?

A) $2,484,000

B) $208,120

C) $4,968,000

D) $416,240

Diff: 1

Objective: 6

AACSB: Application of knowledge

11) Jamal, Kareem, Rashid and Associates are in the process of evaluating its new client services for the business consulting division.

∙ Estate Planning, a new service, incurred $180,000 in development costs and employee training.

∙ The direct costs of providing this service, which is all labor, averages $30 per hour.

∙ Other costs for this service are estimated at $450,000 per year.

∙ The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting.

∙ Customer service expenses average $104 per client, with each job lasting an average of 500 hours. The current staff expects to bill 50,000 hours for each of the two years the program is in effect. Billing averages $46 per hour.

What is estimated life-cycle operating income for the first year?

A) $339,600

B) $149,200

C) $159,600

D) $319,200

Diff: 3

Objective: 6

AACSB: Application of knowledge

12) Jamal, Kareem, Rashid and Associates are in the process of evaluating its new client services for the business consulting division.

∙ Estate Planning, a new service, incurred $190,000 in development costs and employee training.

∙ The direct costs of providing this service, which is all labor, averages $29 per hour.

∙ Other costs for this service are estimated at $410,000 per year.

∙ The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting.

∙ Customer service expenses average $104 per client, with each job lasting an average of 450 hours. The current staff expects to bill 67,500 hours for each of the two years the program is in effect. Billing averages $49 per hour.

What is the estimated life-cycle operating income for the first two years?

A) $6,615,000

B) $1,658,800

C) $924,400

D) $734,400

Diff: 3

Objective: 6

AACSB: Application of knowledge

13) Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division.

∙ Server Planning, a new service, incurred $330,000 in development costs.

∙ The direct costs of providing the service, which is all labor, averages $40 per hour.

∙ Other costs for this service are estimated at $340,000 per year.

∙ The current program for server planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non-viable.

∙ Customer service expenses average $350 per client, with each job lasting an average of 40 hours. The current staff expects to bill 15,000 hours for each of the two years the program is in effect. Billing averages $100 per hour.

What are the estimated life-cycle revenues?

A) $3,000,000

B) $3,340,000

C) $3,670,000

D) $1,500,000

Diff: 1

Objective: 6

AACSB: Analytical thinking

14) Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division.

∙ Server Planning, a new service, incurred $280,000 in development costs.

∙ The direct costs of providing the service, which is all labor, averages $70 per hour.

∙ Other costs for this service are estimated at $350,000 per year.

∙ The current program for server planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non-viable.

∙ Customer service expenses average $350 per client, with each job lasting an average of 20 hours. The current staff expects to bill 7,900 hours for each of the two years the program is in effect. Billing averages $100 per hour.

What is the estimated life-cycle operating income for the first year?

A) -$251,250

B) -$782,500

C) -$531,250

D) $531,250

Diff: 3

Objective: 6

AACSB: Analytical thinking

15) Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division.

• Server Planning, a new service, incurred $260,000 in development costs.

• The direct costs of providing the service, which is all labor, averages $60 per hour.

• Other costs for this service are estimated at $340,000 per year.

• The current program for server planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non-viable.

• Customer service expenses average $150 per client, with each job lasting an average of 40 hours. The current staff expects to bill 16,000 hours for each of the two years the program is in effect. Billing averages $100 per hour.

What is the estimated life-cycle operating income for both years combined?

A) $960,000

B) $(220,000)

C) $(20,000)

D) $1,620,000

Diff: 3

Objective: 6

AACSB: Application of knowledge

16) A life-cycle budget is usually prepared to budget for costs and production for a period of one year.

Diff: 2

Objective: 6

AACSB: Analytical thinking

17) Customer life-cycle costs focus on the total costs incurred by a customer to acquire, use, maintain, and dispose of a product or service.

Diff: 2

Objective: 6

AACSB: Analytical thinking

18) Customer life-cycle costs, because they are only budgeted items, do not influence the prices a company can charge for its products.

Diff: 2

Objective: 6

AACSB: Analytical thinking

19) Managing environmental costs is an example of life-cycle costing and value engineering.

Diff: 2

Objective: 6

AACSB: Analytical thinking

20) Life-cycle budgeting estimates the costs and revenues attributed to a product from its initial R&D through production of a prototype product.

Diff: 2

Objective: 6

AACSB: Analytical thinking

21) Environmental costs that are incurred over several years of the product's life cycle are often locked in at the product- and process-design stage.

Diff: 2

Objective: 6

AACSB: Analytical thinking

22) The product life cycle spans the time from when a product is produced and first offered to customers when customer service and support is no longer offered for that product.

Diff: 2

Objective: 6

AACSB: Analytical thinking

23) Franklin Company is in the process of evaluating a new part using the following information.

∙ Part SLC2002 has one production run each month, each with $18,000 in setup costs.

∙ Part SLC2002 incurred $40,000 in development costs and is expected to be produced over the next three years.

∙ Direct costs of producing Part SLC2002 are $56,000 per run of 24,000 parts each.

∙ Indirect manufacturing costs charged to each run are $88,000.

∙ Destination charges for each run average $15,000.

∙ Part SLC2002 is selling for $14.00 in the United States and $25 in all other countries. Sales are one-third domestic and two-thirds exported.

∙ Sales units equal production units each year.

Required:

a. What are the estimated life-cycle revenues?

b. What is the estimated life-cycle operating income for the first year?

a. Domestic ($14 × 12 months × 24,000 × 3 yrs. × 1/3) $ 4,032,000

Export ($25 × 12 months × 24,000 × 3 yrs. × 2/3) 14,400,000

Estimated life-cycle revenues $18,432,000

b. Sales

Domestic ($14.00 × 12 months × 24,000 × 1/3) $1,344,000

Export ($25 × 12 months × 24,000 × 2/3) 4,800,000

Total Sales 6,144,000

Costs:

Development costs $ 40,000

Setup costs (12 × $18,000) 216,000

Direct manufacturing costs (12 × $56,000) 672,000

Indirect manufacturing costs (12 × $88,000) 1,056,000

Destination costs (12 × $15,000) 180,000 2,164,000

Estimated life-cycle operating income, first year $3,980,000

Diff: 3

Objective: 6

AACSB: Analytical thinking

24) Harry and Sally are starting a new business venture and are in the process of evaluating their product lines. Information for one new product, hand-made lamps, is as follows:

∙ Every six months a new lamp pattern will be put into production. Each new pattern will require $8,000 in setup costs.

∙ The lamp product line incurred $40,000 in development costs and is expected to be produced over the next six years.

∙ Direct costs of producing the lamps average $144 each. Each lamp requires 12 labor-hours and 2 machine-hours.

∙ Indirect manufacturing costs are estimated at $168,000 per year.

∙ Customer service expenses average $16 per lamp.

∙ Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for $300.

∙ Sales units equal production units each year.

Required:

a. What are the estimated life-cycle revenues?

b. What is the estimated life-cycle operating income for the first year?

a. Estimated life-cycle revenues:

(2,000 × 2 patterns per year × $300 per lamp) $ 1,200,000

× 6 years

$7,200,000

b.

Annual revenue (2,000 × $300 × 2) $1,200,000

Setup costs ($8,000 × 2) $16,000

Development costs (2,000 × $144 × 2) 40,000

Direct manufacturing costs 576,000

Indirect manufacturing cost 168,000

Customer service costs ($16 × 2,000 lamps × 2) 64,000 864,000

Estimated life-cycle operating income for the first year $ 336,000

Diff: 2

Objective: 6

AACSB: Application of knowledge

25) Grace Greeting Cards Incorporated is starting a new business venture and are in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows:

∙ Sixteen times each year, a new card design will be put into production. Each new

design will require $700 in setup costs.

∙ The parchment grade card product line incurred $75,000 in development costs and

is expected to be produced over the next four years.

∙ Direct costs of producing the designs average $0.50 each.

∙ Indirect manufacturing costs are estimated at $50,000 per year.

∙ Customer service expenses average $0.10 per card.

∙ Current sales are expected to be 2,500 units of each card design. Each card sells for $4.00.

∙ Sales units equal production units each year.

Required:

a. What are the estimated life-cycle revenues?

b. What is the estimated life-cycle operating income for the first year?

c. What is the estimated life-cycle operating income per year for the years after the first year?

d. What is the total estimated life-cycle operating income?

a. Estimated life-cycle revenues:

(2,500 × 16 designs per year × $4.00 per card sold) $160,000

× 4 years

$640,000

b. Annual revenues (2,500 × $4.00 × 16) $160,000

Development costs $ 75,000

Setup costs ($700 × 16) 11,200

Direct manufacturing costs (2,500 × $0.50 × 16) 20,000

Indirect manufacturing costs 50,000

Customer service costs ($0.10 × 2,500 cards × 16) 4,000 160,200

Estimated life-cycle operating income (loss) for the first year $(20,200)

c. Annual revenues (2,500 × $4.00 × 16) $160,000

Setup costs ($700 × 16) $ 11,200

Direct manufacturing costs (2,500 × $0.50 × 16) 20,000

Indirect manufacturing costs 50,000

Customer service costs ($0.10 × 2,500 cards × 16) 4,000 85,200

Estimated life-cycle operating income (loss) for the first year $74,800

d. Estimated life-cycle operating income for all four years $204,200

(3 × $74,800 - $20,200)

Diff: 2

Objective: 6

AACSB: Analytical thinking

26) Ski Valet provides materials that let people teach themselves how to snow ski. It has six different skill-level programs. Each one includes visual and audio learning aids along with a workbook that can be submitted to the company for grading and evaluation purposes, if the person so desires.

The accounting system of Ski Valet is very traditional in its reporting functions with the calendar year being the company's fiscal year. It includes an abundance of information that can be used for various reporting purposes.

The company has found that any new idea soon runs its course with an effective life of about three years. Therefore, the company is always in the development stage of some new program. Program development requires experts in the area to provide the know-how of the item being developed and a development team that puts together the video, audio, and workbook materials. The actual costs of reproducing the packages are relatively inexpensive when compared to the development costs.

Required:

How might product life-cycle budgeting aid the company in improving its overall operations?

It is probably more important to evaluate company performance on a product basis rather than year to year. Life-cycle budgeting would allow the company to compare products to each other rather than just comparing one year to the next.

Diff: 2

Objective: 6

AACSB: Analytical thinking

Objective 14.7

1) Predatory pricing:

A) is ethical; even though it may devalue the product in the minds of consumers, it saves the consumer money

B) is illegal as it sets prices low to drive out competition

C) sets prices high so as to earn abnormal profits for the seller/producer

D) is ethical since its main purpose is to help the ultimate consumer acquire the product or enjoy the service

Diff: 2

Objective: 7

AACSB: Ethical understanding and reasoning

2) Which of the following is the best description of price discrimination?

A) setting different prices for different products

B) charging different prices for quantity amounts

C) using variable costing for some products and full costing for other products when setting prices

D) charging different prices to different customers or clients for the same products or services

Diff: 2

Objective: 7

AACSB: Analytical thinking

3) Roberto Inc., operates a chain of luxury hotels in the Asia-Pacific region. It charges $150 for one night stay. However when 90% of the rooms are occupied, Roberto charges a premium of 20% on room tariff for the remaining rooms. What pricing method has Roberto Inc. adopted?

A) customer-preference pricing

B) seasonal-load pricing

C) peak-load pricing

D) capacity pricing

Diff: 3

Objective: 7

AACSB: Analytical thinking

4) Which of the following choices is the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service?

A) price discrimination

B) peak-load pricing

C) demand-based pricing

D) customer preference pricing

Diff: 2

Objective: 7

AACSB: Analytical thinking

5) When demand for a product is very elastic and prices are increased, demand will:

A) remain the same, and operating profits will increase

B) remain the same, and operating profits may either increase or decrease

C) decrease, and operating profits will decrease

D) decrease, and operating profits may either increase or decrease

Diff: 3

Objective: 7

AACSB: Analytical thinking

6) Which of the following is an example of price discrimination?

A) Larry's offers a 30% discount to buyers making repeat purchases within 30 days.

B) Enrique Corp sells different kind of goods at different prices.

C) Chang sells his wares at different prices based on the market conditions.

D) Nathan sells his ice-creams for a discount during winter season.

Diff: 3

Objective: 7

AACSB: Application of knowledge

7) Troy City Inc., manufactures a product and is considering raising the price by $20 a unit for the coming year. With a $20 price increase, demand is expected to fall by 2500 units.

Would you recommend the $20 price increase?

A) No, because demand decreased.

B) No, because the contribution margin decreases.

C) Yes, because inventory turnover increases.

D) Yes, because operating income increases.

Diff: 2

Objective: 7

AACSB: Application of knowledge

8) Toy City Inc., manufactures a product and is considering raising the price by $40 a unit for the coming year. With a $40 price increase, demand is expected to fall by 2800 units.

Bright Inc., has a capacity to produce 28,800 units. Due to an increase in the electricity costs, there is a sudden spike in demand by 2800 units. If the company adopts peak-load pricing policy and charges a premium of 20% over the current sales price, what is the total contribution on the sale of additional units?

A) $257,600

B) $280,000

C) $537,600

D) $526,400

Diff: 3

Objective: 7

AACSB: Application of knowledge

9) Velim Electronics manufactures electric shavers and is considering decreasing the price by $3 a unit for the coming year. With a $3 price decrease, the unit demand is expected to increase by 25%, and a high volume materials discount is expected to decrease the variable costs per unit by $2 per unit.

Would you recommend the $3 price decrease?

A) Yes, because demand decreases.

B) No, because the selling price decreases.

C) Yes, because operating income increases.

D) No, because contribution margin per unit increases.

Diff: 2

Objective: 7

AACSB: Application of knowledge

10) Einstein Motors, has a capacity to produce 38,000 electric cars. Due to a temporary subsidy announced, there is a sudden increase in demand. Einstein decides to adopt peak-load pricing and charge a premium of 30% over its normal selling price of $4000. It has already accepted orders for 29,000 units at normal selling price. What is the total contribution to the company on sale of additional 9000 units if the variable cost per unit is $2000?

A) $36,000,000

B) $28,800,000

C) $18,000,000

D) $10,800,000

Diff: 3

Objective: 7

AACSB: Application of knowledge

11) The Maize Eagles are evaluating ticket prices for its basketball games. Studies show that Friday and Saturday night games average more than twice the number of fans compared to other days. The following information pertains to the stadium's normal operations per season:

The stadium is open for 4 operating hours on each day a game is played. All employees work by the hour except for the administrators. A maximum of one game is played per day and each fan has only one ticket per game.

The stadium authority wants to charge more for games on Friday and Saturday. What is the minimum price that should be charged for peak attendance nights?

A) $2.56

B) $0.66

C) $3.42

D) $68.31

Diff: 3

Objective: 7

AACSB: Application of knowledge

12) Hitz Video Rental is evaluating rental prices. Historical data show that Friday and Saturday have twice the rentals of other days of the week. The following information pertains to the store's normal operations per week:

The store manager wants to charge more for rentals on Friday and Saturday. What is the minimum price that should be charged during peak rental days?

A) $0.54

B) $0.47

C) $0.52

D) $0.93

Diff: 3

Objective: 7

AACSB: Application of knowledge

13) Which of the following scenarios is an example of predatory pricing?

A) Ceramic Corp sells its products below average total costs during off-peak seasons.

B) Almeida flowers has arrived at an informal agreement with other sellers in the area to charge a very high selling price.

C) Anton Inc., sells its products for $25 in the U.S, however it can sell the same product for double the price in its home country.

D) Duyen Inc., is launching a new product and has decided to sell its product below its average variable costs until it drives competitors out of market.

Diff: 3

Objective: 7

AACSB: Application of knowledge

14) Predatory pricing is a type of price discrimination that:

A) allows prices to be cut to the level of variable costs

B) deliberately sets prices very low, sometimes even below costs, to minimize competition

C) is required when a company declares bankruptcy so that it can sell its remaining goods quickly

D) is used in the food industry for perishable goods

Diff: 2

Objective: 7

AACSB: Analytical thinking

15) To minimize the chances of violating pricing laws, a company should:

A) keep detailed records of variable costs for all value-chain business functions

B) use a variable cost-plus markup method of pricing

C) underprice products on a consistent basis, rather than sporadically

D) use dumping only when a product is at the end of its life cycle

Diff: 3

Objective: 7

AACSB: Analytical thinking

16) Crimpson Corp., a California-based company is selling its products for $21. Its average variable costs is $23 and the average selling price of its competitors is $26. This is an example of:

A) dumping

B) predatory pricing

C) collusive pricing

D) suicidal pricing

Diff: 3

Objective: 7

AACSB: Application of knowledge

17) When the price of a product does not change as a result of changes in demand, the price insensitivity to demand is called demand inelasticity.

Diff: 2

Objective: 7

AACSB: Analytical thinking

18) Price discrimination is the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service.

Diff: 1

Objective: 7

AACSB: Analytical thinking

19) Peak-load pricing is the practice of charging a lower price for the same product or service when the demand for it approaches the physical limit of the capacity to produce that product or service.

Diff: 1

Objective: 7

AACSB: Analytical thinking

20) The difference in prices between countries can vary beyond the cost of delivering the product to each country, solely because of changes in exchange rates.

Diff: 2

Objective: 7

AACSB: Analytical thinking

21) To prove predatory pricing, one of conditions established by the U.S. Supreme Court is that the company should be charging a price below 60% of its total costs.

Diff: 2

Objective: 7

AACSB: Analytical thinking

22) Faraway Corporation is located in Providence, RI and manufactures a product that costs $100 and charges McLeod Company, a Massachusetts based retailer, $300 but charges a customer located in China $310 as it costs more to ship the product oversees. This is an example of illegal price discrimination under the U.S. Robinson-Patman Act of 1936.

Diff: 2

Objective: 7

AACSB: Analytical thinking

23) Predatory pricing occurs when companies in an industry conspire in their pricing and production decisions to achieve a price above the competitive price and so restrain trade.

Diff: 2

Objective: 7

AACSB: Analytical thinking

24) Price dumping occurs when a domestic company is trying to get rid of out-of-style products at a substantially reduced price.

Diff: 1

Objective: 7

AACSB: Analytical thinking

25) A company is said to be involved in predatory pricing even when it is compelled to sell its products are a price below the average variable cost because of pricing of the competitor.

Diff: 2

Objective: 7

AACSB: Analytical thinking

26) An Indian company selling a product in the United States at a price below the market value of the product in India is an example of collusive pricing.

Diff: 2

Objective: 7

AACSB: Analytical thinking

27) To comply with antitrust laws, a company must not engage in predatory pricing, dumping, or collusive pricing which lessen competition, put another company at a competitive disadvantage, or harm consumers.

Diff: 2

Objective: 7

AACSB: Analytical thinking

28) When is a company said to be engaged in predatory pricing? What are the primary conditions to be satisfied to prove predatory pricing?

The U.S. Supreme Court has established the following conditions to prove that predatory pricing has occurred:

1) The predator company charges a price below an appropriate measure of its costs.

2) The predator company has a reasonable prospect of recovering in the future, through larger market share or higher prices, the money it lost by pricing below cost.

Diff: 2

Objective: 7

AACSB: Analytical thinking

29) What factors may influence the level of markups?

Diff: 2

Objective: 7

AACSB: Analytical thinking

30) A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices be adjusted during peak periods? During slow times? Why?

Diff: 2

Objective: 7

AACSB: Analytical thinking

31) Clark Manufacturing offers two product lines, IN2 and EL5. The demand of the IN2 product line is inelastic, while the demand of the EL5 product line is very elastic. If Clark initiates a price increase for both product lines, how will customer demand change? How will the price increase affect operating profits?

Diff: 2

Objective: 7

AACSB: Analytical thinking

32) What advice would you give a company to avoid the appearance of predatory pricing?

Diff: 2

Objective: 7

AACSB: Analytical thinking