Cost-plus pricing is circular for the manufacturing industry in that demand must be estimated to determine the fixed manufacturing costs per unit before the cost is marked up to obtain a
Trang 1Pricing Decisions, Analyzing Customer Profitability,
and Activity-Based Pricing Summary of Questions by Objectives and Bloom’s Taxonomy
Trang 2TRUE-FALSE
1 The most difficult part of determining the profit-maximizing price is determining the demand
function
2 Even though the same percentage markup may be applied to all customers, some customers may
be more profitable than others
3 Generally, the higher the price, the lower the quantity demanded
4 The selling price that maximizes revenues is the price that will also maximize profit
5 A demand function is the relation between price and quantity demanded
6 Charging a higher price per unit causes an increase in profits for the company because the selling
price is larger than the variable cost
7 A company should never price a product below full cost
8 Fixed costs will affect a special order decision when the selling company is at capacity
9 A company cannot increase profits if it accepts a special order at a price below its incremental
variable cost
10 In order for a special order to be accepted, the full cost of the product must be covered
11 When evaluating a special order, only costs that are incremental in nature should be a part of the
analysis
12 A company should accept all orders for which a company has the capacity to produce
13 As long as fixed costs increase by less than the excess of incremental revenue over incremental
cost, the acceptance of a special order will increase a company’s net income
14 The most difficult part of using cost-plus pricing is determining the demand function
15 Cost-plus pricing is circular for the manufacturing industry in that demand must be estimated to
determine the fixed manufacturing costs per unit before the cost is marked up to obtain a selling price, which has a major impact on the quantity demanded
16 A company using cost-plus pricing starts with an estimate of the cost and adds a markup to arrive
at a price that allows for a reasonable level of profit
17 Cost-plus pricing is the pricing method that begins with a careful analysis of competing products
and customer needs and wants
18 Product cost can be easily adjusted after the design phase is complete as long as production has
not begun
19 The target costing process begins with the design of the product
Trang 320 The first step in the target costing process is to estimate how much a product will cost to develop.
21 Prices developed using target costing are based on competing products and customer needs and
wants
22 Target costing establishes selling prices based on the full cost of the product
23 Target cost is computed by determining the appropriate selling price and then subtracting desired
profit from it
24 In effect, a CPM system uses ABC to allocate costs to customers instead of to products and
services
25 A customer’s profitability is calculated by dividing the sales revenue generated from each
customer by the cost of goods sold for each customer
26 In a CPM system, costs are allocated to customers, who are the cost objectives
27 When order processing costs do not vary based on the size of the order, a customer who makes
large, infrequent orders is generally more profitable than a customer who makes small, more frequent orders, for the same quantity and price
28 Activity-based pricing is utilized when a customer buying products is charged for the full cost of
a product or service plus a markup added to the cost
29 In activity-based pricing, customers are offered separate prices for separate items or services they
choose in addition to the price of goods they purchase
30 Suppliers adopting activity-based pricing may encourage customers to limit the variety of goods
they purchase to mitigate the price to be charged
31 Activity-based pricing uses ABC concepts to determine one optimum uniform price to charge all
Trang 4MULTIPLE CHOICE
32 Which one of the following does economic theory suggest?
A Set a price that allows profit maximization
B Set a price that allows the minimum number of units to be sold at the highest unit price
C Set a price that will maximize revenues
D Set a price that will maximize market share
33 Which of the following factors is considered in a product pricing decision made using cost-plus
pricing?
A Price customers are willing to pay
B Selling and administrative costs
C Competitors’ actions
D Fixed cost per unit
34 What occurs to the quantity demanded as the price decreases?
A It will increase
B It will decrease
C It will remain constant
D It will increase and then decrease
35 Which of the following stays constant when the price per unit changes?
B Contribution margin per unit
C Total fixed costs
36 Which of the following statements about price, demand, and profit is generally true?
A As price increases, demand decreases
B As demand increases, profit decreases
C As price increases, demand increases
D As price decreases, demand decreases
37 Rosetone Retail sells one product with a variable cost of $3.50 per unit The demand at different
prices to be charged is shown below:
Units Demanded Unit Price
Trang 538 Which of the following statements about prices and profit is true?
A Higher prices always lead to lower profits because fewer units will be sold
B Higher prices always lead to lower demand and higher profits
C Higher prices combine with lower demand to change the level of profits
D Higher prices will be offset by lower demand so profits will stay constant
39 What should be maximized when setting the price for a product?
A Total revenue
B Contribution margin per unit
C Net income
D The number of units of product sold
40 Winslow Carpet produces and sells berber carpet by the yard with a variable cost of $16 per yard
Total fixed costs are $280,000 The following chart represents the estimated demand at various price levels
Yards Demanded Unit Price
41 Wilkes Manufacturing sells one product with a variable unit cost of $18 The company knows that
the price charged will affect demand Fixed costs are $275,000 If sales exceed 50,000 units, the company will need to lease additional manufacturing space and equipment at an additional cost of
$100,000 per year The following chart represents the estimated demand at various price levels:
Units Demanded Unit Price
Based on this information which of the following statements is true?
A Selling the units at $23 will generate the largest profit
B Selling the units at either $23 or $28 will generate a profit of $225,000
C Selling the units at either $25 or $28 will generate a profit of $225,000
D Selling the units at $28 will generate the largest profit
Trang 642 Testor Paints sells varnish with a variable cost of $6.50 per gallon The company is unsure which
price to charge in order to maximize profits The price charged will also affect the demand
Gallons Demanded Unit Price Per Gallon
43 Dollar Deals sells a single product that has a unit variable cost of $9 per unit The company’s total
fixed costs are $220,000 The company estimates demand at various activity levels as follows:
Units Demanded Unit Price
44 Calico Joe Fabrics sells a single product The company estimates total fixed costs at $360,000
with demand, price, and total variable costs as follows:
Units Demanded Unit Price Total Variable Costs
Trang 745 Calico Joe Fabrics sells a single product The company estimates total fixed costs at $360,000
with demand and unit variable costs at various activity levels as follows:
Units Demanded Unit Price Total Variable Costs
46 Calico Joe Fabrics sells a single product The company estimates total fixed costs at $360,000
with demand and unit variable costs at various activity levels as follows:
Units Demanded Unit Price Total Variable Costs
B It is increasing as volume increases
C It is decreasing as volume increases
D There is not enough information provided to determine the answer
47 Palm Decor sells a single product that has variable costs of $12 per unit The company estimates
the following demand at various unit prices:
Units Demanded Unit Price
Trang 848 Right Air Supply sells a specialized air filter that has a variable cost of $10 each Fixed costs are
estimated to be $700,000 across all levels of sales shown below:
Units Demanded Unit Price
49 Right Air Supply sells a specialized air filter that has a variable cost of $10 each Fixed costs are
estimated to be $700,000 across all levels of sales shown below:
Units Demanded Unit Price
What information given, if any, is not relevant to the price maximization decision?
A The selling prices
B The variable costs per unit
C The quantities demanded
D The total fixed costs
50 Right Air Supply sells a specialized air filter that has a variable cost of $10 each Fixed costs are
estimated to be $700,000 across all levels of sales shown below:
Units Demanded Unit Price
Trang 951 Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs.
The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of
$27.00 per unit Maker Sun Chairs has determined that the following relationships exist between price and demand:
Unit Price Unit Demand
52 Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs
The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of
$27.00 per unit Maker Sun Chairs has determined that the following relationships exist between price and demand:
Unit Price Unit Demand
53 Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs
The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of
$27.00 per unit Maker Sun Chairs has determined that the following relationships exist between price and demand:
Unit Price Unit Demand
Trang 1054 Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs.
The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of
$27.00 per unit Maker Sun Chairs has determined that the following relationships exist between price and demand:
Unit Price Unit Demand
55 Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs
The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of
$27.00 per unit Maker Sun Chairs has determined that the following relationships exist between price and demand:
Unit Price Unit Demand
56 Tong Chin is the manager of an Asian restaurant She is considering four price levels for an
all-you-can-eat buffet Her estimate of price and quantity demanded are:
Buffet Meal Price Meals Demanded
Trang 1157 Ramsey Foods has analyzed its customer and order handling data for the past year and has
determined the following costs:
Additional costs if order must be expedited (Per order) $6.00
Relationship management costs (Per customer per year) $1,900
In addition to these costs, product costs amount to 75% of sales In the prior year, Ramsey had thefollowing experience with one of its customers, Turnkey Enterprises:
Calculate the profit earned on the Turnkey Enterprises account
58 Allstate HVAC recently developed a low-end electronic thermostat that it plans on selling via a
cable channel marketing program The cable program’s fee for selling the item is 20% of revenue.For this fee, the program will advertise the thermostat over six 10-minute segments in September Allstate’s fixed costs of producing the thermostats are $110,000 per production run The companyplans to wait for all orders to come in, and then it will produce exactly the number of units ordered Variable production costs are $25 per unit In addition, it will cost approximately $5 per unit to ship the thermostats to customers Production time will be less than three weeks Henry Kristen, a product manager at Allstate, is charged with recommending a price for the thermostat Based on his experience with similar items, focus group responses, and survey information, he has estimated the number of units that can be sold at various prices:
Unit Price Quantity
Trang 1259 Allstate HVAC recently developed a low-end electronic thermostat that it plans on selling via a
cable channel marketing program The cable program’s fee for selling the item is 20% of revenue.For this fee, the program will advertise the thermostat over six 10-minute segments in September Allstate’s fixed costs of producing the thermostats are $110,000 per production run The companyplans to wait for all orders to come in, and then it will produce exactly the number of units ordered Variable production costs are $25 per unit In addition, it will cost approximately $5 per unit to ship the thermostats to customers Production time will be less than three weeks Henry Kristen, a product manager at Allstate, is charged with recommending a price for the thermostat Based on his experience with similar items, focus group responses, and survey information, he has estimated the number of units that can be sold at various prices:
Unit Price Quantity
61 Which of the following must be true for a company to accept a special order?
A Variable costs must be less than the contribution margin
B Incremental revenues must be greater than incremental costs
C Opportunity costs must be greater than total revenue
D Total fixed costs must stay constant
62 When deciding to accept or reject a special order, which of the following costs is most likely to be
irrelevant?
A The wages of direct labor to make the order
B Depreciation on the machinery used to make the order
C The raw material used to make the order
D The electricity used to run the machine to make the order
Trang 1363 In accepting a special order, which one of the following is not considered?
A Whether production capacity exists to complete the order
B Whether demand for other products will be affected
C Whether the fixed costs of production will increase
D Whether the contribution margin per unit is greater for products in the special order than
the contribution margin for the same products sold to regular customers
64 Which of the following is relevant in deciding whether to accept or reject a special order?
A The impact the order will have on existing business
B The price that will be charged on the special order
C The impact the order will have on existing business and the price that will be charged on
the special order
D None of these answer choices are correct
65 Which of the following statements is true of fixed costs of production in determining whether to
accept or reject a special order?
A They are increased in proportion to the amount that production increases when a special
order is accepted
B They are often considered relevant if the plant is operating at capacity
C If the order can be completed without creating additional fixed costs, they are relevant
D They are always relevant in the decision
66 Wagner Enterprises is contemplating accepting a special order The company determined that the
order will cause an increase in fixed costs Should the order be accepted?
A No, as any increase in fixed costs will reduce the company’s profit
B Yes, as long as the total revenue is greater than the associated variable costs
C Yes, if the increase in fixed costs is less than the incremental revenue
D Yes, if the incremental revenue is greater than the total incremental costs
67 Cinotti Bread Depot bakes and sells each bagel for $1.25 The cost of producing 600,000 bagels
in the prior year was:
Manufacturing overhead - variable 84,000
At the start of the current year, Cinotti received a special order for 15,000 bagels to be sold for
$1.10 per bagel The company estimates it will incur an additional $700 in total fixed costs in order to lease a special machine needed to bake the bagels in the customer’s logo shape Also, thisorder will not affect any of its other operations Should the company accept the special order?
A No, profit will decrease by $2,950
B No, profit will decrease by $2,250
C Yes, profit will increase by $3,800
D Yes, profit will increase by $500
Trang 1468 Bell Supply House produces recycled paper that it sells by the case Budgeted amounts for the
coming year are as follows:
LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case This special order will have additional variable costs of $0.35 per case due to delivery costs Bell Supply House has the capacity to produce this order and it will not affect any of its other operations How much is the incremental revenue associated with accepting this special order?
69 Bell Supply House produces recycled paper that it sells by the case Budgeted amounts for the
coming year are as follows:
LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case This special order will have additional variable costs of $0.35 per case due to delivery costs Bell Supply House has the capacity to produce this order and it will not affect any of its other operations How much is the incremental cost of accepting the special order?
Trang 1570 Bell Supply House produces recycled paper that it sells by the case Budgeted amounts for the
coming year are as follows:
LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case This special order will have additional variable costs of $0.35 per case due to delivery costs Bell Supply House has the capacity to produce this order and it will not affect any of its other operations How much is the incremental profit (loss) associated with the special order?
C ($21,000)
D ($11,700)
71 Element Boards makes skateboard wheels Budget information regarding current period
operations reflecting the sale of 200,000 wheels appears below:
The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of
$2.75 per wheel Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company’s orders However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted What is the incremental revenue associated with accepting the special order?
Trang 1672 Element Boards makes skateboard wheels Budget information regarding the current period is
given below:
The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of
$2.75 per wheel Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company’s orders However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted What is the incremental cost associated with accepting the special order?
The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of
$2.75 per wheel Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company’s orders However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted What is the incremental income (loss) associated with accepting the special order?
74 P&T Furniture has a capacity to produce 40,000 oak shelves per year and is currently selling
36,000 shelves for $32 each Bates Hotel has approached P&T about buying 1,200 shelves for a new hotel it is building and is willing to pay $26 for each shelf The shelves can be packaged in bulk, saving P&T $1.50 per shelf compared to the normal packaging cost Normally, the shelves have a unit variable cost of $27 The annual fixed costs of $450,000 will be unaffected by the special order and it will not affect any of its other operations What would be the impact on profits if P&T accepts this special order?
A Profits will decrease by $6,000
B Profits will increase by $31,200
C Profits will increase by $600
D Profits will decrease by $1,200
Trang 1775 P&T Furniture has a capacity to produce 40,000 oak shelves per year and is currently selling all
40,000 shelves for $32 each Bates Hotel has approached P&T about buying 1,200 shelves for a new hotel it is building and is willing to pay $26 each The shelves can be packaged in bulk, saving P&T $1.50 per shelf compared to the normal packaging cost Normally, the shelves have a unit variable cost of $27 The annual fixed costs of $450,000 will be unaffected by the special order and it will not affect any of its other operations What is the minimum price per shelf that P&T should accept for this special order?
76 Accent Furniture has a capacity of 30,000 desk chairs per year and is currently selling all 30,000
for $240 each Country Bank has approached Accent for buying 800 chairs for only $210 each Accent has a normal variable cost of $165 per chair, including $50 per unit in direct labor per chair Accent can produce the special order on an overtime shift This would result in direct labor being paid overtime at 150% of the normal pay rate The annual fixed costs will be unaffected by the special order and it will not affect any of its other operations What will be the impact on profits of accepting the order?
A Profit will decrease by $24,000
B Profit will increase by $16,000
C Profit will increase by $36,000
D Profit will decrease by $4,000
77 Tenna Electronics sells arc monitors for $55 per unit Unit product costs are as follows:
78 Why is cost-plus pricing criticized?
A It includes selling and administrative costs in determining the product cost
B It does not consider the fixed manufacturing overhead in determining the product cost
C It is inherently circular for manufacturing firms
D It requires a high level of technical expertise to price products using this method
Trang 1879 To what amount does a company set a price equal if it uses a cost-plus approach to pricing?
A Total costs incurred
B Variable product costs plus a markup for profit
C Estimated total costs plus a markup for profit
D Total variable costs plus a share of the fixed costs
80 Sky Blue Plans provides financial planning for senior citizens The costs of preparing 800
financial plans in the prior year were:
it agrees to prepare plans for the 150 citizens of MooseHaven?
A Profit will increase by $1,500
B Profit will decrease by $45,375
C Profit will increase by $132,000
D Profit will decrease by $1,500
81 Which of the following is not a valid criticism of cost-plus pricing?
A It is difficult to determine the appropriate markup
B The method depends on technical expertise in determining a cost
C The firm’s demand curve is ignored in setting the price and quantity
D The method is inherently circular for manufacturing firms
82 Garden Corporation uses cost-plus pricing with a 30% mark-up The company is currently selling
12,000 units at $21.45 per unit Each unit has a variable cost of $11.50 In addition, the company incurs $60,000 in fixed costs annually If demand falls to 10,000 units, how much will the
company have to charge per unit in order to earn the same annual profit?
83 SawTown Tools uses cost-plus pricing with a 30% mark-up The company is currently selling
80,000 units at $65 per unit Each unit has a variable cost of $47 In addition, the company incurs
$240,000 in fixed costs annually If demand falls to 40,000 units and the company wants to continue to charge the same price per unit, what markup percentage is the company using?
Trang 1984 Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity The
company is currently selling 40,000 units at $19.60 per unit Each unit has a variable cost of $9
In addition, the company incurs $200,000 in fixed costs annually If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge?
85 Ragtown Grill uses cost-plus pricing with a 40% mark-up The company is currently selling
20,000 units annually, but has a capacity of 30,000 units Each unit has a variable cost of $15 In addition, the company incurs $60,000 in fixed costs annually For how much is the company selling each unit?
86 Segundo Office Tech uses cost-plus pricing and produces 100,000 calculators at a total cost of
$3.5 million Total fixed costs are $1.5 million If the company increases production by 20% and uses a 30% markup, how much will the price per unit be?
87 DT Company uses cost-plus pricing and has $30 per unit in variable costs and $800,000 per year
in fixed costs Demand is estimated to be 200,000 units annually What is the price if a markup of 30% on total cost is used to determine the price?
88 A company uses cost-plus pricing and has a total cost of $40.00 per unit at a volume of 120,000
units The variable cost per unit is $25.00 What will the price be if the company expects a volume of 110,000 units and uses a markup of 50%?
89 A company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of
40,000 units If the company uses cost-plus pricing, which of the following should the company use to determine the price?
A The company should use a unit cost of $8.70 per unit only at a volume of 40,000 units
B The company should use a unit cost of $8.70 at any volume level
C The company should use a unit cost of $8.70 at any volume within the relevant range
D The company should use a unit cost of $6.50 per unit only at a volume of 40,000 units
Trang 2090 A company has $8.00 per unit in variable costs and $4.00 per unit in fixed costs at a volume of
50,000 units If the company marks up total cost by 60%, what price should be charged if 60,000 units are expected to be sold?
91 Harp Widgets determined each deluxe widget it produces has a unit variable cost of $15.00, with
total fixed costs of $600,000 for the period Harp expects to sell 60,000 deluxe widgets and has applied a markup percentage of 35% What contribution margin will Harp earn from the sale of each deluxe widget?
92 Magic Fun has total fixed costs of $4,000,000 and total variable cost of $2,000,000 during a
month when it sold 200,000 units What price will Magic Fun charge if it uses cost-plus pricing and a markup of 20%?
93 Cain Manufacturing produces 40,000 clocks at a total cost of $908,000 Total fixed costs are
$408,000 If Cain increases production by 20% and uses a 50% markup, how much will the selling price per unit be?
94 A manufacturing company produces and sells 50,000 units of a single product Total product costs
are $8 per unit If total sales are $550,000, what markup percentage is the company using?
95 A manufacturing company produces and sells 40,000 buckets At this level of activity, variable
costs total $80,000 and fixed costs total $120,000 If each bucket is sold for $8, what markup percentage is the company using?
Trang 2196 The chief engineer at Wilson Electronics has proposed the production of a digipad to be sold at a
30 percent markup on full cost Management estimates that the fixed costs per year will be
$150,000 and the variable cost of the digipad will be $28 per unit If Wilson sells 30,000
digipads, what is the full cost of each unit?
97 The chief engineer at Wilson Electronics has proposed the production of a digipad to be sold at a
30 percent markup Management estimates that the fixed costs per year will be $150,000 and the variable cost of the digipad will be $28 per unit If Wilson sells 30,000 digipads, how much is the selling price of each digipad?
98 The target costing process for a new product
A starts with the features that customers want and the price customers are willing to pay
B is applied after the product has been designed
C focuses on creating products that include all possible product features to broaden the
company’s market share
D adds a markup percentage for profit once the price of the product has been determined
99 Which of the following lists the steps in the target costing process in the proper order?
A Analyze customer needs and wants, determine the desired profit, find the target cost, and
design the product
B Design the product, analyze customer needs and wants, determine the desired profit, and
find the target cost
C Analyze customer needs and wants, find the target cost, design the product, and
determine the desired profit
D Analyze customer needs and wants, determine the desired profit, design the product, and
find the target cost
100 What is the basic premise of target costing?
A Products should be designed to meet customer needs at a price customers are willing to
pay that allows the company to make a reasonable profit
B Products should be designed at the least cost possible to enable the lowest price in the
market
C Products should be designed based on features that competitors’ products include to
enhance the company’s ability to compete more effectively
D The price with the highest profit should always be selected
101 In which stage are most of the manufacturing costs for a product determined?