Deck 15: Target Costing and Cost Analysis for Pricing Decisions

Question 1

The curve that shows the change in total cost that accompanies a change in quantity produced and sold is called the:

A)marginal revenue curve.
B)marginal cost curve.
C)profit curve.
D)average revenue curve.
E)revenue curvE.

Answer 1

B

Question 2

The curve that shows the relationship between the sales price and quantity sold is called the:

A)marginal revenue curve.
B)average cost curve.
C)profit curve.
D)demand curve.
E)revenue curvE.

Answer 2

D

Question 3

Under which of the following condition(s)are prices said to be elastic?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Answer 3

E

Question 4

The revenue curve shows the relationship between the sales price and quantity sold.

Question 5

On a graph where the horizontal axis represents quantity sold and the vertical axis represents selling price,the basic demand curve in a competitive market can be graphed:

A)as a horizontal line.
B)as a vertical line.
C)as a downward sloping line to the right.
D)as an upward sloping line to the right.
E)in the same manner as the total revenue curvE.

Question 6

Prices are said to be inelastic under which of the following conditions?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 7

Which of the following is not a major influence on pricing decisions?

A)Planning and control policies of the firm.
B)Customer demand.
C)Costs.
D)Competitors.
E)Political,legal,and image-related issues.

Question 8

The curve that shows the change in total revenue that accompanies a change in quantity sold is called the:

A)marginal revenue curve.
B)average cost curve.
C)profit curve.
D)demand curve.
E)revenue curvE.

Question 9

If a company has excess capacity,a sensible bidding strategy is to base the bid on the incremental costs incurred because the job will contribute toward the company's profit.

Question 10

From an economic perspective,a company's profit-maximizing quantity is found where:

A)the total cost curve intersects with the marginal cost curve.
B)the total revenue curve intersects with the average revenue curve.
C)the marginal revenue curve intersects with the demand curve.
D)the marginal revenue curve intersects with the marginal cost curve.
E)the marginal cost curve intersects with the demand curvE.

Question 11

Penetration pricing is a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share.

Question 12

Which of the following choices correctly denotes factors that can influence a company's pricing practices for goods and services?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 13

Consider the following statements about pricing:
I)Prices are often determined by the market,subject to the constraint that costs must be covered in the long run.
II)Prices are often based on costs,subject to the constraint that customers and competitors will exert an influence.
III)A balance of market forces and cost is important when making pricing decisions.
Which of the above statements is (are)true?

A)I only.
B)II only.
C)I and III.
D)II and III.
E)I,II,and III.

Question 14

If a company uses a cost-plus approach to pricing,it will find that there are several different definitions of cost and the higher the cost,the higher the markup percentage.

Question 15

Melborne Corporation manufactures a single product that has a cost of $350.The company uses a 70% markup on cost to arrive at a selling price of $595,which results in a price that virtually always exceeds that of the market leaders.If Mohawk changes to the approach known as target costing,the company will first undertake a thorough study of competitors' prices.

Question 16

The curve that shows the relationship between the total sales revenue and quantity sold is called the:

A)marginal revenue curve.
B)average cost curve.
C)profit curve.
D)demand curve.
E)revenue curvE.

Question 17

Which of the following can influence a company's pricing decisions?

A)Manufacturing costs.
B)Competitors.
C)Customer demand.
D)Pricing laws.
E)All of thesE.

Question 18

If the volume sold reacts strongly to changes in price,demand:

A)has no elasticity.
B)has negative elasticity.
C)is inelastiC.
D)is elastic.
E)is unrealistic.

Question 19

Consider the following statements regarding the economic pricing model:
I)The economic model is limited in use because a firm's demand curve is difficult to determine.
II)The marginal revenue and marginal cost model is valid for all forms of market organization (perfect competition,oligopoly,and so forth).
III)Cost accounting systems are not designed to measure the marginal changes in cost incurred as production and sales increase.
Which of the above statements is (are)true?

A)I only.
B)III only.
C)I and III.
D)II and III.
E)I,II,and III.

Question 20

Which of the following statements regarding price elasticity is false?

A)The concept of price elasticity is an extension of the economic pricing model.
B)Demand is elastic if a price change has a large negative impact on sales volume.
C)Demand is elastic if price changes have no impact on sales volume.
D)Measuring price elasticity is an important objective of market research.
E)Demand is relatively inelastic if price changes have little impact on sales quantity.

Question 21

The following data pertain to Lomax Enterprises:
What price will the company charge if the firm uses cost-plus pricing based on absorption manufacturing cost and a markup percentage of 110%?

A)$84.
B)$147.
C)$210.
D)$231.
E)Some other amount.

Question 22

The following costs relate to Southside Company: Variable manufacturing cost,$30;variable selling and administrative cost,$8;applied fixed manufacturing overhead,$15;and allocated fixed selling and administrative cost,$4.If Southside uses absorption manufacturing-cost pricing formulas,the company's markup percentage would be computed on the basis of:

A)$30.
B)$38.
C)$45.
D)$57.
E)some other amount.

Question 23

Patterson and Clay Companies both use cost-plus pricing formulas and arrived at a selling price of $1,000 for the same product.Patterson uses absorption manufacturing cost as the basis for computing its dollar markup whereas Clay uses total cost.Which of the following choices correctly denotes the company that would have (1)the higher cost basis for deriving its dollar markup and (2)the higher markup percentage?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 24

The following data pertain to Lemon Enterprises:
What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 110%?

A)$84.
B)$147.
C)$210.
D)$231.
E)Some other amount.

Question 25

The following data pertain to Quincey Enterprises:
What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 60%?

A)$63.
B)$168.
C)$175.
D)$280.
E)Some other amount.

Question 26

Heathrow employs cost-plus pricing formulas to derive selling prices for its various products.If the formulas are all used correctly,which of the following cost bases will result in the highest selling price?

A)Variable manufacturing cost.
B)Absorption manufacturing cost.
C)Total variable cost.
D)Total cost.
E)None of these because if the formulas are applied correctly,all should result in the same selling price through the use of varying markups.

Question 27

When determining the markup to be used in a cost-plus pricing formula,many companies base the markup on a target:

A)return on investment.
B)sales margin.
C)capital turnover.
D)earnings per share.
E)debt-to-equity ratio.

Question 28

Consider the following statements about why prices are often based on product costs:
I)Companies sell many products and services,and cost-based approaches provide a simple and direct pricing method.
II)The cost of a product or service provides a lower limit or floor,below which price should not be set in the long run.
III)Determining a company's demand and marginal revenue curves is difficult,costly,and time consuming.
Which of the above statements is (are)true?

A)I only.
B)III only.
C)I and III.
D)II and III.
E)I,II,and III.

Question 29

The following costs relate to Southern Company: Variable manufacturing cost,$30;variable selling and administrative cost,$8;applied fixed manufacturing overhead,$15;and allocated fixed selling and administrative cost,$4.If Southern uses total-cost pricing formulas,the company's markup percentage would be computed on the basis of:

A)$30.
B)$38.
C)$45.
D)$57.
E)some other amount.

Question 30

The difference between absorption manufacturing cost and total cost with respect to product pricing is caused by:

A)variable manufacturing cost.
B)applied fixed manufacturing cost.
C)variable selling and administrative cost.
D)allocated fixed selling and administrative cost.
E)choices "C" and "D" abovE.

Question 31

What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 220%?

A)$396.00
B)$495.00
C)$576.00
D)$643.50
E)Some other amount.

Question 32

Which of the following formulas represents the markup percentage on total cost?

A)Target profit/ annual volume.
B)Target profit / (annual volume * total cost per unit).
C)(Annual volume * total cost per unit)/ target profit.
D)Target profit / variable cost.
E)(Target profit * total cost per unit)/ annual volumE.

Question 33

In a typical business,the firm's overall demand would be influenced by interactions of pricing policies and:

A)the company's reputation.
B)the quality of goods and services offered.
C)competing goods and services.
D)advertising and promotional campaigns.
E)all of these factors.

Question 34

In a cost-plus approach to pricing:

A)there is an inverse relationship between the magnitude of the cost basis and the markup percentage.
B)there is a direct relationship between the magnitude of the cost basis and the markup percentage.
C)the cost basis used must include fixed manufacturing overhead.
D)"plus" refers to the addition of allocated administrative overhead to the direct manufacturing costs.
E)"plus" refers to the addition of allocated fixed manufacturing overhead to the variable manufacturing costs.

Question 35

Which of the following represents the cost-plus pricing formula?

A)Price = cost + (markup percentage * cost).
B)Price = cost + markup percentage.
C)Price = markup percentage *cost.
D)Price = cost/ markup percentage.
E)Price = cost + (markup percentage + cost).

Question 36

If a company uses a cost-plus approach to pricing,it will find:

A)there are several different definitions of cost and the higher the cost,the higher the markup percentage.
B)there are several different definitions of cost and the higher the cost,the lower the markup percentage.
C)there is one definition of cost,and there is no relationship between cost and the markup percentage used.
D)there is one definition of cost,and there is no markup percentage with the cost-plus approach.
E)it is in violation of generally accepted accounting principles (GAAP).

Question 37

Consider the following statements about absorption-cost pricing formulas:
I)Absorption-cost formulas consider a company's fixed manufacturing costs when establishing a selling price.
II)Absorption-cost formulas are often justified on the grounds that a company must cover all of its costs in the long run.
III)Absorption-cost data are the type that managers need when facing certain pricing decisions,such as whether or not to accept a special order.
Which of the above statements is (are)true?

A)II only.
B)I and II.
C)I and III.
D)II and III.
E)I,II,and III.

Question 38

What price will the company charge if the firm uses cost-plus pricing based on total variable cost and a markup percentage of 160%?

A)$150.
B)$384.
C)$390.
D)$624.
E)Some other amount.

Question 39

What price will the company charge if the firm uses cost-plus pricing based on absorption cost and a markup percentage of 120%?

A)$420.
B)$459.
C)$594.
D)$672.
E)Some other amount.

Question 40

Lassie Company uses cost-plus pricing and has calculated total variable manufacturing cost,total absorption manufacturing cost,and total cost for one of its products.Which of these costs would be the smallest?

A)Total variable manufacturing cost.
B)Total absorption manufacturing cost.
C)Total cost.
D)There is no difference between choices "B" and "C."
E)More information is needed to correctly answer the question.

Question 41

Company A uses a pricing approach where the initial price for a product is set high and then lowered,and Company B uses an approach where initial prices are set low in an effort to gain market share.What terms best describe these practices?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 42

What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 40%?

A)$462.
B)$513.
C)$567.
D)$594.
E)Some other amount.

Question 43

The four tasks that follow take place with the concept known as target costing:
1-Value engineering.
2-Establish a target selling price.
3-Establish a target cost.
4-Establish a target profit.
Which of the following choices depicts the correct sequence of these tasks?

A)1,3,4,2.
B)3,1,4,2.
C)2,4,3,1.
D)2,3,1,4.
E)Some other sequence not listed abovE.

Question 44

Madison produces bicycles in a highly competitive market.During the past year,the company has added a 30% markup on the $250 manufacturing cost for one of its most popular models.A new competitor manufactures a similar model,has established a $300 selling price,and is seriously eroding Madison's market share.Management now desires to use a target-costing approach to remain competitive and is willing to accept a 20% return on sales.If target costing is used,which of the following choices correctly denotes (1)the price that Madison will charge and (2)company's target cost?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 45

Quantum Enterprises currently sells a piece of luggage for $200.An aggressive competitor has announced plans for a similar product that will be sold for $170.Quantum's marketing department believes that if the price is dropped to meet competition,unit sales will increase by 10%.The current cost to manufacture and distribute the luggage is $130,and Quantum has a profit goal of 30% of sales.If Quantum meets competitive selling prices,what must happen to the company's manufacturing and distribution cost?

A)Nothing,because the costs are within defined ranges and can actually increase by $10.
B)Nothing,because the costs are within defined ranges and can actually increase by $23.
C)Costs must decrease by $11.
D)Costs must decrease by $39.
E)None of thesE.

Question 46

Franco Electronics currently sells a camera for $240.An aggressive competitor has announced plans for a similar product that will be sold for $205.Franco's marketing department believes that if the price is dropped to meet competition,unit sales will increase by 10%.The current cost to manufacture and distribute the camera is $175,and Franco has a profit goal of 20% of sales.If Franco meets competitive selling prices,what is the company's target cost?

A)$41.
B)$48.
C)$164.
D)$175.
E)$192.

Question 47

Which of the following is (are)a key feature of target costing?

A)The use of cross-functional teams.
B)A focus on the customer.
C)A focus on product design.
D)A focus on process design.
E)All of thesE.

Question 48

Which of the following features is typically absent in target costing?

A)An approach that begins with the determination of a product or service's target cost.
B)An approach that begins with the determination of a product or service's target selling price.
C)A focus on the customer.
D)A focus on product design.
E)A focus on process design.

Question 49

Montana uses a 140% markup on total cost and recently computed a selling price of $1,560 for a particular product.On the basis of this information,the product's total cost is:

A)$650.00.
B)$910.00.
C)$1,114.29.
D)$2,184.00.
E)some other amount.

Question 50

Belcher Company,which desires to enter the market with a new product,will perform the following tasks:
1-Design and engineer the product.
2-Determine the product's cost.
3-Determine the desired profit margin.
4-Determine the suggested selling price.
If Belcher uses target costing,which task would the company perform first?

A)1.
B)2.
C)3.
D)4.
E)None of thesE.

Question 51

Lyman currently sells an industrial mixer for $900 that market leaders sell for $820.The current costs to manufacture and distribute the mixer total $645,and the company has a profit goal of 30% of sales.Lyman uses target costing in its efforts to be a leader in the marketplace.On the basis of this information,(1)what should Lyman consider to be the initial driver of the target-costing process and (2)what amount of cost reduction is needed for the company to achieve its goals?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 52

If Dexter uses cost-plus pricing based on absorption cost,the markup percentage the company must use would be:

A)15.72%.
B)21.64%.
C)29.56%.
D)58.93%.
E)some other amount.

Question 53

What is price skimming?

A)The initial price is set low and kept constant.
B)The initial price is set low and then raised.
C)The initial price is set high and later lowered.
D)The initial price is set high and kept constant.
E)The initial price is set high and then raised.

Question 54

Mojave Corporation manufactures a single product that has a cost of $350.The company uses a 70% markup on cost to arrive at a selling price of $595,which results in a price that virtually always exceeds that of the market leaders.If Mojave changes to the approach known as target costing,the company will first:

A)reduce its 70% markup rate.
B)trim its $350 cost.
C)attempt to re-engineer its product.
D)undertake a thorough study of competitors' prices.
E)change the markup so that it is based on sales rather than based on cost.

Question 55

Algeria Transport Company has average invested capital of $800,000 and a target return on investment of 15%.The total cost per unit is $20 based on a volume level of 25,000 units.Albany's markup percentage on total cost is:

A)9.375%.
B)24.0%.
C)47.5%.
D)62.5%.
E)some other amount.

Question 56

Which of the following terms describes a pricing strategy in which a new product's initial price is set high and then eventually lowered to appeal to a broader range of customers?

A)Penetration pricing.
B)Price skimming.
C)Customer pricing.
D)Designed pricing.
E)Market-share pricing.

Question 57

Which of the following terms describes a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share?

A)Penetration pricing.
B)Price skimming.
C)Customer pricing.
D)Designed pricing.
E)Market-share pricing.

Question 58

If the target profit is $60,000 for a volume of 480 units,fixed costs are $168,000,and the variable cost per unit is $450,then the markup percentage on variable cost would be:

A)104.56%.
B)105.56%.
C)106.00%.
D)106.45%.
E)some other amount.

Question 59

What price must Dexter charge if the company uses cost-plus pricing based on total variable cost?

A)$712.
B)$900.
C)$1,030.
D)$1,192.
E)Some other amount.

Question 60

What price must Dexter charge if the company uses cost-plus pricing based on total cost?

A)$868.
B)$900.
C)$1,000.
D)$1,192.
E)Some other amount.

Question 61

Assuming there is no profit markup on material cost,the amount to be added to each dollar of material cost to obtain the total material charge is:

A)$0.06.
B)$0.08.
C)$0.10.
D)$0.13.
E)some other amount.

Question 62

Consider the following statements about pricing and the law:
I)American antitrust laws restrict certain types of pricing behavior.
II)The term "price discrimination" involves charging different prices to different customers for the same goods and services.
III)Charging different prices to different customers for the same goods is permissible if price differences are based on cost differences of producing and/or selling the good.
Which of the above statements is (are)true?

A)I only.
B)II only.
C)I and II.
D)II and III.
E)I,II,and III.

Question 63

Which of the following cost-reduction and process-improvement techniques is often used in conjunction with target costing?

A)Linear programming.
B)Deterministic simulations.
C)Cost allocation.
D)Budgetary padding.
E)Value engineering.

Question 64

With the time and material pricing method,the hourly time charge is typically set equal to:

A)the hourly labor cost.
B)the hourly labor cost + annual overhead.
C)the hourly labor cost + an hourly overhead charge + an hourly charge to cover the profit margin.
D)annual overhead + an hourly charge to cover the profit margin.
E)the hourly labor cost + an hourly charge to cover the profit margin.

Question 65

Which of the following management tools is a key component of target costing?

A)Management simulation.
B)Linear programming.
C)Value engineering.
D)Goal programming.
E)Performance reporting systems.

Question 66

If a company has excess capacity,which of the following is a sensible bidding strategy?

A)Set a price to cover all costs.
B)Base the bid on the incremental costs incurred because the job will contribute toward the company's profit.
C)Base the bid solely on direct labor hours.
D)Downplay the potential impact of competitors.
E)Allocate common fixed costs to individual jobs before preparing the bid.

Question 67

Which of the following pricing practices is illegal?

A)Penetration pricing.
B)Price skimming.
C)Predatory pricing.
D)Cost-based pricing.
E)Market-share pricing.

Question 68

If a particular job takes 20 hours of labor and $800 of materials,the price charged for the job is:

A)$1,380.
B)$1,444.
C)$1,530.
D)$1,594.
E)some other amount.

Question 69

The following data pertain to Polar Company's commercial snow thrower:
A.Variable manufacturing cost.
B.Absorption manufacturing cost.
C.Total cost.
D.Total variable cost.

Question 70

Overland Shipping Company is involved in a competitive bidding situation.Variable costs related to the project total $520,000,and allocated fixed cost is $95,000.Which of the following cost figures should be used in setting a minimum bid price if Overland has (1)excess capacity and (2)no excess capacity?

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 71

Green Park Recreation is exploring a competitive bidding situation.The firm,which currently has no excess capacity,estimates the following costs for a project to be performed for the Morningside School District:
Which of the following cost figures would be used in determining a minimum price if Green Park decides to bid on the Morningside project?

A)$131,000.
B)$350,000.
C)$441,000.
D)$481,000.
E)Some other amount.

Question 72

Superior Company is involved in a competitive bidding situation.The following costs are anticipated for a project to be bid with the City of Southlake:
Which of the following cost figures should be used in setting a minimum bid price if Superior has excess capacity?

A)$530,000.
B)$950,000.
C)$1,370,000.
D)$1,480,000.
E)Some other amount.

Question 73

Goldman Corporation uses time and material pricing.The repair department expects 20,000 direct labor hours of activity and has the following selected data:
The company's time charge per hour is:

A)$11.
B)$24.
C)$40.
D)$64.
E)$75.

Question 74

Under the time and material pricing method,a customer would be charged for:

A)Choice A
B)Choice B
C)Choice C
D)Choice D
E)Choice E

Question 75

Consider the following statements about competitive bidding:
I)The higher the price that a company bids,the greater the profit if the firm gets the contract.
II)Bidding a higher price increases the probability of obtaining a contract.
III)A company that bids low to ensure acceptance of a contract may actually wind up bidding too low to make an acceptable profit.
Which of the above statements is (are)true?

A)I only.
B)II only.
C)III only.
D)I and III.
E)I,II,and III.

Question 76

Neptune Pool Company is involved in a number of competitive bidding situations.The following costs are anticipated for a project to be bid for Trimex Manufacturing:
Which of these costs would be treated differently if Neptune had either excess capacity or no excess capacity?

A)Direct materials used,$680,000.
B)Direct labor,$2,450,000.
C)Allocated variable overhead,$570,000.
D)Allocated fixed cost,$230,000.
E)None of these,as all four costs are considered in both situations.

Question 77

If a firm has no excess capacity,which of the following is a sensible bidding strategy?

A)Set a price to cover all costs.
B)Base the bid on the incremental costs incurred because the job will contribute toward the company's profit.
C)Base the bid solely on direct labor hours.
D)Downplay the potential impact of competitors.
E)Try to minimize the company's tax liability.

Question 78

The time charge per hour is:

A)$19.50.
B)$27.00.
C)$29.00.
D)$36.50.
E)some other amount.

Question 79

Consider the following statements about time and material pricing:
I)The time charge includes the direct cost of an employee's time.
II)The time charge includes an amount to cover various overhead costs.
III)The material charge includes a handling charge for material.
Which of the above statements is (are)true?

A)I only.
B)I and II.
C)I and III.
D)II and III.
E)I,II,and III.

Question 80

Consider the following statements about activity-based costing and its use in pricing:
I)A company that uses target costing generally would have little need for activity-based costing.
II)Companies that use cost-plus pricing methods would have little need for activity-based costing.
III)The use of activity-based costing will often lead to better pricing decisions by managers.
Which of the above statements is (are)true?

A)I only.
B)II only.
C)III only.
D)I and III.
E)I,II,and III.