Deck 9: Pricing and Customer Profitability

Question 1

Answer the following questions using the information below:
Gold Coast Freshair (GCF)manufactures single room-sized air conditioners.The cost accounting system estimates manufacturing costs to be $120 per air conditioner,consisting of 75% variable costs and 25% fixed costs.The company has surplus capacity available.It is GCF's policy to add a 40% mark-up 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.GCF is invited to submit a bid to the motel chain.What per unit price will GCF MOST likely bid for this special order of 50 units?

A)$140.00 per unit
B)$120.00 per unit
C)$168.00 per unit
D)$71.25 per unit

Answer 1

C

Question 2

Answer the following questions using the information below:
Rockhampton Manufacturing is approached by a Brazilian customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. Rockhampton Manufacturing has a policy of adding a 10% mark-up to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:
$\begin{array}{lr}\text {Variable costs:}\\\text { Direct materials } & \$ 30 \\\text { Direct labour } & 10 \\\text { Manufacturing overhead } & 15 \\\text { Marketing costs } & 5\\\text { Fixed costs: }\\\quad \text { Manufacturing overhead } & 100 \\\quad \text { Marketing costs } & \underline{20} \\\text { Total costs } & 180 \\\text { Mark-up }(10 \%) & 18 \\\text { Estimated selling price } & \underline{ \$ 198}\end{array}$


-Before accepting this one-time-only special order,Geelong Generators wants to know how much profit would be made on the order.

A)$0
B)$1000
C)Loss of $75
D)$215

Answer 2

A

Question 3

Answer the following questions using the information below:
Alice Water Coolers is approached by Mrs Hu Qi,a new customer,to fulfil a large one-time-only special order for a product similar to one offered to regular customers.Alice Water Coolers has excess capacity.The following per unit data apply for sales to regular customers:
$$\begin{array} { l r } \text { Direct materials } & \$ 250 \\\text { Direct manufacturing labour } & 80 \\\text { Variable manufacturing support } & 50 \\\text { Fixed manufacturing support } & \underline { 100 } \\{ \text { Total manufacturing costs } } & 480 \\\text { Mark-up (30\%) } & \underline { 144 } \\\text { Estimated selling price } & \underline {\$ 624}\end{array}$$

-Before accepting this one-time-only special order,Alice Water Coolers should consider the impact on:

A)long-term customers.
B)competitors.
C)current plant capacity.
D)All of these answers are correct.

Answer 3

D

Question 4

Answer the following questions using the information below:
Alice Water Coolers is approached by Mrs Hu Qi,a new customer,to fulfil a large one-time-only special order for a product similar to one offered to regular customers.Alice Water Coolers has excess capacity.The following per unit data apply for sales to regular customers:
$$\begin{array} { l r } \text { Direct materials } & \$ 250 \\\text { Direct manufacturing labour } & 80 \\\text { Variable manufacturing support } & 50 \\\text { Fixed manufacturing support } & \underline { 100 } \\{ \text { Total manufacturing costs } } & 480 \\\text { Mark-up (30\%) } & \underline { 144 } \\\text { Estimated selling price } & \underline {\$ 624}\end{array}$$

-If Mrs Hu Qi wanted a long-term commitment for supplying this product,what price would MOST likely be quoted to her?

A)$330
B)$380
C)$480
D)$624

Question 5

A price-bidding decision for a one-time-only special order includes an analysis of all:

A)manufacturing costs.
B)fixed manufacturing costs.
C)direct and indirect variable costs of each function in the value chain.
D)cost drivers related to the product.

Question 6

Answer the following questions using the information below:
Alice Water Coolers is approached by Mrs Hu Qi,a new customer,to fulfil a large one-time-only special order for a product similar to one offered to regular customers.Alice Water Coolers has excess capacity.The following per unit data apply for sales to regular customers:
$$\begin{array} { l r } \text { Direct materials } & \$ 250 \\\text { Direct manufacturing labour } & 80 \\\text { Variable manufacturing support } & 50 \\\text { Fixed manufacturing support } & \underline { 100 } \\{ \text { Total manufacturing costs } } & 480 \\\text { Mark-up (30\%) } & \underline { 144 } \\\text { Estimated selling price } & \underline {\$ 624}\end{array}$$

-For Alice Water Coolers,what is the minimum acceptable price of this one-time-only special order?

A)$380
B)$330
C)$624
D)$480

Question 7

Long-run pricing decisions:

A)and short-run pricing decisions generally have the same relevant costs.
B)have a time horizon of less than one year.
C)include adjusting product mix in a competitive environment.
D)use prices that include a reasonable return on investment.

Question 8

Answer the following questions using the information below:
Rockhampton Manufacturing is approached by a Brazilian customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. Rockhampton Manufacturing has a policy of adding a 10% mark-up to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:
$\begin{array}{lr}\text {Variable costs:}\\\text { Direct materials } & \$ 30 \\\text { Direct labour } & 10 \\\text { Manufacturing overhead } & 15 \\\text { Marketing costs } & 5\\\text { Fixed costs: }\\\quad \text { Manufacturing overhead } & 100 \\\quad \text { Marketing costs } & \underline{20} \\\text { Total costs } & 180 \\\text { Mark-up }(10 \%) & 18 \\\text { Estimated selling price } & \underline{ \$ 198}\end{array}$


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

A)$1075
B)$1000
C)$1290
D)$900

Question 9

Answer the following questions using the information below:
Rockhampton Manufacturing is approached by a Brazilian customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. Rockhampton Manufacturing has a policy of adding a 10% mark-up to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:
$\begin{array}{lr}\text {Variable costs:}\\\text { Direct materials } & \$ 30 \\\text { Direct labour } & 10 \\\text { Manufacturing overhead } & 15 \\\text { Marketing costs } & 5\\\text { Fixed costs: }\\\quad \text { Manufacturing overhead } & 100 \\\quad \text { Marketing costs } & \underline{20} \\\text { Total costs } & 180 \\\text { Mark-up }(10 \%) & 18 \\\text { Estimated selling price } & \underline{ \$ 198}\end{array}$


-If the Brazilian customer wanted a long-term commitment for supplying this product,what price would MOST likely be quoted?

A)$180.00
B)$217.80
C)$198.00
D)$66.00

Question 10

Companies must ALWAYS examine their pricing:

A)based on the supply of the product.
B)through the eyes of their competitors.
C)based on the cost of producing the product.
D)through the eyes of their customers.

Question 11

Answer the following questions using the information below:
Acacia Furniture manufactures rustic furniture.The cost accounting system estimates manufacturing costs to be $140 per table,consisting of 60% variable costs and 40% fixed costs.The company has surplus capacity available.It is Acacia Furniture's policy to add a 50% mark-up to full costs.
A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style.Acacia Furniture is invited to submit a bid to the hotel chain.What per unit price will Acacia Furniture MOST likely bid on this long-term order?

A)$108 per unit
B)$72 per unit
C)$210 per unit
D)$140 per unit

Question 12

Companies should ONLY produce and sell units as long as:

A)the revenue from an additional unit exceeds the cost of producing it.
B)there is customer demand for the product.
C)there is a generous supply of low-cost direct materials.
D)the competition allows it.

Question 13

For long-run pricing decisions,what is the advantage of using stable prices?

A)Helps to build buyer-seller relationships
B)Minimises the need to frequently monitor competitors' prices
C)Reduces the need to change cost structures frequently
D)Reduces competition

Question 14

Answer the following questions using the information below:
Rockhampton Manufacturing is approached by a Brazilian customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. Rockhampton Manufacturing has a policy of adding a 10% mark-up to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:
$\begin{array}{lr}\text {Variable costs:}\\\text { Direct materials } & \$ 30 \\\text { Direct labour } & 10 \\\text { Manufacturing overhead } & 15 \\\text { Marketing costs } & 5\\\text { Fixed costs: }\\\quad \text { Manufacturing overhead } & 100 \\\quad \text { Marketing costs } & \underline{20} \\\text { Total costs } & 180 \\\text { Mark-up }(10 \%) & 18 \\\text { Estimated selling price } & \underline{ \$ 198}\end{array}$


-What is the full cost of the product per unit?

A)$66
B)$180
C)$60
D)$198

Question 15

Answer the following questions using the information below:
Rockhampton Manufacturing is approached by a Brazilian customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. Rockhampton Manufacturing has a policy of adding a 10% mark-up to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:
$\begin{array}{lr}\text {Variable costs:}\\\text { Direct materials } & \$ 30 \\\text { Direct labour } & 10 \\\text { Manufacturing overhead } & 15 \\\text { Marketing costs } & 5\\\text { Fixed costs: }\\\quad \text { Manufacturing overhead } & 100 \\\quad \text { Marketing costs } & \underline{20} \\\text { Total costs } & 180 \\\text { Mark-up }(10 \%) & 18 \\\text { Estimated selling price } & \underline{ \$ 198}\end{array}$


-If Stephen Fleming wanted a long-term commitment for supplying this product,what price would MOST likely be quoted to him?

A)$1400
B)$1000
C)$1290
D)$1075

Question 16

The cost of producing a product:

A)in highly competitive markets controls pricing.
B)is an important influence on pricing.
C)affects the willingness of a company to supply a product.
D)for pricing decisions includes manufacturing costs,but not product design costs.

Question 17

Answer the following questions using the information below:
Gold Coast Freshair (GCF)manufactures single room-sized air conditioners.The cost accounting system estimates manufacturing costs to be $120 per air conditioner,consisting of 75% variable costs and 25% fixed costs.The company has surplus capacity available.It is GCF's policy to add a 40% mark-up to full costs.
GCF is invited to bid on a one-time-only special order to supply 50 air conditioners.What is the lowest price GCF should bid on this special order?

A)$4750
B)$4500
C)$6175
D)$6250

Question 18

Answer the following questions using the information below:
Acacia Furniture manufactures rustic furniture.The cost accounting system estimates manufacturing costs to be $140 per table,consisting of 60% variable costs and 40% fixed costs.The company has surplus capacity available.It is Acacia Furniture's policy to add a 50% mark-up to full costs.
Acacia Furniture is invited to bid on a one-time-only special order to supply 250 rustic tables.What is the lowest price Acacia Furniture should bid on this special order?

A)$21 000
B)$7200
C)$14 400
D)$12 000

Question 19

In a competitive market with differentiated products like cameras,what is/are the key factor(s)affecting pricing decisions?

A)customer's willingness to pay
B)cost of producing and delivering the product
C)the price charged for alternative products
D)All of these answers are correct.

Question 20

Which of the following factors should NOT be considered when pricing a special order?

A)The incremental cost of one unit of product
B)Revenues that will be lost on existing sales if prices are lowered
C)Stable pricing to earn the desired long-run return
D)The likely bids of competitors

Question 21

Organisation-sustaining costs should be allocated to:

A)evaluate distribution-channel managers.
B)determine the selling price that will cover all costs.
C)identify the most profitable customers.
D)motivate changes in customer behaviour.

Question 22

Which of the following is NOT allowed in Australia?

A)Discounting of prices
B)Competitive pricing
C)Price fixing
D)Price wars

Question 23

Answer the following questions using the information below:
Rockhampton Manufacturing is approached by a Brazilian customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. Rockhampton Manufacturing has a policy of adding a 10% mark-up to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:
$\begin{array}{lr}\text {Variable costs:}\\\text { Direct materials } & \$ 30 \\\text { Direct labour } & 10 \\\text { Manufacturing overhead } & 15 \\\text { Marketing costs } & 5\\\text { Fixed costs: }\\\quad \text { Manufacturing overhead } & 100 \\\quad \text { Marketing costs } & \underline{20} \\\text { Total costs } & 180 \\\text { Mark-up }(10 \%) & 18 \\\text { Estimated selling price } & \underline{ \$ 198}\end{array}$


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

A)$66
B)$40
C)$60
D)$55

Question 24

Profit margins are often set to earn a reasonable return on investment for short run pricing decisions,but not long-run pricing decisions.

Question 25

Businesses have complete freedom to set prices.

Question 26

Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-time-only special orders.

Question 27

'Dumping' and 'predatory' pricing are the same.

Question 28

A perfect market is characterised by many buyers and many sellers,a homogenous product,zero transaction costs and some other conditions.

Question 29

Companies must always examine pricing decisions through the eyes of their customers.

Question 30

Answer the following questions using the information below:
Rockhampton Manufacturing is approached by a Brazilian customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. Rockhampton Manufacturing has a policy of adding a 10% mark-up to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:
$\begin{array}{lr}\text {Variable costs:}\\\text { Direct materials } & \$ 30 \\\text { Direct labour } & 10 \\\text { Manufacturing overhead } & 15 \\\text { Marketing costs } & 5\\\text { Fixed costs: }\\\quad \text { Manufacturing overhead } & 100 \\\quad \text { Marketing costs } & \underline{20} \\\text { Total costs } & 180 \\\text { Mark-up }(10 \%) & 18 \\\text { Estimated selling price } & \underline{ \$ 198}\end{array}$


-A short-run pricing decision typically has a time horizon of less than:

A)one year.
B)two years.
C)five years.
D)None of these answers are correct.

Question 31

Price fixing is allowed in Australia.

Question 32

Full costs of a product are relevant for one-time-only special order pricing decisions.

Question 33

Answer the following questions using the information below:
Ozfone manufactures high-tech mobile phones.Ozfone has a policy of adding a 30% mark-up to full costs and currently has excess capacity.The following information pertains to the company's normal operations per month:
$$\begin{array} { l r l } \text { Output units } & 20000 \text { phones } \\\text { Machine-hours } & 8000 \text { hours } \\\text { Direct manufacturing labour-hours } & 5000 \text { hours } \\& \\\text { Direct materials per unit } & \$ 25 \\\text { Direct manufacturing labour per hour } & \$ 20 \\\text { Variable manufacturing overhead costs } & \$ 175000 \\\text { Fixed manufacturing overhead costs } & \$ 425000 \\\text { Product and process design costs } & \$ 400000 \\\text { Marketing and distribution costs } & \$ 475000\end{array}$$

-Ozfone is approached by an overseas customer to fulfil a one-time-only special order for 1000 units.All cost relationships remain the same except for a one-time set-up charge of $15 000.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)$92.50
B)$180.00
C)$53.75
D)$234.00

Question 34

In a one-time-only special order situation,if the price offered by the potential buyer is less than the absorption cost per unit,the producer should not accept the special offer.

Question 35

Answer the following questions using the information below:
Eucalyptus Products manufactures office desks.Eucalyptus Products has a policy of adding a 20% mark-up to full costs and currently has excess capacity.The following information pertains to the company's normal operations per month:
$$\begin{array} { l r l } \text { Output units } & 30000 & \text { tables } \\\text { Machine-hours } & 8000 \text { hours } \\\text { Direct manufacturing labour-hours } & 10000 \text { hours } \\& & \\\text { Direct materials per unit } & \$ 50 \\\text { Direct manufacturing labour per hour } & \$ 6 \\\text { Variable manufacturing overhead costs } & \$ 161250 \\\text { Fixed manufacturing overhead costs } & \$ 600000 \\\text { Product and process design costs } & \$ 450000 \\\text { Marketing and distribution costs } & \$ 562500\end{array}$$

-For long-run pricing of the office desks,what price will MOST likely be used by Eucalyptus?

A)$80.85
B)$67.38
C)$111.13
D)$133.35

Question 36

Answer the following questions using the information below:
Ozfone manufactures high-tech mobile phones.Ozfone has a policy of adding a 30% mark-up to full costs and currently has excess capacity.The following information pertains to the company's normal operations per month:
$$\begin{array} { l r l } \text { Output units } & 20000 \text { phones } \\\text { Machine-hours } & 8000 \text { hours } \\\text { Direct manufacturing labour-hours } & 5000 \text { hours } \\& \\\text { Direct materials per unit } & \$ 25 \\\text { Direct manufacturing labour per hour } & \$ 20 \\\text { Variable manufacturing overhead costs } & \$ 175000 \\\text { Fixed manufacturing overhead costs } & \$ 425000 \\\text { Product and process design costs } & \$ 400000 \\\text { Marketing and distribution costs } & \$ 475000\end{array}$$

-For long-run pricing of the mobile phones,what price will MOST likely be used by Ozfone?

A)$65.00
B)$92.50
C)$180.00
D)$134.88

Question 37

Predatory pricing is a type of price discrimination that:

A)deliberately sets prices very low,sometimes even below costs,to minimise competition.
B)allows prices to be cut to the level of variable costs.
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.

Question 38

Companies that produce high quality products do not have to pay attention to the actions of their competitors.

Question 39

In markets with little or no competition,the key factor affecting price is costs,not customers' willingness to pay or competitors.

Question 40

Answer the following questions using the information below:
Eucalyptus Products manufactures office desks.Eucalyptus Products has a policy of adding a 20% mark-up to full costs and currently has excess capacity.The following information pertains to the company's normal operations per month:
$$\begin{array} { l r l } \text { Output units } & 30000 & \text { tables } \\\text { Machine-hours } & 8000 \text { hours } \\\text { Direct manufacturing labour-hours } & 10000 \text { hours } \\& & \\\text { Direct materials per unit } & \$ 50 \\\text { Direct manufacturing labour per hour } & \$ 6 \\\text { Variable manufacturing overhead costs } & \$ 161250 \\\text { Fixed manufacturing overhead costs } & \$ 600000 \\\text { Product and process design costs } & \$ 450000 \\\text { Marketing and distribution costs } & \$ 562500\end{array}$$

-Eucalyptus Products is approached by an overseas customer to fulfil a one-time-only special order for 2000 units.All cost relationships remain the same except for a one-time set-up charge of $20 000.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)$67.38
B)$80.85
C)$111.13
D)$77.38

Question 41

WA Utility Company charges its high-usage commercial customers a lower rate per kilowatt-hour than other customers.This is an example of:

A)high-load pricing.
B)price discrimination.
C)peak-load pricing.
D)customer-preference pricing.

Question 42

Bluegum Incorporated manufactures coffee tables.The cost accounting system estimates manufacturing costs to be $100 per table,consisting of 70% variable costs and 30% fixed costs.The company has surplus capacity available.It is Bluegum's policy to add a 50% mark-up to full costs.
a.Bluegum Incorporated is invited to bid on an order to supply 100 coffee tables.What is the lowest price Bluegum 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 Bluegum style.Bluegum Incorporated is invited to submit a bid to the hotel chain.What is the lowest price per unit Bluegum should bid on this long-term order?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 43

Which of the following reflects price discrimination?

A)Charging different prices to different customers or clients for the same products or services
B)Charging different prices according to quantity amounts
C)Setting different prices for different products
D)Using variable costing for some products and full costing for other products when setting prices

Question 44

The Cronulla Sea Eagles are evaluating ticket prices for basketball games.Studies show that Friday and Saturday night games average more than twice the fans of games on other days.The following information pertains to the stadium's normal operations per season:
$$\begin{array} { l r l } \text { Average fans per game (all games) } & 2500 \text { fans } \\\text { Average fans per Friday and Saturday night games } & 3500 \text { fans } \\\text { Number of home games per season } & 30 \text { games } \\\text { Stadium capacity } & 3500 \text { seats } \\\text { Variable operating costs per operating hour } & \$ 5000 & \\\text { Marketing costs per season for basketball } & \$ 238750 & \\\text { Customer-service costs per season for basketball } & \$ 75000 &\end{array}$$
The stadium is open for five 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)$10.60
B)$171.45
C)$14.19
D)$6.40

Question 45

Answer the following questions using the information below:
LeBlanc Lighting manufactures table lamps and is considering raising the price by $15 a unit for the coming year.With a $15 price increase,demand is expected to fall by 2500 units.
$$\begin{array} { l r r } & \text { Current } & \text { Projected } \\ \text { Demand }& 20000 \text { urits } & 17500 \text { urits } \\\text { Selling price }& \$ 150 & \$ 165 \\\text { Variable costs per unit } & \$ 100 & \$ 100\end{array}$$


-'Peak-load pricing' is a form of price discrimination and is illegal.

Question 46

'Reverse engineering' involves disassembling and analysing competitors' products to determine product designs and materials and to become acquainted with the technologies that competitors use.

Question 47

Answer the following questions using the information below:
LeBlanc Lighting manufactures table lamps and is considering raising the price by $15 a unit for the coming year.With a $15 price increase,demand is expected to fall by 2500 units.
$$\begin{array} { l r r } & \text { Current } & \text { Projected } \\ \text { Demand }& 20000 \text { urits } & 17500 \text { urits } \\\text { Selling price }& \$ 150 & \$ 165 \\\text { Variable costs per unit } & \$ 100 & \$ 100\end{array}$$


-'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.

Question 48

Answer the following questions using the information below:
LeBlanc Lighting manufactures table lamps and is considering raising the price by $15 a unit for the coming year.With a $15 price increase,demand is expected to fall by 2500 units.
$$\begin{array} { l r r } & \text { Current } & \text { Projected } \\ \text { Demand }& 20000 \text { urits } & 17500 \text { urits } \\\text { Selling price }& \$ 150 & \$ 165 \\\text { Variable costs per unit } & \$ 100 & \$ 100\end{array}$$


-Would you recommend the $15 price increase?

A)No,because demand decreased.
B)Yes,because contribution margin per unit increases.
C)No,because the selling price increases.
D)Yes,because operating profit increases.

Question 49

Different categories of customers are willing to pay different prices for services depending on their circumstances.

Question 50

Sellers estimate a target price for a product or service that potential customers will be willing to pay based on their understanding of customers' perceived value of its outputs and how competitors will price competing products or services.

Question 51

Too high a price may:

A)indicate supply is too plentiful.
B)deter a customer from purchasing a product.
C)increase demand for the product.
D)decrease a competitor's market share.

Question 52

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

Question 53

Answer the following questions using the information below:
LeBlanc Lighting manufactures table lamps and is considering raising the price by $15 a unit for the coming year.With a $15 price increase,demand is expected to fall by 2500 units.
$$\begin{array} { l r r } & \text { Current } & \text { Projected } \\ \text { Demand }& 20000 \text { urits } & 17500 \text { urits } \\\text { Selling price }& \$ 150 & \$ 165 \\\text { Variable costs per unit } & \$ 100 & \$ 100\end{array}$$


-When demand is elastic,an increase in price will lead to an increase in profits.

Question 54

A hotel in Fiji experiences peak periods and slower times.How should prices be adjusted during peak periods? How should prices be adjusted during slow times? Why?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 55

Answer the following questions using the information below:
LeBlanc Lighting manufactures table lamps and is considering raising the price by $15 a unit for the coming year.With a $15 price increase,demand is expected to fall by 2500 units.
$$\begin{array} { l r r } & \text { Current } & \text { Projected } \\ \text { Demand }& 20000 \text { urits } & 17500 \text { urits } \\\text { Selling price }& \$ 150 & \$ 165 \\\text { Variable costs per unit } & \$ 100 & \$ 100\end{array}$$


-The demand for this product is:

A)elastic.
B)greatly inelastic.
C)slightly inelastic.
D)indeterminable.

Question 56

Plaza Video Rentals 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:
$$\begin{array} { l r } \text { Average rentals per day on Friday and Saturday } & 1150 \\\text { Average rentals per day on Sunday through Thursday } & 500 \\\text { Store hours per day } & 12 \\\text { Total units available for rent } & 10000 \\& \\\text { Variable operating costs per hour } & \$ 40 \\\text { Marketing costs per week } & \$ 1500 \\\text { Customer service costs per week } & \$ 250\end{array}$$
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)$0.60
B)$0.90
C)$0.83
D)$1.07

Question 57

Answer the following questions using the information below:
LeBlanc Lighting manufactures table lamps and is considering raising the price by $15 a unit for the coming year.With a $15 price increase,demand is expected to fall by 2500 units.
$$\begin{array} { l r r } & \text { Current } & \text { Projected } \\ \text { Demand }& 20000 \text { urits } & 17500 \text { urits } \\\text { Selling price }& \$ 150 & \$ 165 \\\text { Variable costs per unit } & \$ 100 & \$ 100\end{array}$$


-Companies that operate in non-competitive environments offering products or services that differ from each other can charge a very high price for their products and services.

Question 58

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

Question 59

Answer the following questions using the information below:
LeBlanc Lighting manufactures table lamps and is considering raising the price by $15 a unit for the coming year.With a $15 price increase,demand is expected to fall by 2500 units.
$$\begin{array} { l r r } & \text { Current } & \text { Projected } \\ \text { Demand }& 20000 \text { urits } & 17500 \text { urits } \\\text { Selling price }& \$ 150 & \$ 165 \\\text { Variable costs per unit } & \$ 100 & \$ 100\end{array}$$


-Companies that operate in non-competitive environments offering products or services that differ from each other use a market-based approach when making their long-run pricing decisions.

Question 60

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)operating profit.
B)contribution margin.
C)production costs.
D)gross margin.

Question 61

Answer the following questions using the information below:
Laver Shavers manufactures electric shavers and is considering decreasing the price by $2.50 a unit for the coming year.With a $2.50 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 $1 per unit.
$\begin{array}{lrr}&\text { Currently } & \text { Projected } \\\text { Demand } & 10000 \text { units } & 12500 \text { units } \\\text { Selling price } & \$ 51 & \$ 48.50 \\\text { Variable costs per unit } & \$ 45 & \$ 44\end{array}$

-The demand for this product is:

A)slightly inelastic.
B)greatly inelastic.
C)elastic.
D)indeterminable.

Question 62

Answer the following questions using the information below:
Cairns Company has invested $2 000 000 in a plant to make spear guns for fishing.The target operating profit desired from the plant is $300 000 annually.The company plans annual sales of 1500 spear guns at a selling price of $2000 each.
What is the cost base of each spear gun for Cairns Company?

A)$1700
B)$1802
C)$1780
D)$1739

Question 63

Answer the following questions using the information below:
Cairns Company has invested $2 000 000 in a plant to make spear guns for fishing.The target operating profit desired from the plant is $300 000 annually.The company plans annual sales of 1500 spear guns at a selling price of $2000 each.
What is the target rate of return on investment for Cairns Company?

A)15.0%
B)11.1%
C)17.6%
D)10.0%

Question 64

Advantages of using the full cost of the product as the cost base include all of the following EXCEPT that:

A)it does not require a detailed analysis of cost behaviour for computations.
B)it limits the ability of a salesperson to cut prices.
C)managers are informed regarding the minimum long-run cost they need to recover to stay in business.
D)fixed cost allocations can be arbitrary.

Question 65

Which of the following starts with estimated product costs and next adds desired operating profit?

A)Cost-plus pricing
B)Target costing
C)Life-cycle budgeting
D)Kaizen costing

Question 66

For pricing decisions,full product costs:

A)include all manufacturing and selling costs.
B)include all direct costs plus an appropriate allocation of the indirect costs of all business functions.
C)include all costs that are traceable to the product.
D)allow for the highest possible product prices.

Question 67

What is the general form of the cost-plus pricing approach?

A)Variable cost + Fixed cost + Contribution margin = Prospective selling price
B)Prospective selling price - Cost base = Mark-up component
C)Cost base + Mark-up component = Prospective selling price
D)Cost base + Gross margin = Prospective selling price

Question 68

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?
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Question 69

Answer the following questions using the information below:
Laver Shavers manufactures electric shavers and is considering decreasing the price by $2.50 a unit for the coming year.With a $2.50 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 $1 per unit.
$\begin{array}{lrr}&\text { Currently } & \text { Projected } \\\text { Demand } & 10000 \text { units } & 12500 \text { units } \\\text { Selling price } & \$ 51 & \$ 48.50 \\\text { Variable costs per unit } & \$ 45 & \$ 44\end{array}$

-Would you recommend the $2 price decrease?

A)Yes,because demand increases.
B)No,because contribution margin per unit decreases.
C)No,because operating profit decreases.
D)No,because the selling price decreases.

Question 70

A ________ formula for pricing does not require a detailed analysis of cost behaviour patterns to separate costs into fixed and variable components for each product.

A)variable cost
B)fixed cost
C)full-cost
D)activity cost

Question 71

Answer the following questions using the information below:
Botany Manufacturers has invested $1 000 000 in a plant to make commercial juicer machines.The target operating profit desired from the plant is $180 000 annually.The company plans annual sales of 7000 juicer machines at a selling price of $200 each.
What is the target rate of return on investment for Botany Manufacturers?

A)12.9%
B)18.0%
C)14.8%
D)22.0%

Question 72

Answer the following questions using the information below:
Botany Manufacturers has invested $1 000 000 in a plant to make commercial juicer machines.The target operating profit desired from the plant is $180 000 annually.The company plans annual sales of 7000 juicer machines at a selling price of $200 each.
What is the mark-up percentage as a percentage of cost for Botany Manufacturers?

A)18.0%
B)12.9%
C)14.8%
D)22.0%

Question 73

Which of the following statements is FALSE regarding cost-plus pricing?

A)The selling price computed is only a prospective price.
B)A company uses a mark-up percentage that estimates a product price that covers full product costs and earns the required return on investment.
C)A company selects a cost base that it regards as reliable.
D)The cost-plus price chosen has already been studied for customer reaction to the price.

Question 74

Which approach reduces the need to go back and forth between prospective cost-plus prices,customer reactions and design modifications?

A)Cost-plus
B)Target-pricing
C)Full cost
D)Variable cost

Question 75

The mark-up percentage is usually higher if the cost base used is:

A)variable manufacturing costs.
B)the variable cost of the product.
C)total manufacturing costs.
D)the full cost of the product.

Question 76

Suppliers who provide unique products and services (e.g.accountants and management consultants)usually use ________ pricing.

A)target
B)cost-plus
C)full cost
D)variable

Question 77

The ________ rate of return on investment leads to the mark-up percentage and the prospective selling price.

A)internal
B)external
C)target
D)expected

Question 78

Answer the following questions using the information below:
Cairns Company has invested $2 000 000 in a plant to make spear guns for fishing.The target operating profit desired from the plant is $300 000 annually.The company plans annual sales of 1500 spear guns at a selling price of $2000 each.
What is the mark-up percentage as a percentage of cost for Cairns Company?

A)17.6%
B)12.8%
C)10.0%
D)11.1%

Question 79

Northern Territory Company is considering pricing its 25 000-litre petroleum tanks using either variable manufacturing or full product costs as the base.The variable cost base provides a prospective price of $23 000 and the full cost base provides a prospective price of $23 050.The difference between the two prices is:

A)the estimated amount of profit.
B)known as 'price discrimination'.
C)that the variable cost base estimates fixed costs in the mark-up percentage while the full cost base includes an amount for fixed costs.
D)caused by the inability of most companies to estimate fixed cost per unit with any degree of reliability.

Question 80

A product's mark-up percentage needs to cover operating profits when the cost base is:

A)variable manufacturing costs.
B)the full cost of the product.
C)the variable cost of the product.
D)All of these answers are correct.