Deck 5: Pricing Decisions and Profitability Analysis

Question 1

Jamie Ltd. had the following information: What would be the price for something that has a cost of £500, assuming that the markup is based on cost of goods sold?

A) £833
B) £625
C) £708
D) £2,000

Answer 1

A

Question 2

Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2004 when 30,000 were projected. Sales for 2005 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. What is the profit (loss) from Option Three?

A) £215,000
B) £1,200,000
C) £110,000
D) (£60,000)

Answer 2

A

Question 3

Which of the following correctly describes the slope of the demand and supply curves?

A) upward sloping downward sloping
B) no slope upward sloping
C) downward sloping no slope
D) downward sloping upward sloping

Answer 3

D

Question 4

Which of the following statements is FALSE?

A) The markup is a percentage applied to base cost.
B) The markup is an absolute rule.
C) A major advantage of markup pricing is that standard markups are easy to apply.
D) The markup can be calculated using a variety of bases.

Question 5

Farr Company had the following information: What is the markup based on prime costs?

A) 300.0%
B) 133.3%
C) 50.0%
D) 166.7%

Question 6

Jamie Ltd. had the following information: What is the markup based on materials?

A) 400.0%
B) 185.7%
C) 42.9%
D) 71.4%

Question 7

Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2004 when 30,000 were projected. Sales for 2005 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. What is the profit (loss) from Option Two?

A) £600,000
B) £100,000
C) £40,000
D) (£100,000)

Question 8

Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2004 when 30,000 were projected. Sales for 2005 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. Which option is preferred?

A) Option One
B) Option Two
C) Option Three
D) Options One and Three are equally preferred.

Question 9

_____ on the international market is called dumping.

A) Price discrimination
B) Predatory pricing
C) Price skimming
D) Penetration pricing

Question 10

Farr Company had the following information: What is the markup based on cost of goods sold?

A) 50.0%
B) 100.0%
C) 37.5%
D) 62.5%

Question 11

_____ is where a higher price is charged at the beginning of a product's life cycle.

A) Penetration pricing
B) Predatory pricing
C) Price skimming
D) Target costing

Question 12

The following information pertains to three different products being sold by Andy Company: Which products have an elastic demand curve?

A) Product A
B) Product B
C) Product C
D) all of the above

Question 13

Price skimming occurs in which of the following life-cycle stages?

A) Introduction
B) Growth
C) Maturity
D) Decline

Question 14

Which of the following markets is characterized by the following: many buyers and sellers, a homogeneous product, easy entry into and exit from the industry, and all firms are price takers?

A) perfectly competitive market
B) monopolistic competition
C) monopoly
D) oligopoly

Question 15

Which of the following statements is TRUE about the equilibrium price, P, and equilibrium quantity, Q?

A) If the price is set at P, then more than Q will be sold.
B) If the price is set above P, then less than Q will be sold.
C) If the price is set below P, then more than Q will be sold.
D) Both b and c are true.

Question 16

_____ is the pricing of a new product at a low initial price to build market share quickly.

A) Penetration pricing
B) Predatory pricing
C) Price skimming
D) Target costing

Question 17

Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2004 when 30,000 were projected. Sales for 2005 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. What is the profit (loss) from Option One?

A) £1,050,000
B) £210,000
C) £950,000
D) £110,000

Question 18

Which of the following could be considered a segment?

A) division
B) product-line
C) sales territory
D) all of the above

Question 19

Which of the following is a FALSE statement about target costing?

A) Target costing is a method of determining the cost of a product or service based on the price that customers are willing to pay.
B) The cost is calculated by subtracting the desired profit from the target price.
C) Target costing is an interactive process.
D) Target costing is cost driven.

Question 20

The following information pertains to three different products being sold by Andy Company: Which products have an inelastic demand curve?

A) Product A
B) Product B
C) Product C
D) both Product A and Product C

Question 21

World-class organizations operating in competitive markets are more likely to take which one of the following approaches toward pricing?

A) Begin with cost data as given and determine price by adding a reasonable mark-up.
B) Determine price based on the amount management believes customers are willing to pay.
C) Employ a cost-based approach to pricing.
D) Determine the price that keeps the facilities fully utilized.

Question 22

. Figure 1
Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 percent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow:
Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000.
Refer to Figure 1 above, what amount of order-filling costs would be allocated to the large customer if these costs are allocated using an activity-based costing approach?

A) £10,000
B) £350,000
C) £28,800
D) £331,200

Question 23

In a cost-based pricing system, the markup should cover

A) selling and administrative expenses, desired profit, and manufacturing cost
B) selling and administrative expenses and desired profit only
C) selling and administrative expenses and manufacturing cost only
D) desired profit and manufacturing cost only

Question 24

Setting prices below cost for the purpose of injuring competitors and eliminating competition is

A) predatory pricing
B) target pricing
C) price discrimination
D) price gouging

Question 25

Which of the following stages has revenues for the entire industry decreasing?

A) Introduction
B) Growth
C) Maturity
D) Decline

Question 26

When cost-based pricing is employed and markup is based on manufacturing costs, the markup must be sufficiently large enough to:

A) cover selling expenses.
B) cover administrative expenses.
C) provide for the desired profit.
D) accomplish all of the above.

Question 27

A target cost is computed as

A) the cost to manufacture plus a desired markup
B) the cost to manufacture plus the designated selling expenses
C) the market willingness to pay less the cost to manufacture
D) the market willingness to pay less the desired profit

Question 28

Segment margin is equal to sales less

A) variable costs.
B) variable costs and direct fixed costs.
C) variable costs and indirect fixed costs.
D) cost of goods sold.

Question 29

Cost-based pricing has traditionally been important because:

A) cost data are available.
B) cost-based prices are defensible.
C) revenues must exceed costs if the firm is to remain in business.
D) of all of the above.

Question 30

Rudy Company sells a product for £450 per unit. Its market share is 25 percent. The marketing manager feels that the market share can be increased to 33 percent with a reduction in price to £390. The product is currently earning a profit of £72 per unit. The president of Rudy Company feels that the £72 profit per unit must be maintained. What is the original cost per unit?

A) £390
B) £450
C) £318
D) £378

Question 31

. Figure 1
Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 percent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow:
Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000.
Refer to Figure 1, what amount of order-filling costs would be allocated to the large customer if these costs are allocated based on sales volume?

A) £144,000
B) £216,000
C) £150,000
D) £225,000

Question 32

Common segment costs, when contrasted with direct segment costs, are

A) costs of all segments such as direct labour.
B) costs related to more than one segment and not directly traceable to a particular segment.
C) incurred at one level for the benefit of two or more segments.
D) both b and c

Question 33

. Figure 1
Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 percent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow:
Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000.
Refer to Figure 1 above, what amount of sales-force costs would be allocated to the five smaller customers if these costs are allocated based on sales volume?

A) £144,000
B) £216,000
C) £150,000
D) £225,000

Question 34

Which of the following stages is characterized by rapid increases in sales and production?

A) Introduction
B) Growth
C) Maturity
D) Decline

Question 35

Which of the following statements describes a legitimate disadvantage of cost-based pricing?

A) Marginal costs and revenues are difficult to measure.
B) Determining the amount a customer is willing to pay may require sufficient estimation.
C) Customers may not be willing to pay the price determined by the procedure.
D) all of the above

Question 36

Chris Company sells a product for £225 per unit. Its market share is 20 percent. The marketing manager feels that the market share can be increased to 30 percent with a reduction in price to £195. The product is currently earning a profit of £36 per unit. The president of Chris Company feels that the £36 profit per unit must be maintained. What is the target cost per unit?

A) £225
B) £195
C) £189
D) £159

Question 37

Charging different prices to different customers for essentially the same product is

A) predatory pricing
B) target pricing
C) price discrimination
D) price gouging

Question 38

. Figure 1
Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 percent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow:
Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000.
Refer to Figure 1 above, what amount of order-filling costs would be allocated to the five smaller customers if these costs are allocated using an activity-based costing approach?

A) £10,000
B) £350,000
C) £28,800
D) £331,200

Question 39

Rudy Company sells a product for £450 per unit. Its market share is 25 percent. The marketing manager feels that the market share can be increased to 33 percent with a reduction in price to £390. The product is currently earning a profit of £72 per unit. The president of Rudy Company feels that the £72 profit per unit must be maintained. What is the target price per unit?

A) £390
B) £450
C) £318
D) £378

Question 40

Marginal Revenues are best defined as:

A) the average selling price of a good.
B) the varying increment in total revenue derived from the sale of one more unit.
C) the profit received from the last unit sold.
D) total revenues divided by the number of units sold.

Question 41

Johnson Company produces office equipment for 16 major buyers. Of the 16 customers, one accounts for 50 percent of the sales, with the remaining 15 accounting for the rest of the sales. The 15 smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Johnson's customer activity follow:
Order-filling costs for Johnson Company total £270,000, and sales-force costs are £300,000.
Required:

a.
Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the 15 smaller customers if these costs are allocated based on sales volume.
b.
Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the 15 smaller customers if these costs are assigned using activity-based costing.
c.
Comment on the differences in amounts attributed to the smaller customers in requirements a and b

Question 42

Many products have a predictable profit or product life cycle. Describe the product life cycle from the marketing perspective. In addition, graph profit versus the different phases. Finally, discuss the impact of the product life cycle on products, learning effects, setups, purchasing, and marketing expenses.

Question 43

Bay Company produces boats for 11 major buyers. Of the 11 customers, one accounts for 45 percent of the sales, with the remaining ten accounting for the rest of the sales. The ten smaller customers purchase boats in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Bay's customer activity follow:
Order-filling costs for Bay Company total £401,500, and sales-force costs are £260,000.
Required:

a.
Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the ten smaller customers if these costs are allocated based on sales volume.
b.
Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the ten smaller customers if these costs are assigned using activity-based costing.
c.
Comment on the differences in amounts attributed to the smaller customers in requirements a and b

Question 44

Etro Company sells a product used in many manufacturing processes. The sales activity involves three activity areas:
The following customer information is given:
Required:
What is the profitability of customer B?

Question 45

Which of the following statements concerning target costing is NOT true?

A) Implementing target costing requires detailed information on the cost of alternative activities.
B) Target costing can be applied to components of products as well as the new products as a whole.
C) A primary advantage of target costing is that it requires little or no coordination among processes.
D) Short product life cycles increase the importance of target costing.

Question 46

Nordholm Construction Company builds houses. Each job requires a bid. Nordholm's bidding policy is to estimate the costs of materials, direct labour, and subcontractor's costs. These are totaled and a markup is applied to cover overhead and profit. In the coming year, Nordholm believes it will be the successful bidder on ten jobs with the following total revenues and costs:
The residual will cover overhead and profits.
Required:

a.
What is the markup percentage on total direct costs?
b.
Suppose Nordholm is asked to bid on a job with estimated direct costs of £55,000. What is the bid? If the customer complains that the profit seems pretty high, how might Nordholm counter that?

Question 47

Ellie Manufacturing Company produces three products: A, B, and C. The income statement for 2004 is as follows:
The sales, contribution margin ratios, and direct fixed expenses for the three types of products are as follows:
Required:
Prepare income statements segmented by products. Include a column for the entire firm in the statement.

Question 48

Discuss the limitation of profit measurement.

Question 49

The following information pertains to three different products being sold by Leone Company:
Required:

a.
Determine the price elasticity of demand for each of the products.
b.
Which products have an elastic demand? Inelastic demand?

Question 50

. Multiple Products Co.
Multiple Products Co. has predicted the following costs for this year for 100,000 units:
41 Refer to Multiple Products Co. What is the markup on variable costs needed to achieve a target profit of £100,000?

A) 375 percent
B) 275 percent
C) 250 percent
D) 200 percent

Question 51

. Multiple Products Co.
Multiple Products Co. has predicted the following costs for this year for 100,000 units:
Refer to Multiple Products Co. What is the markup on variable costs needed to break even?

A) 100 percent
B) 40 percent
C) 140 percent
D) 180 percent

Question 52

. Multiple Products Co.
Multiple Products Co. has predicted the following costs for this year for 100,000 units:
Refer to Multiple Products Co. What is the manufacturing cost markup needed to obtain a target profit of £100,000?

A) 100 percent
B) 67 percent
C) 50 percent
D) 25 percent

Question 53

Todd Ltd. sells a product for £400 per unit. Its market share is 22 percent of the units sold. The marketing manager feels that the market share can be increased to 28 percent of the units sold with a reduction in price to £340. The product is currently earning a profit of £64 per unit. The president of Todd Ltd. feels that his company needs to maintain the same profit level per unit. The market share consists of £4,000,000 (10,000 units).
Required:
a.
How many units does Todd Ltd. currently sell of the product?
b.
What is the target price per unit?
c.
What is the original cost per unit?
d.
What is the target cost per unit?

Question 54

Which of the following accurately describes the effect target costing has on the manufacturing design function?

A) Target costing allows the design engineer's job to end once the product is designed.
B) Target costing forces design engineers to explicitly consider the costs of manufacturing and other aspects of business that traditionally fall outside the engineering department.
C) Target costing defines clear lines of responsibility among departments allowing for design engineers to be evaluated purely on meeting the customer's functional requirements.
D) Target costing has no implications for design engineering.

Question 55

Vicki Johns operates a catering company. Vicki provides food and servers for parties. She also rents tables, chairs, dinnerware, glassware, and linens. Alan and Debbie Holms contacted Vicki about catering for their daughter's wedding. They have requested an open bar, hors d'oeuvres (enough for 300 people), a large wedding cake, and forty tables with linens, dinnerware, and glassware. Vicki put together the following bid:
Required:
Suppose that the Holmses blanch when they see the bid. Mr. Holmes suggests that they had hoped to spend no more than £3,750 or so on the party. How could Vicki work with the Holmses to achieve a target cost of that amount?

Question 56

Spencer Manufacturing Company sells a product for £200 per unit. Its market share is 18 percent of the units sold. The marketing manager feels that the market share can be increased to 25 percent of the units sold with a reduction in price to £170. The product is currently earning a profit of £32 per unit. The president of Spencer Manufacturing Company feels that his company needs to maintain the same profit level per unit. The market share consists of £2,000,000 (10,000 units).
Required:
a.
How many pounds does Spencer Manufacturing Company currently sell of the product?
b.
What is the target price per unit?
c.
What is the original cost per unit?
d.
What is the target cost per unit?

Question 57

. Multiple Products Co.
Multiple Products Co. has predicted the following costs for this year for 100,000 units:
Refer to Multiple Products Co. What is the markup on manufacturing costs needed to break even?

A) 100 percent
B) 40 percent
C) 140 percent
D) 280 percent

Question 58

Foley Ltd. has predicted the following costs for this year for 100,000 units:
Required:

a.
What is the markup on variable costs needed to achieve a target profit of £200,000?
b.
What is the initial unit selling price needed to obtain a target profit of £200,000 using the variable cost markup method?
c.
What is the manufacturing cost markup needed to obtain a target profit of £200,000?

Question 59

Wurster Company sells a product for £400 per unit. Its market share is 20 percent of the units sold. The marketing manager believes that the market share can be increased to 28 percent of the units sold with a reduction in price to £360. The product is currently earning a profit of £62 per unit. The president of Wurster Company believes that his company needs to maintain the same profit level per unit. The total market for the product has annual sales of 5,000 units.
Required:
a.
How many units does Wurster Company currently sell of the product?
b.
What is the target price per unit?
c.
What is the target cost per unit?

Question 60

Answer the following:
a. Discuss each of the following economic market structures (i.e., number of firms in industry, barriers to entry, uniqueness of product):

1. Perfectly competitive market
2. Monopolistic competition
3. Oligopoly
4. Monopoly
b. Match the following industries with the appropriate economic market:

Local cable television company
Restaurants
United States Post Office
Cereal
Wheat farmer
Automotive

Question 61

Provide a short critique of cost-based pricing. What are the four major drawbacks to this pricing approach?

Question 62

List some of the pros and cons of target costing.