Deck 25: Pricing Decisions, including Target Costing and Transfer Pricing

Question 1

Profit maximization has been tempered by other more socially focused concerns in recent years.

Answer 1

True

Question 2

A company's pricing policy objectives may include maintaining a minimum rate of return on investment.

Answer 2

True

Question 3

In a competitive market,prices can be reduced to gain market share by displacing the sales of competing companies.

Answer 3

True

Question 4

Marginal cost is the change in total cost caused by a one-unit change in output.

Question 5

Setting appropriate prices is one of the simplest decisions that managers make on a day-to-day basis.

Question 6

The economic approach to pricing is based on macroeconomic theory.

Question 7

A primary internal factor to be considered in product pricing is the cost of producing the product or service.

Question 8

Companies should be concerned about the effect of their prices on their public image.

Question 9

Organizations will not invest in making a product or providing a service unless it will provide a minimum return.

Question 10

The long-term objectives of a company need not include statements concerning pricing policy.

Question 11

Maximizing profits has been and continues to be a dominant factor in price setting.

Question 12

Within the relevant range,fixed and variable costs are fairly predictable.

Question 13

A company that produces standard items for a competitive market should not have the same pricing strategies as a company that makes unique items custom-designed for its customers.

Question 14

Customers' needs should be given strong consideration before the final price is chosen.

Question 15

Both internal and external factors can influence the pricing decision.

Question 16

A company should never attempt to increase its market share by reducing prices below cost.

Question 17

Auction-based pricing is a pricing method used primarily on the Internet where price is determined by willing buyers and sellers.

Question 18

Factors that influence the pricing decision are only external in nature.

Question 19

A company producing standardized products for its customers can be more conservative in its pricing strategy than a company producing custom-designed items.

Question 20

Legal constraints and ethical considerations should be considered when developing a company's pricing policy.

Question 21

Return on assets pricing has the same objective as gross margin pricing for the price determination process.

Question 22

The gross margin pricing method computes unit selling price based on production costs rather than total costs.

Question 23

A company should not deviate from the traditional approaches to price determination.

Question 24

When using a cost-based approach,once the cost of a good or service has been determined,additional factors need not be considered in establishing a selling price.

Question 25

Under microeconomic theory,total revenue will continue to increase,but the rate of increase will diminish as more and more units are sold.

Question 26

The gross margin-based price is computed by adding total production costs per unit to the total production costs per unit times the gross margin markup percentage.

Question 27

The denominator of the gross margin markup percentage is total production costs.

Question 28

In gross margin pricing,the markup percentage is based on total production costs.

Question 29

Marginal revenue is the change in total revenue caused by a one-unit change in output.

Question 30

For the return on assets pricing method,the desired rate of return on assets per unit is added to the total costs and expenses per unit to determine the selling price.

Question 31

It is realistic to assume that a total revenue line will be straight rather than curved.

Question 32

Service-oriented businesses take the same approach to pricing their "product" as product-oriented businesses.

Question 33

For the return on assets pricing method,desired earnings are computed by dividing asset costs by projected units to be produced and then multiplying by the desired rate of return on assets.

Question 34

Economic theory indicates that as a product is marketed,price reductions will have to be made to sell additional units.

Question 35

Beyond the sales level that achieves maximum profits,total costs rise at a faster rate than total revenue.

Question 36

A good starting point for any pricing method is to develop a price based on the cost of producing the good or service.

Question 37

Gross margin pricing establishes selling prices at an amount that is a stipulated rate above variable production costs.

Question 38

Because a business should have as its primary objective the earning of a minimum rate of return on assets,the return on assets pricing method has a great deal of appeal and support.

Question 39

For service-oriented businesses,pricing is determined using cost-based approaches that add the cost of overhead to materials,parts,and labor via markup percentages.

Question 40

A company will choose a cost-based pricing method based on the degree of trust it has in the cost base.

Question 41

A selling division with adequate capacity to fulfill the demand of the buying division should sell to the buying division at any price that recovers incremental costs.

Question 42

Gross margin is the difference between sales and the total production costs of those sales.

Question 43

If engineers determine that a product can't be produced at or less than its target cost,then production of the product should not be undertaken.

Question 44

Management accountants are directly involved in designing products that meet target costs.

Question 45

When using traditional,cost-based pricing,the pricing decision is made after products have been put into production.

Question 46

A transfer price should not contain any profit since the profit for a product should be determined when the product is completed.

Question 47

The numerator in the markup percentage for the gross margin-based pricing method comprises selling expenses,general and administrative expenses,and a desired profit.

Question 48

A transfer price is the price at which goods are exchanged among company divisions.

Question 49

Committed costs are engineered into a product or service at the design stage of product development.

Question 50

The markup percentage includes the gross margin in the computation of the selling price.

Question 51

Transfer prices are used for internal decisions and performance evaluation purposes and are not made known to the outside world.

Question 52

In a competitive environment,the use of target costing enables managers to analyze a product's potential before committing resources to its production.

Question 53

Target costing reverses the procedure used by cost-based pricing methods.

Question 54

Transfer prices affect the revenues and costs of the divisions involved but do not affect the revenues and costs of the company as a whole.

Question 55

Determining the production costs of a product is the first step in target costing.

Question 56

Return on assets pricing is based on the estimated number of units to be sold.

Question 57

Target costing identifies a competitive price and then subtracts the desired profit to determine a target cost.

Question 58

Target costing gives managers the ability to control or dictate the costs of a new product at the planning stage of the product's life cycle.

Question 59

Target costing identifies a competitive price and then adds the desired profit to determine a target cost.

Question 60

A target price is an estimate of a price for a product or service that potential customers will be willing to pay.

Question 61

One approach to the development of a transfer price is to use the market value if the item has an existing market at the time of transfer.

Question 62

The weakness of a cost-plus transfer price is that cost recovery is guaranteed to the selling division,which may lead to failure to detect inefficient operating conditions and excessive cost incurrence.

Question 63

A negotiated transfer price will be between the negotiation floor (selling division's variable cost)and the negotiation ceiling (the market price).

Question 64

An example of a pricing objective is to

A)ignore long-term pricing strategies in favor of short-term profits.
B)increase market share irrespective of the cost of a product.
C)maintain a price that is always under that of the competition.
D)maintain a minimum rate of return.

Question 65

An internal issue to be considered when setting a price is

A)whether the process is labor-intensive or automated.
B)the customer's preferences for quality versus price.
C)current prices of competing products or services.
D)the life of the product or service.

Question 66

Identifying the minimum price the company can sustain falls under the evaluating stage of the management process.

Question 67

The cost-plus transfer price is the sum of the costs incurred by the producing division plus an agreed-upon profit percentage.

Question 68

A company can stay in business as long as the selling price of its products is equal to all the costs incurred in bringing the product or service to market.

Question 69

When making the decision on a product's price,the manager must consider

A)all products at the same time.
B)the minimum price that will produce a profit.
C)only cost-based information.
D)the product's total variable costs.

Question 70

Setting internal transfer prices for products or services falls under the planning stage of the management process.

Question 71

Breaking any of the four pricing rules for a long period will force a company into bankruptcy.

Question 72

A negotiated transfer price is one that is bargained for between the managers of the buying and selling divisions of a company.

Question 73

Transfer prices are often called artificial or created prices.

Question 74

Negotiation between managers is not appropriate in determining a transfer price.

Question 75

A manager may deviate from the four pricing rules if a specific short-term objective is being targeted.

Question 76

The pricing objective of maximizing profits

A)has not been affected by other,more socially focused concerns.
B)is to be implemented under any and all circumstances.
C)has not always been considered the underlying objective of any pricing policy.
D)must be considered when determining the price needed to increase market share.

Question 77

A negotiated transfer price is often used for internal pricing.

Question 78

An example of a pricing objective is to

A)have prices that top the market.
B)maintain or gain market share.
C)maximize losses.
D)minimize quality and cost.

Question 79

Overhead costs allocated to divisions from corporate levels should be incorporated in the computation of the transfer price.

Question 80

Identifying the maximum price the market will accept falls under the performing stage of the management process.