Deck 13: Pricing Decisions

Question 1

In cost-based pricing, mark-up percentages often originate from general industry practice.

Answer 1

True

Question 2

Predatory pricing is illegal in Canada.

Answer 2

True

Question 3

The internet enables managers to have greater access to market prices which results in prices being more consistent.

Answer 3

True

Question 4

Not-for-profit organizations price products in the same manner as for-profit organizations.

Question 5

If a product has an external market and divisions are treated as profit centres, cost-based transfer prices can often lead to suboptimal decisions.

Question 6

A penetration price is the price charged for transactions that take place within a single organization.

Question 7

Changes in variable costs and changes in the product's demand sensitivity to price are the two factors that affect the profit-maximizing price.

Question 8

An ideal transfer price would be the opportunity cost of internal transfers.

Question 9

Companies sometimes use competitors' prices to establish their own prices.

Question 10

In an economic downturn, a problem with cost-based pricing is a potential death spiral.

Question 11

To establish a cost-based price, managers need data on consumer demand.

Question 12

Market-based prices are influenced by product differentiation and competition.

Question 13

The sensitivity of sales to price increases is called the price elasticity of demand.

Question 14

Peak load pricing refers to the illegal practice of charging different prices at different times to reduce capacity constraints.

Question 15

Profit-maximizing price occurs when marginal profits equal marginal revenues.

Question 16

The internet is likely to makes prices more inelastic because substitutes are more easily discovered.

Question 17

If a supplying division has excess capacity, the best transfer price is the product's variable cost.

Question 18

In cost-based pricing, managers must use only variable costs in the cost base.

Question 19

A transfer price is required only when goods or services are transferred between cost centres in the same organization.

Question 20

Market-based prices are typically based on some measure of customer demand.

Question 21

When an organization using market-based prices cannot differentiate its product due to extensive competition, the product:

A)Is considered a commodity
B)Is considered a regulated price
C)Involves more non-value-added activities than value-added activities
D)Cannot be sold at a profit

Question 22

Which of the following formulas calculates the profit-maximizing price?

A)Total variable cost + total fixed cost
B)(Total variable cost + total fixed cost)/ price elasticity of demand
C)Variable cost × [elasticity / (elasticity + 1)]
D)Total cost × [elasticity / (elasticity + 1)]

Question 23

TTV Corporation's managers estimate that a 50% increase in price would cause an 80% reduction in the quantity of product sold. Total fixed costs for the product are $5,000 and total variable costs are $4,000, based on production of 400 units. The following values may be useful: ln (0.2)= -1.609 ln (1.5)= 0.405
Ln (0.5)= -0.693 ln (4,000)= 8.294
Ln (0.8)= -0.223 ln (5,000)= 8.517
TTV's price elasticity of demand is:

A)-3.973
B)-0.252
C)+0.322
D)+3.108

Question 24

BLG Corporation produces and sells yachts for wealthy customers. BLG's accountants produced the data shown below as a basis for client negotiations for the coming year: Big Winner Sport Star CEO
Basic yacht $ 600 $ 600 $ 600
Customization costs 300 500 200
Marketing costs 100 400 300
Total costs $1,000 $1,500 $1,100
Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. BLG's managers want to achieve a profit margin of 80% based on total costs.
Suppose BLG allocates unavoidable corporate costs based on total avoidable costs. The selling price of Sport Star's yacht will be:

A)$1,833
B)$3,300
C)$1,467
D)$2,200

Question 25

Which of the following factors affect a product's profit-maximizing price?
I) Fixed costs
II) Price elasticity of demand
III) Variable costs

A)I and III
B)II and III
C)I and II
D)I, II, and III

Question 26

BLG Corporation produces and sells yachts for wealthy customers. BLG's accountants produced the data shown below as a basis for client negotiations for the coming year: Big Winner Sport Star CEO
Basic yacht $ 600 $ 600 $ 600
Customization costs 300 500 200
Marketing costs 100 400 300
Total costs $1,000 $1,500 $1,100
Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. BLG's managers want to achieve a profit margin of 80% based on total costs.
If unavoidable costs are allocated as a percentage of avoidable costs, the total cost of Sport Star's yacht will be:

A)$1,500
B)$2,300
C)$1,833
D)$1,167

Question 27

In a dual-rate transfer pricing system, the selling department is credited for the market price and the buying department is charged the product's variable cost.

Question 28

Which of the following statements regarding the internet in relation to market based pricing is incorrect?

A)The internet has made it easier to access market prices
B)The internet has made prices less consistent
C)The internet is likely to make prices more elastic
D)The internet increases the global reach of many companies

Question 29

Managers determine what a customer is willing to pay for a product or service under which one of these pricing methods?

A)Market-based
B)Cost-based
C)Activity-based
D)Life cycle

Question 30

TTV Corporation's managers estimate that a 50% increase in price would cause an 80% reduction in the quantity of product sold. Total fixed costs for the product are $5,000 and total variable costs are $4,000, based on production of 400 units. The following values may be useful: ln (0.2)= -1.609 ln (1.5)= 0.405
Ln (0.5)= -0.693 ln (4,000)= 8.294
Ln (0.8)= -0.223 ln (5,000)= 8.517
TTV's profit maximizing price is:

A)$2.44
B)$3.37
C)$7.57
D)$13.36

Question 31

Market-based prices are normally determined using some measure of:

A)Supplier prices
B)Supplier demand
C)Customer demand
D)Degree of governmental regulation

Question 32

BLG Corporation produces and sells yachts for wealthy customers. BLG's accountants produced the data shown below as a basis for client negotiations for the coming year: Big Winner Sport Star CEO
Basic yacht $ 600 $ 600 $ 600
Customization costs 300 500 200
Marketing costs 100 400 300
Total costs $1,000 $1,500 $1,100
Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. BLG's managers want to achieve a profit margin of 80% based on total costs.
Which customer's yacht will have the lowest total cost if unavoidable costs are allocated based on the cost of a basic yacht?

A)Big Winner
B)Sport Star
C)CEO
D)Costs will be equal for all three customers

Question 33

Market-based prices are least likely to be influenced by:

A)The degree of product differentiation
B)Competition
C)Whether or not the product is a commodity
D)The cost to produce the product

Question 34

BLG Corporation produces and sells yachts for wealthy customers. BLG's accountants produced the data shown below as a basis for client negotiations for the coming year: Big Winner Sport Star CEO
Basic yacht $ 600 $ 600 $ 600
Customization costs 300 500 200
Marketing costs 100 400 300
Total costs $1,000 $1,500 $1,100
Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. BLG's managers want to achieve a profit margin of 80% based on total costs.
BLG's system is best described as:

A)Market-based pricing
B)Life cycle costing
C)Cost-based pricing
D)Kaizen costing

Question 35

Which of the following is a formal method for incorporating demand into prices?

A)Cost-based pricing
B)Market-based pricing
C)Price elasticity of demand
D)Price elasticity of supply

Question 36

A company with subsidiaries located in both high and low tax countries could charge a low transfer price in the high-tax countries so that most of the contribution margin arises where taxes are the lowest.

Question 37

Transfer pricing policies can affect a company's tax liability, particularly if it does business internationally.

Question 38

The Internet is likely to:

A)Decrease price elasticity of demand because transactions are numerous and quick
B)Have no impact on price elasticity of demand because few people do business on the Internet
C)Increase price elasticity of demand because of the availability of substitute products
D)Decrease price elasticity of demand because of the availability of complementary products

Question 39

Market-based prices are influenced by all of the following except:

A)Customer demand
B)Product differentiation
C)Competition
D)Allocated costs

Question 40

Which of the following formulas calculates price elasticity of demand?

A)ln (1 + % change in quantity sold)/ ln (1 + % change in price)
B)(1 + % change in quantity sold)/ (1 + % change in price)
C)% change in quantity sold / % change in price
D)ln (1 - % change in quantity sold)/ ln (1 - % change in price)

Question 41

Charging different prices at different times to reduce capacity constraints is called

A)Penetration pricing
B)Transfer pricing
C)Peak load pricing
D)Price skimming

Question 42

Anti-dumping tariffs in Canada are set so that:

A)A foreign product's price will be equivalent to the price charged by Canadian companies
B)A foreign product's price will be higher than the price charged by Canadian companies
C)A Canadian company's price will be lower than the price charged by a foreign company
D)Customers will always be motivated to purchase products from Canadian companies

Question 43

When two or more organizations conspire to set prices above a competitive price, they are engaging in:

A)Predatory pricing
B)Price gouging
C)Collusive pricing
D)Price discrimination

Question 44

In Canada, illegal pricing practices include:
I) Dumping
II) Market-based pricing
III) Predatory pricing

A)I and II
B)II and III
C)I and III
D)I, II, and III

Question 45

The practice of charging higher prices for products or services when they are first introduced is known as:

A)Transfer pricing
B)Price skimming
C)Peak load pricing
D)Price gouging

Question 46

Which of the following is an example of a product with elastic demand?

A)Cigarettes
B)Customized homes
C)Gasoline
D)High fashion clothing

Question 47

The price does not need to cover costs for what kinds of organizations?

A)All types of for-profit organizations
B)For profit retail sales organizations
C)Not-for-profit organizations
D)For profit manufacturing organizations

Question 48

When managers take advantage of an unusual event by charging prices that consumers believe are too high, they are practicing:

A)Predatory pricing
B)Price gouging
C)Cost-based pricing
D)Illegal pricing

Question 49

Low prices are not considered predatory if:

A)They can be justified by cost differences
B)They are collusive
C)Customers do not complain about them
D)Price elasticity of demand is above 1.00

Question 50

What do accountants use to estimate the effects of price changes on sales volume?

A)Market prices
B)Historical prices
C)Competitor prices
D)Forecasted prices

Question 51

Which of the following is the main disadvantage of market-based pricing?

A)Difficulty in estimating market demand and prices
B)Subjectivity of market demand
C)Inability to operate profitably
D)Tendency to make poor decisions relative to cost-based pricing

Question 52

A major drawback of cost-based pricing is that it:

A)Ignores the full cost of a product
B)Ignores the relationship between customer demand and price
C)Ignores variable costs and includes only fixed costs
D)Can be used only when all costs have been incurred

Question 53

Which of the following are generally illegal in Canada?
I) Price discrimination
II) Predatory pricing
III) Price gouging

A)I and II
B)I and III
C)II and III
D)I, II, and III

Question 54

Setting prices low to drive competitors out of the market and then raising prices is called:

A)predatory pricing
B)market-based pricing
C)price dumping
D)collusive pricing

Question 55

The "death spiral" may be a problem when managers use:

A)Market-based prices
B)Cost-based prices
C)Profit-maximizing prices
D)Regulated prices

Question 56

Which of the following statements about price discrimination is true?

A)It is always illegal in Canada
B)Organizations can use cost differences as a defence against price discrimination charges
C)Price elasticity of demand can justify price discrimination
D)It is legal if it results in less competition

Question 57

Because of grants, donations, and interest from endowed funds, not-for-profit organizations generally

A)Operate at a profit
B)Must use market-based pricing
C)Do not expect to recover all their costs from the fees they charge
D)Are not allowed to use market-based pricing

Question 58

To combat the practice of dumping, Canada:

A)Imposes an anti-dumping tariff
B)Allows limited instances of collusive pricing
C)Encourages the development of oligopolies
D)Does nothing, because dumping is not illegal in Canada

Question 59

Which pricing method is used to capture market share by charging low introductory prices?

A)Penetration pricing
B)Price gouging
C)Price skimming
D)Peak load pricing

Question 60

The most commonly used pricing method in Canada is:

A)Market-based pricing
B)Life cycle pricing
C)Zero-based pricing
D)Cost-based pricing

Question 61

A transfer pricing policy based on market price:

A)Maximizes total organizational profit
B)Is best because the market price is always objective and easily obtainable
C)May result in suboptimal decision-making for the company as a whole
D)Is the only alternative accepted by the Canada Revenue Agency

Question 62

Under Canadian laws, which of the following statements is the best example of the process known as dumping?

A)A Canadian company with excess inventory sells its product for a price below cost
B)A foreign company sells its products in Canada for less than the market value in the country where the products are manufactured.
C)A foreign company with excess inventory sells it in its home country for a price below the normal selling price
D)A company with a new product sells it in Canada for a price above the normal selling price

Question 63

Setting transfer prices can be especially problematic when:

A)Managers are evaluated based on non-financial factors
B)Compensation is tied to the financial performance of responsibility centres
C)Centralized decision-making is the organizational norm
D)Compensation is tied to the financial performance of the organization as a whole

Question 64

Division A produces a component for Hielkema Company's main product - automobiles. The division operates as a profit centre. It also sells to outsiders. The present selling price is $75 per component. The company buys 600,000 units of a similar component per year from outside sources. The external purchase price is $73 as a result of a quantity discount. Division A has adequate capacity to supply the needs of the Assembly division. The following data are for Division A: Direct material $30 per unit
Direct labour $25 per unit
Variable overhead $10 per unit
Fixed overhead (based on a capacity of 5,000 units)$6 per unit
The minimum price at which A would sell components internally is:

A)$71
B)$73
C)$75
D)$65

Question 65

The Mukilteo Division of Snohomish Corp. produces and sells a product to outside and internal customers. Per-unit data collected from its operations include: Outside sales price $640
Direct materials 105
Direct labour 250
Fixed overhead 180
If Mukilteo is operating at full capacity and selling solely to outside customers, what price should another division pay for Mukilteo's product?

A)$285
B)$625
C)$640
D)$480

Question 66

Hitek, Inc. has 2 divisions, Diodes and Boards. The diode can be sold internally or externally. If sold externally, the sales price is $15 per diode. The Boards division needs 3 diodes for each electronic board it produces. The external sales prices and costs are: Diodes Boards
Sales price per unit $15.00 $16.50
Variable costs (direct)per unit 6.00 9.00
Fixed costs per unit 3.00 6.00
If the Diodes division can sell all of its production externally, what is the minimum price at which it would be willing to sell internally, and what is the maximum price the Board Division would be willing to pay?
Diodes Boards
Willing to Sell Willing to Pay

A)$15 $2.50
B)$15 $7.50
C)$15 $15.00
D)$27 $27.00

Question 67

Certain highways in British Columbia require users to pay a toll for their use. Toll prices vary according to the time of day, demonstrating the use of:

A)Penetration pricing
B)Cost-based pricing
C)Price skimming
D)Peak load pricing

Question 68

Division A of Sibley, Inc. has operating data as follows: Capacity 20,000 units
Selling price $80 per unit
Variable costs $45 per unit
Fixed costs $20 per unit
Division B wants to purchase units from Division A. If Division A agrees to sell units to Division B, A's variable costs will be $5 less per unit.
If Division A has capacity available to meet B's requirements, what is the minimum price it should charge?

A)$40
B)$75
C)$20
D)$60

Question 69

Under what circumstances is penetration pricing considered legal in Canada?

A)Penetration pricing is never considered legal in Canada
B)Penetration pricing is not legal if the industry is regulated
C)Penetration pricing is not legal if it is considered predatory pricing
D)Penetration pricing is legal only if the industry is regulated

Question 70

Division A of Sibley, Inc. has operating data as follows: Capacity 20,000 units
Selling price $80 per unit
Variable costs $45 per unit
Fixed costs $20 per unit
Division B wants to purchase units from Division A. If Division A agrees to sell units to Division B, A's variable costs will be $5 less per unit.
If Division A is operating at capacity, what is the minimum price it should charge?

A)$40
B)$75
C)$20
D)$60

Question 71

Which of the following is an advantage of cost-based transfer prices?
I) Managers do not have much incentive to reduce fixed costs
II) Managers may be motivated to purchase goods and services from outside the company
III) Contribution margins may be split between buying and selling divisions

A)I only
B)II only
C)III only
D)None of the above (I, II, and III are all disadvantages)

Question 72

When a company uses activity-based transfer prices:

A)The internal buyer is motivated to overstate the number of units to buy internally
B)The internal buyer is motivated to understate the number of units to buy internally
C)Capacity is usually reserved for products or services that are transferred internally
D)Batch-level costs are excluded from the computation

Question 73

Problems with market-based transfer prices include:

A)Lack of knowledge about underlying costs
B)Lack of objectivity
C)Their impact on corporate profitability
D)Their lack of reliance on supply-and-demand relationships

Question 74

The National Division of Roboto Company is buying 10,000 widgets from an outside supplier at $30 per unit. Roboto's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: Sales price per unit $45.00
Variable cost per unit 22.50
Fixed cost (at capacity)per unit 15.00
If the Overseas Division meets the outside supplier's price and sells the 10,000 widgets to National, the effect on overall company profits will be:

A)$75,000 higher
B)$150,000 lower
C)$300,000 higher
D)$225.000 lower

Question 75

The Jupiter Division of Space, Inc. produces dilithium crystals. One-third of its output is sold to the Antari Division, and the remainder is sold externally. Jupiter's estimated sales and cost data for the coming year are: Antari Division External Sales
Units 12,500 25,000
Sales $18,750 $50,000
Variable costs 12,500 25,000
Fixed costs 3,750 7,500
Assume that Jupiter cannot sell any additional crystals externally. If the Antari Division has an opportunity to buy from an outside supplier at $1.40 per crystal and Jupiter refuses to meet this price, the company as a whole will be:

A)$1,250 better off
B)$3,750 worse off
C)$6,250 better off
D)$5,000 worse off

Question 76

Division A produces a component for Hielkema Company's main product - automobiles. The division operates as a profit centre. It also sells to outsiders. The present selling price is $75 per component. The company buys 600,000 units of a similar component per year from outside sources. The external purchase price is $73 as a result of a quantity discount. Division A has adequate capacity to supply the needs of the Assembly division. The following data are for Division A: Direct material $30 per unit
Direct labour $25 per unit
Variable overhead $10 per unit
Fixed overhead (based on a capacity of 5,000 units)$6 per unit
The price range within which A would sell components to the Assembly Division is:

A)$71 to $73
B)$65 to $73
C)$71 to $75
D)$65 to $75

Question 77

The Mukilteo Division of Snohomish Corp. produces and sells a product to outside and internal customers. Per-unit data collected from its operations include: Outside sales price $640
Direct materials 105
Direct labour 250
Fixed overhead 180
If Mukilteo has excess capacity available to meet an internal order, what transfer price should be set?

A)$625
B)$355
C)$430
D)$285

Question 78

Which prices are recorded by departments under a dual-rate transfer pricing system? Selling Purchasing
Department Department

A)Variable cost Variable cost
B)Variable cost Market price
C)Market price Full cost
D)Market price Variable cost

Question 79

The price used to record exchanges of goods and services inside an organization is called a:

A)Transfer price
B)Exchange price
C)Full price
D)Suboptimal price

Question 80

The National Division of Roboto Company is buying 10,000 widgets from an outside supplier at $30 per unit. Roboto's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: Sales price per unit $45.00
Variable cost per unit 22.50
Fixed cost (at capacity)per unit 15.00
If the National Division buys its 10,000 widgets from the Overseas Division, the transfer price should be:

A)$45.00
B)$30.00
C)$22.50
D)$37.50