Question 1

Which product pricing factor is primarily used by the majority of Japanese,Irish,and English companies?
A)Market-based
B)Cost-based
C)Quality-based
D)Quantity-based

Accepted Answer

Market-based pricing is primarily used by companies in Japan, Ireland, and England, as it focuses on setting prices based primarily on the market and competitive conditions rather than solely on the cost of production or the quality of the products. This approach helps companies to stay competitive and adapt to market changes.

Question 2

In the long run,the practice of setting price so that it must at least equal the differential cost of producing and selling the product will cover all costs because
A)fixed costs are differential in the long run.
B)variable costs are differential in the long run.
C)fixed and variable costs are differential in the long run.
D)fixed and variable costs are discretionary in the long run.

Accepted Answer

In the long run, both fixed and variable costs are considered differential costs because they can change based on the decisions made by the company, such as increasing production or entering new markets. Therefore, setting prices to cover these costs ensures all costs are covered over time.

Question 3

Which of the following cost allocation methods would be used to determine the lowest price that could be quoted for a special order that would utilize idle capacity within a production area?
A)Job order
B)Process
C)Variable
D)Standard

Accepted Answer

Variable cost allocation method is used when determining the lowest price for a special order that utilizes idle capacity within a production area. This is because variable costs increase with increased production, and in this case, the production level is not expected to change significantly. Using the variable cost allocation method would ensure that the special order covers only the variable costs associated with producing the goods, and not any fixed costs.

Question 4

Grizzly Company
Grizzly Company manufactures footballs.The forecasted income statement for the year before any special orders is as follows:

Refer to Grizzly Company.By what amount would operating income of Grizzly be increased or decreased as a result of accepting the special order?
A)$25,000 decrease
B)$62,500 decrease
C)$100,000 increase
D)$125,000 increase

Accepted Answer

Accepting the special order will result in additional revenue of $500,000 for the year. The cost to make these units is $300,000, resulting in a contribution margin of $200,000 ($500,000 - $300,000). Operating income will increase by the contribution margin of $200,000. Therefore, the correct answer is D, a $125,000 increase in operating income.

Question 5

Which of the following is true about short-run and long-run pricing decisions?
A)Short-run decisions include pricing for a special order with no long-term implications.
B)Short-run decisions typically have a time horizon of two years or more.
C)Short-run decisions include pricing a main product in a major market.
D)Long-run decisions include pricing for a special order with no short-term implications.

Accepted Answer

Short-run pricing decisions are usually for a specific event or circumstance that will not have long-term implications. Pricing for a special order would fall under this category. The other options, pricing a main product in a major market or having a time horizon of two years or more, suggest longer-term decisions, which would fall under long-run pricing decisions.

Question 6

Which statement is true with regards to differential pricing?
A)Only fixed costs become differential costs in the long run.
B)Both fixed and variable costs become differential costs in the long run.
C)Fixed costs are never differential costs.
D)When considering a special order all costs become differential costs.

Accepted Answer

Differential pricing involves the use of different prices for the same product or service based on different costs. Both fixed and variable costs can become differential costs in the long run as they can vary across different products, regions, or customer groups. Option A is incorrect as it states that only fixed costs become differential costs which is not true. Option C is incorrect as fixed costs can become differential costs. Option D is incorrect as not all costs become differential costs when considering a special order.

Question 7

The total of all the costs incurred by the activities in the value chain are
A)variable costs.
B)fixed costs.
C)total costs.
D)full costs.

Accepted Answer

Total costs include all direct and indirect costs associated with activities in the value chain, including both variable and fixed costs. Full costs refer to total costs plus any additional costs associated with externalities, such as environmental or social costs. Therefore, D is the best choice as it encompasses all costs incurred in the value chain activities.

Question 8

Mitch's Microbrew's regular selling price for a case of its product is $6.Variable costs are $4 per case.Fixed costs total $1 per case based on 100,000 cases,and remain unchanged within the relevant range of 50,000 cases to total capacity of 200,000 cases.After sales of 80,000 cases were projected for the year,a special order was received for an additional 10,000 cases.What is the minimum selling price for the special order?
A)$3.
B)$4.
C)$5.
D)$6.

Accepted Answer

The minimum selling price for the special order would be $4, which covers the variable costs of $4 per case. Fixed costs are not considered for the special order pricing since they remain unchanged within the relevant range and are already covered by the regular sales.

Question 9

Using full costs for pricing decisions can be justified in which of the following circumstances?
A)When a firm enters into a long-term contractual relationship to supply a product.
B)For development and production of customized products and contracts with the government.
C)When managers initially set prices to cover full costs plus a profit then adjust to reflect market conditions.
D)All of the answers are correct.

Accepted Answer

Using full costs for pricing decisions is justified in all the provided circumstances: long-term contracts ensure recovery of full costs over time, customized products and government contracts often require full cost recovery for pricing, and setting initial prices to cover full costs plus profit before adjusting for market conditions is a common pricing strategy.

Question 10

The value chain influences long-run pricing decisions because __________ cost is the total of all the costs incurred by the activities in the value chain.
A)differential
B)full
C)marginal
D)variable

Accepted Answer

Full cost is the total cost incurred by all the activities in the value chain, including both direct and indirect costs. Therefore, long-run pricing decisions should take into account the full cost of the value chain to ensure that the pricing strategy is profitable and sustainable in the long term. This includes not only the direct costs of producing a product or providing a service, but also the indirect costs associated with activities such as research and development, marketing, and distribution.

Question 11

What costs can be justified when managers initially set prices to cover the costs plus a profit and then subsequently adjusts the prices to reflect market conditions?
A)Variable costs
B)Fixed costs
C)Full costs
D)Absorption costs

Accepted Answer

Full costs, which include both variable and fixed costs, are considered when setting prices initially to cover costs plus a profit. This approach ensures that all expenses are accounted for before adjusting prices based on market conditions.

Question 12

In the short run,__________ limitations require choices among alternatives.
A)capacity
B)joint cost
C)split-off point
D)full cost

Accepted Answer

Capacity limitations refer to the maximum amount of goods or services that a firm can produce within a given time period. In the short run, a firm may not be able to increase its capacity to meet demand. Therefore, it must choose among various alternatives to make the best use of its existing capacity. For example, a restaurant may have a limited number of tables and staff available on a given night, so the owner must decide whether to accept more reservations or turn people away. Similarly, a factory may have limited production capacity and must decide which products to prioritize based on demand and profitability.

Question 13

What costs can be justified when a firm enters into agreements for the development and production of customized products with the Federal government?
A)Variable costs
B)Fixed costs
C)Full costs
D)Absorption costs

Accepted Answer

When a firm enters into agreements for the development and production of customized products with the Federal government, it can justify full costs. Full costs include both direct and indirect costs, encompassing all expenses related to the project. This approach ensures that the firm covers all its costs in the pricing of the contract, which is particularly important in government contracts where the products are customized and may require significant upfront investment in development and production.

Question 14

Which of the following is true about short-run and long-run pricing decisions?
A)Short-run decisions include pricing for a special order with no long-term implications.
B)Short-run decisions typically have a time horizon of six months or less.
C)Long-run decisions include pricing a main product in a major market.
D)All of the answers are correct.

Accepted Answer

All of the options are correct statements about short-run and long-run pricing decisions. Short-run pricing decisions may include pricing for a special order with no long-term implications, while long-run decisions may include pricing a main product in a major market. The time horizon for short-run decisions is typically six months or less.

Question 15

Grizzly Company
Grizzly Company manufactures footballs.The forecasted income statement for the year before any special orders is as follows:

Refer to Grizzly Company.Fixed costs included in the above forecasted income statement are $1,200,000 in manufacturing CGS and $100,000 in selling expenses.Grizzly received a special order offering to buy 50,000 footballs for $7.50 each.There will be no additional selling expenses if Grizzly accepts.Assume Grizzly has sufficient capacity to manufacture 50,000 more footballs.The unit relevant cost for Grizzly's decision is
A)$8.00
B)$5.00
C)$8.75
D)$5.75

Accepted Answer

To determine the relevant cost for Grizzly's decision, we need to consider only the incremental costs and benefits of accepting the special order. The incremental manufacturing cost would include direct materials, direct labor, and variable manufacturing overhead, which is $4.50 per football (total variable manufacturing costs of $225,000 divided by 50,000 units). Therefore, the unit relevant cost is $4.50 + $0 (no additional selling expenses) = $4.50. Since the special order is offering to buy the footballs for $7.50 each, the incremental benefit is $7.50 per football. Subtracting the incremental cost from the incremental benefit, the special order will increase the company's profit by $3.00 per football. Since this is greater than the current contribution margin per football of $2.50, Grizzly Company should accept the special order. The best choice is B.

Question 16

In the short run,the practice of setting price so that it must at least equal the differential cost of producing and selling the product will result in which of the following?
A)predatory pricing violation.
B)anti-trust violation.
C)dumping.
D)positive contribution to covering fixed costs and generating profit.

Accepted Answer

Setting prices that cover the differential cost of the product in the short run will result in a positive contribution to covering the fixed costs and generating profit, as it allows the company to at least break even on the production and sale of the product. This is a common pricing strategy used by businesses to ensure profitability. It is not predatory pricing, anti-trust violation or dumping, which involve more complex and unethical pricing practices.

Question 17

Which product pricing practice is used by the majority of Japanese companies in assembly-type operations (e.g.electronics and automobiles)?
A)Variable costs,only
B)Fixed costs,only
C)Full costs
D)Absorption costs

Accepted Answer

The majority of Japanese companies in assembly-type operations use full cost pricing, which takes into account both variable and fixed costs. This approach ensures that all costs are covered and provides a more accurate basis for pricing decisions.

Question 18

Which product pricing factor is primarily used by the majority of American companies?
A)Market-based
B)Cost-based
C)Quality-based
D)Quantity-based

Accepted Answer

The majority of American companies use cost-based pricing, which involves calculating the cost of producing a product or service and then adding a markup to determine the selling price. This pricing strategy is straightforward and easy to implement, and allows companies to ensure that they are covering their costs and making a profit. Market-based pricing is also common, but may be used in conjunction with cost-based pricing to ensure that the price is competitive with other products in the market. Quality-based and quantity-based pricing are less common pricing strategies.

Question 19

Which of the following is false about short-run and long-run pricing decisions?
A)Short-run decisions include pricing for a special order with no long-term implications.
B)Short-run decisions typically have a time horizon of six months or less.
C)Long-run decisions include pricing a main product in a major market.
D)Long-run decisions include pricing for a special order with no short-term implications.

Accepted Answer

The statement "Long-run decisions include pricing for a special order with no short-term implications" is false. Long-run decisions refer to pricing for a main product in a major market or for a product with long-term implications. Pricing for a special order with no long-term implications would fall under short-run pricing decisions.

Question 20

Which of the following influences should not be considered in short-run pricing decisions?
A)The value customers place on the product
B)The pricing strategies of competitors
C)The costs of the product
D)Total fixed costs allocated to the specific product

Accepted Answer

Total fixed costs allocated to the specific product should not be considered in short-run pricing decisions because fixed costs do not change with the level of production or sales in the short run. Pricing decisions should focus on variable costs and other factors that are directly affected by the production and sale of additional units.

Quiz 7: Differential Cost Analysis for Operating Decisions

Which product pricing factor is primarily used by the majority of Japanese,Irish,and English companies?

In the long run,the practice of setting price so that it must at least equal the differential cost of producing and selling the product will cover all costs because

Which of the following cost allocation methods would be used to determine the lowest price that could be quoted for a special order that would utilize idle capacity within a production area?

Grizzly Company Grizzly Company manufactures footballs.The forecasted income statement for the year before any special orders is as follows: Refer to Grizzly Company.By what amount would operating income of Grizzly be increased or decreased as a result of accepting the special order?

Which of the following is true about short-run and long-run pricing decisions?

Which statement is true with regards to differential pricing?

The total of all the costs incurred by the activities in the value chain are

Using full costs for pricing decisions can be justified in which of the following circumstances?

The value chain influences long-run pricing decisions because __________ cost is the total of all the costs incurred by the activities in the value chain.

What costs can be justified when managers initially set prices to cover the costs plus a profit and then subsequently adjusts the prices to reflect market conditions?

In the short run,__________ limitations require choices among alternatives.

What costs can be justified when a firm enters into agreements for the development and production of customized products with the Federal government?

Which of the following is true about short-run and long-run pricing decisions?

In the short run,the practice of setting price so that it must at least equal the differential cost of producing and selling the product will result in which of the following?

Which product pricing practice is used by the majority of Japanese companies in assembly-type operations (e.g.electronics and automobiles) ?

Which product pricing factor is primarily used by the majority of American companies?

Which of the following is false about short-run and long-run pricing decisions?

Which of the following influences should not be considered in short-run pricing decisions?