Question 1

In the economic profit-maximising pricing model, how do the total revenue and total cost curves generally behave?

Accepted Answer

C

Question 2

Which of the following statements about prices is false?

Accepted Answer

Setting prices close to variable manufacturing costs would result in a lower profit margin, not a higher one. Therefore, statement D is false.

Question 3

If the target profit is $60 000 for an annual volume of 480 units, the total annual fixed costs are $168 000 and the total variable cost per unit is $450, then what is the mark-up percentage on full cost?

Accepted Answer

The mark-up percentage on full cost is calculated as follows:Mark-up percentage on full cost = (Target profit / (Total annual fixed costs + Total variable cost per unit * Annual volume)) * 100= (60,000 / (168,000 + 450 * 480)) * 100= (60,000 / 336,000) * 100= 0.1786 * 100= 17.86%

Question 4

The curve that shows the relationship between sales price and quantity sold is called the:

Accepted Answer

The curve that shows the relationship between sales price and quantity sold is called the demand curve. This is because it represents the quantity of a good or service that consumers are willing and able to buy at various prices, based on the law of demand. The marginal revenue curve shows the change in revenue that results from selling an additional unit of a good or service, the average cost curve shows the average cost per unit of production at different levels of output, and the revenue curve shows the total revenue earned at different levels of output.

Question 5

Which of the following statements regarding price is/are true?
i. Prices are determined by the market, subject to the constraint that costs must be covered in the long run.
ii. Prices are based on costs, subject to the constraint that customers and competitors will exert an influence.
ii. A balance of market forces and cost is important when making pricing decisions.

Accepted Answer

All statements are true regarding price. Prices are influenced by market forces, costs, customer expectations, and competitor pricing, requiring a balance of these factors for effective pricing decisions.

Question 6

The demand curve is also called the:

Accepted Answer

The demand curve shows the relationship between quantity demanded and price, and represents the average revenue received for each unit sold. It is not the total revenue curve (which shows total revenue at different levels of output), nor the marginal revenue curve (which shows the change in revenue from selling one additional unit of output), nor the marginal cost curve (which shows the change in total cost from producing one additional unit of output).

Question 7

Which of the following statements regarding absorption cost pricing formulas is/are true?
i. Absorption cost pricing formulas provide a justifiable price that tends to be perceived as equitable by all parties.
ii. Since absorption cost information is necessary for external reporting, it is cost effective to use it for pricing.
iii. Absorption cost-plus pricing formulas generally will result in a higher mark-up percentage than variable manufacturing cost formulas.

Accepted Answer

Absorption cost pricing formulas provide a justifiable price that tends to be perceived as equitable by all parties. Since absorption cost information is necessary for external reporting, it is cost effective to use it for pricing.

Question 8

Which of the following is not an advantage of the variable cost pricing formula?

Accepted Answer

The variable cost pricing formula is not required for external reporting, so it is not an advantage that it is cost effective to use for that purpose.

Question 9

Which of the following statements regarding cost-plus pricing is/are true?

Accepted Answer

All of the given answers are true. Cost-plus pricing formulas take into account both fixed and variable costs, provide a starting point for pricing decisions, and can be used to update prices for existing products.

Question 10

Consider the following statements regarding cost-plus pricing formulas.
i. Full cost pricing formulas have the advantage of keeping the manager's attention focused on covering total costs.
ii. With cost-plus pricing formulas, management must consider market conditions and likely actions of competitors.
iii. Variable cost-plus formulas have the advantage of not obscuring important information about cost behaviour.
Which of the above statements is/are true?

Accepted Answer

All the statements are true. Statement i highlights the focus on covering total costs in full cost pricing. Statement ii emphasizes the need to consider market conditions and competitor actions in cost-plus pricing. Statement iii points out the advantage of variable cost-plus formulas in providing clear information about cost behavior.

Question 11

In the economic profit-maximising pricing model, how do the marginal revenue and marginal cost curves generally behave?

Accepted Answer

The answer of In the economic profit-maximising pricing model, how...

Question 12

Managers base prices on product costs due to many reasons. Which of the following is not one of the reasons?

Accepted Answer

Cost-based pricing is not specifically useful for standard cost analysis, but rather for setting a baseline price based on production costs.

Question 13

Which of the following represents the cost-based pricing formula?

Accepted Answer

The cost-based pricing formula involves adding a mark-up percentage to the cost of the product to determine the sale price. Option A represents this formula correctly, while the other options either leave out a necessary component or include an unnecessary one.

Question 14

Which of the following statements is false regarding price elasticity?

Accepted Answer

Demand is actually considered inelastic if price changes have little or no impact on sales quantity, not elastic as stated in choice C. Therefore, choice C is false.

Question 15

If the target profit is $60 000 for an annual volume of 480 units, the total annual fixed costs are $168 000 and the total variable cost per unit is $450, then what is the mark-up percentage on total variable cost?

Accepted Answer

The mark-up percentage on total variable cost is calculated by dividing the target profit by the total variable cost and then multiplying by 100. First, calculate the total variable cost: 480 units * $450/unit = $216,000. The target profit is $60,000. So, the mark-up percentage = ($60,000 / $216,000) * 100 = 27.8%. However, to find the mark-up on a per unit basis, we consider the cost plus profit per unit. The selling price per unit must cover the variable cost ($450) plus a portion of the fixed costs and profit. The fixed costs are $168,000, and dividing this by the volume (480 units) gives $350 per unit for fixed costs. Adding the target profit gives a total required revenue of $228,000 ($168,000 fixed costs + $60,000 profit). Dividing by the volume gives a required revenue per unit of $475. The mark-up percentage on the variable cost is then calculated as [(Selling Price - Variable Cost) / Variable Cost] * 100. This calculation was incorrect in the initial step, leading to an incorrect conclusion. The correct approach involves determining the selling price per unit first, which was not directly provided or correctly derived from the given information. The error was in the calculation and interpretation of how the mark-up percentage is derived from the given data. Without the correct selling price per unit, the mark-up calculation as initially described does not apply directly to the options provided.

Question 16

Which of the following statements regarding the profit maximising model is/are true?
i. The profit maximising model is limited because a firm's demand and marginal revenue are difficult to discern.
ii. The marginal revenue and marginal cost model is valid for all forms of market.
iii. Costing systems are not usually designed to measure the marginal changes in cost incurred as production and sales increase unit by unit.

Accepted Answer

Statement i is true because determining a firm's demand and marginal revenue can be challenging in some situations. Statement iii is also true because traditional costing systems are not designed to measure marginal changes in cost as production and sales increase. Statement ii is false because the marginal revenue and marginal cost model assumes perfect competition, which may not be applicable to all forms of market.

Question 17

The marginal revenue curve:

Accepted Answer

The marginal revenue curve shows the change in total revenue that results from a change in the quantity sold. It is the additional revenue a firm earns from selling one more unit of a good or service. Therefore, choice A is the best answer. Choices B, C, and D are incorrect because they do not accurately describe the purpose or relationship of the marginal revenue curve.

Question 18

If the average invested capital is $300 000 and the target return on investment is 20 per cent, what is the target profit?

Accepted Answer

The target profit can be calculated as follows:
Target profit = Average invested capital x Target return on investment
Target profit = $300,000 x 20% = $60,000
Therefore, the answer is B, $60,000.

Question 19

Which of the following formulas represents the mark-up percentage on full cost?

Accepted Answer

Mark-up percentage on full cost is calculated by dividing the target profit by the total cost (which includes both fixed and variable costs) and then multiplying by 100 to get a percentage. Option A correctly represents this calculation, albeit with some formatting issues in the text.

Question 20

Which of the following is not an issue when making a pricing decision?

Accepted Answer

While environmental regulations may impact the cost of production and thus influence pricing decisions, they are not typically considered an issue in the actual pricing decision-making process. Legal issues, competition, and political considerations can all be factors in determining pricing strategies.

Quiz 20: Pricing and Product Mix Decisions