Question 1

Figure 18-1
The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
  The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing
$0.25 per case. Bad debt expense averages 10% of sales.
-Refer to Figure 18-1. What is the profit per case for drugstore chains?

Accepted Answer

The cost to manufacture one case of bottled water is $2. The drugstore chains require special handling costs of $0.20 per case and increased administrative assistance costing $45,000 per year. Therefore, the cost to sell one case of bottled water to drugstore chains is $2 + $0.20 = $2.20. The selling price of a case of bottled water is not provided, so we cannot calculate the profit per case.

Question 2

Which of the following markets is characterized by the following: only a few firms in the industry, a fairly unique product, difficult entry into the industry, and spending for differentiation of the product?

Accepted Answer

An oligopoly market is characterized by only a few firms in the industry, a fairly unique product, difficult entry into the industry, and spending for differentiation of the product. In this market, the firms have some degree of control over the price and output of the industry. Perfectly competitive market is characterized by many firms, homogeneous products, easy entry and exit, and no market power. Monopolistic competition is characterized by many firms, differentiated products, easy entry and exit, and limited market power. Monopoly is characterized by a single firm, no close substitutes, high barriers to entry, and a significant degree of market power.

Question 3

Figure 18-1
The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
  The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing
$0.25 per case. Bad debt expense averages 10% of sales.
-Refer to Figure 18-1. What customer type has the least total cost per case ?

Accepted Answer

The answer of Figure 18-1
The Lancashire Corporation manufactures bottled water...

Question 4

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2016 when 30,000 were projected. Sales for 2017 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?

Accepted Answer

To calculate the profit (loss) for Option Two, we need to first calculate the new variable cost per game after reducing material costs by $10.

New variable cost = $56 - $10 = $46

Next, we can calculate the new contribution margin per game by subtracting the new variable cost from the new selling price of $60.

Contribution margin per game = $60 - $46 = $14

Finally, we can calculate the total contribution margin for 10,000 units.

Total contribution margin = 10,000 units x $14 = $140,000

We also need to take into account the reduction in advertising cost by $60,000, which reduces the fixed costs to $40,000.

Total costs = $40,000 (fixed) + 10,000 units x $46 (variable) = $460,000

Profit (loss) = Total contribution margin - Total costs

Profit (loss) = $140,000 - $460,000 = ($320,000)

Therefore, Option Two would result in a loss of ($320,000).

The best choice would be Option One because it has the potential to sell the most units at a slightly reduced price, resulting in higher total revenue and potentially a higher contribution margin.

Question 5

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

Accepted Answer

The demand curve is typically downward sloping, indicating that as the price decreases, the quantity demanded increases. The supply curve is usually upward sloping, indicating that as the price increases, the quantity supplied increases.

Question 6

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2016 when 30,000 were projected. Sales for 2017 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?

Accepted Answer

The profit from Option One is calculated as follows: Revenue = 15,000 units * $70 = $1,050,000. Variable Costs = 15,000 units * $56 = $840,000. Fixed Costs = $100,000. Profit = Revenue - Variable Costs - Fixed Costs = $1,050,000 - $840,000 - $100,000 = $110,000.

Question 7

Which of the following markets is characterized by the following: a single firm in the industry, a unique product, and difficult entry into the industry?

Accepted Answer

A monopoly is characterized by a single firm in the industry, a unique product, and difficult entry into the industry due to barriers to entry. In a monopoly, the firm has the power to set prices and control the quantity supplied. The other options do not fit this description. A perfectly competitive market has many firms selling identical products with easy entry into the market. Monopolistic competition has many firms selling differentiated products with relatively easy entry into the market. An oligopoly has a few dominant firms in the industry with significant barriers to entry.

Question 8

Figure 18-1
The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
  The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing
$0.25 per case. Bad debt expense averages 10% of sales.
-Refer to Figure 18-1. What is the total cost per case for drugstore chains?

Accepted Answer

The total cost per case for drugstore chains would be: 
$2 (average manufacturing cost) + $0.20 (special handling costs) + $0.45 (increased administrative assistance cost per case) = $2.65
Therefore, the best choice is B as it provides the correct total cost per case for drugstore chains.

Question 9

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

Accepted Answer

Products with inelastic demand have a relatively small change in demand when there is a change in price. Based on the given information, Product A has a unique feature that provides a competitive advantage, which suggests that customers may be willing to pay the current price regardless of changes. Product C, on the other hand, has a limited availability, which also hints at an inelastic demand. Both of these factors indicate that the demand for Product A and Product C is likely to be inelastic, making answer D the correct choice.

Question 10

Which of the following markets is characterized by the following: many firms in the industry, a somewhat unique product, fairly easy entry into the industry, and spending for differentiation of the product?

Accepted Answer

Monopolistic competition describes a market structure with many firms, differentiated products, relatively easy entry and exit, and expenses toward product differentiation.

Question 11

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?

Accepted Answer

A perfectly competitive market is characterized by many buyers and sellers, a homogeneous product, easy entry into and exit from the industry, and all firms are price takers. Monopolistic competition involves differentiated products, while a monopoly involves only one seller and significant barriers to entry. Oligopoly involves a small number of large firms controlling the market.

Question 12

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2016 when 30,000 were projected. Sales for 2017 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?

Accepted Answer

The answer of Scottish Company manufactures a variety of toys...

Question 13

Which of the following is true regarding expenses related to specific market structure types?

Accepted Answer

The answer of Which of the following is true regarding...

Question 14

Which type of expenses does a monopoly usually incur that are different from the other types of market structures?

Accepted Answer

The answer of Which type of expenses does a monopoly...

Question 15

Johanson Company had the following information: Revenues $400,000
Cost of goods sold:
Direct materials $100,000 Direct labor 50,000
Overhead 50,000 200,000
Gross profit $200,000
Selling and administrative expenses
75,000
Operating income $125,000
  What is the markup based on prime costs?

Accepted Answer

Markup based on prime costs is calculated as (Selling price - Direct materials cost - Direct labor cost) / Direct materials cost. In this case, the selling price is the revenues which is $400,000. Direct materials cost and direct labor cost are $100,000 and $50,000 respectively. Therefore, the markup based on prime costs is (($400,000 - $100,000 - $50,000) / $100,000) x 100% = 166.7%.

Question 16

Figure 18-1
The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
  The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing
$0.25 per case. Bad debt expense averages 10% of sales.
-Refer to Figure 18-1. What customer type is the most profitable ?

Accepted Answer

The supermarket chains are the most profitable customer type as they require only electronic ordering which incurs a cost of $25,000 annually, and there are no extra handling, marketing or commission costs associated with them.

Question 17

Monopolistic competition is best defined as

Accepted Answer

Monopolistic competition is a market structure where there are many buyers and sellers, but the products are differentiated on some basis. This differentiation can be based on quality, design, packaging, branding, or any other feature that gives the product a unique identity. Due to this differentiation, customers are willing to pay a little more for the unique features that appeal to them. Monopolistic competition combines elements of perfect competition and monopoly, but it is closer to a competitive situation as there are many firms in the market selling differentiated products. So, all of the options A, B, and C are correct.

Question 18

Which of the following is NOT an example of a market structure?

Accepted Answer

Oligopoly, monopoly, and perfectly competitive are all examples of market structures. Barrier market is not a recognized market structure term.

Question 19

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

Accepted Answer

The answer of The following information pertains to three different...

Question 20

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2016 when 30,000 were projected. Sales for 2017 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?

Accepted Answer

Option Three is preferred because it maximizes profit by selling 15,000 units at an effective price of $77 (after accounting for the rebate redemption rate), resulting in higher total contribution margin compared to the other options.

Quiz 18: Pricing and Profitability Analysis