Deck 3: Pricing

Question 1

Indirect costs: i) can usually be traced to a specific operation; ii) normally appear in the "Cost of Sales" section of an Income Statement; iii) tend to be associated with fixed costs; iv) tend not to change as output changes. Which of these statements are correct?

A) Only i) and ii) are correct
B) Only i) and iii) are correct
C) Only ii) and iii) are correct
D) Only iii) and iv) are correct

Answer 1

D

Question 2

The price elasticity of demand for a good is 2.1. What is the percentage change in quantity demanded if there is a 3.6% rise in price?

A) 1.71% increase in the quantity demanded
B) 4.5% fall in the quantity demanded
C) 7.56% fall in the quantity demanded
D) 8.63% increase in the quantity demanded

Answer 2

C

Question 3

You are in charge of the local city-owned leisure centre and have been charged with increasing its revenue. The Mayor advises you to decrease the price of a day pass. The City Manager recommends increasing the price of a day pass. What does this tell you about their understanding of price elasticity of demand?

A) The Mayor thinks the demand is elastic and the City Manager thinks the demand is inelastic
B) The mayor think sthe demand is inelastic and the City Manager thinks demand is elastic
C) Nothing - demand may be more or less elastic, but this has no bearing on the issue in question

Answer 3

A

Question 4

A company has fixed costs of €185,000 and variable costs of €10 per unit. What are the costs per unit if: i) 25,000 units are produced and ii) 65,000 units are produced?

A) i) €17.40 and ii) €12.85
B) i) €19.56 and ii) €15.32
C) i) €25.50 and ii) €18. 37
D) i) €28.42 and ii) €22.96

Question 5

A small family-run, 60-room hotel is open all the year round.  Variable costs per guest are $ 15 and total annual overhead $ 1.6 million. Rooms division absorbs 60% of the overheads and occupancy is expected to be 55%. If the hotel has a desired mark up of 35%, how much would they charge for a room?

A) $ 128
B) $ 137.50
C) $ 152
D) $ 160

Question 6

One year a restaurant sells 83,000 meals at an average price of $ 21. If variable costs are $ 12 and fixed costs $ 529,000, what is the contribution?

A) $ 218,000
B) $ 348,000
C) $ 747,000
D) $ 996,000

Question 7

An overhead expense of $ 535,000 is allocated to three departments A, B and C as 1.5 : 2.0 : 3.5. respectively. How much would be allocated to department B?

A) $ 152,857
B) $ 161,997
C) $ 166,558
D) $ 178,333

Question 8

Use the table below to answer the question. All numbers in local currency. Assume indirect costs are allocated according to the value of equipment in each department. Cleaning has 75,000 worth of equipment and Catering has 300,000. That would mean: $$\begin{array} { | l | l | l | l | } \hline & \text { Cleaning } & \text { Catering } & \text { Total } \\\hline \text { Sales Revenue } & 195,000 & 455,000 & 650,000 \\\hline \text { Direct costs } & 165,000 & 300,000 & 465,000 \\\hline \text { Contribution } & & & \\\hline \text { Indirect Costs } & & & 105,000 \\\hline \text { Operating Income } & & & \\\hline\end{array}$$

A) Catering makes a profit of 65,000 and Cleaning makes a profit of 15,000.
B) Catering makes a profit of 71,000 and Cleaning makes a profit of 9,000.
C) Catering makes a profit of 76,700 and Cleaning makes a profit of 3,300.
D) Catering makes a profit of 85,200 and Cleaning makes a loss of 5,200.

Question 9

A company has the following estimated costs for the next financial year (see table). The firm estimate they will produce and sell 140,000 units in the next financial year.  If they use a Variable Cost Mark-Up of 80%, what will their selling price be? $$\begin{array} { | l | l | } \hline \text { Direct materials } & 1,300,000 \\\hline \text { Direct labour } & 2,195,000 \\\hline \text { Mortgage Repayments } & 725,000 \\\hline \text { Property Taxes } & 245,000 \\\hline \begin{array} { l } \text { General Headquarters \& Administration } \\\text { Expenses }\end{array} & 765,000 \\\hline \text { Other Overhead Expenses } &580,000 \\\hline \text { Other Variable Costs } &460,000 \\\hline\end{array}$$

A) 50.85
B) 68.44
C) 76.75
D) 91.68

Question 10

The Queen's Arms Hotel's year-end sales and costs figures are in the table - all in local currency. The owner wants to close during low season, but the assistant manager suggests keeping open is better. Who is right? $$\begin{array} { | l | l | l | l | } \hline & 9 \text { months } & 3 \text { months } & \text { Total } \\\hline \text { Sales } & 450,000 & 50,000 & 500,000 \\\hline \text { Direct costs } & 200,000 & 22,000 & 222,000 \\\hline \text { Contribution } & 250,000 & 28,000 & 278,000 \\\hline \text { Indirect costs } & 170,000 & 30,000 & 200,000 \\\hline \text { Operating income } & 80,000 & 2,000 & 78,000 \\\hline\end{array}$$

A) The assistant manager is right, as closing for the 3-month low season would cause total operating income to fall to 50,000
B) The assistant manager is right, as closing for the 3-month low season would cause total operating income to fall to 20,000.
C) The owner is right, as closing for the 3-month low season would cause total operating income to rise to 80,000
D) The owner is right, as closing for the 3-month low season would cause total operating income to rise to 250,000

Question 11

Which of the following types of costs is generally allocated among different revenue generating departments (or cost centres)?

A) overhead costs
B) incremental costs
C) discretionary costs
D) step costs

Question 12

A restaurant uses the Desired Ingredient Cost Mark-Up (DICMU) method of menu pricing. They have a policy of ensuring that for all meals ingredients cost 12.5% of the overall menu price. The table has the purchase prices of a beef dish (all in local currency). What price will the restaurant charge for this meal?
A. 5.6
B. 18.1
C. 44.8
D. 70

Question 13

What is the Hubbart Formula?

A) A pricing method which starts with the desired ingredient cost mark up and works forwards to calculate the price of the item.
B) A pricing method which starts with the desired amount of profit and works backwards to calculate the average room rate.
C) A pricing method which starts with the view that consumers assume certain price levels are associated with particular quality standards.
D) A pricing method which starts with the assumption that the level of competition is of paramount importance when establishing the price of a hotel room.

Question 14

A hotel's owners desire a return of 20% (after tax) on their investment of 10 million dollars. If corporation tax is 37.5%, what is the required income before tax?

A) 0.75 million
B) 2 million
C) 3.2 million
D) 6.25 million

Question 15

How are hotel rooms 'perishable goods'?

A) Distribution partners such as OTAs get allocated a limited number of rooms.
B) A guest room needs a major refurbishment investment every 7 to 10 years.
C) You only have 24 hours a day to sell it at the best rate possible.