Deck 12: Pricing Decisions, product Profitability Decisions, and Cost Management

Question 1

Target pricing is based on

A)engineered cost.
B)variable manufacturing and nonmanufacturing costs.
C)full product cost.
D)what customers are willing to pay.
E)full manufacturing cost.

Answer 1

D

Question 2

Relevant pricing information for the short-run and long-run should be the same.

Answer 2

False

Question 3

Decisions on the price to bid on a one-time-only special order should include

A)only cost data.
B)only the potential bids of competitors.
C)existing fixed manufacturing overhead.
D)cost data,and the use of variable costing income statements.
E)cost data and potential bids of competitors.

Answer 3

E

Question 4

In deciding whether to accept a special sales order,any fixed costs that would remain unchanged are considered irrelevant data.

Question 5

A price-bidding decision for a one-time-only special order includes an analysis of

A)only marketing costs.
B)all cost drivers.
C)all costs of each function in the value chain.
D)only fixed manufacturing costs.
E)indirect costs of each category in the value chain.

Question 6

The three major influences on pricing decisions are: costs,competitors,and customers.

Question 7

Relevant costs for pricing decisions include manufacturing costs,but not costs from other value-chain functions.

Question 8

Answer the following question(s)using the information below.
Rogers' Heaters is approached by Ms.Yukki,a new customer,to fulfill a large one-time-only special order for a product similar to one offered to regular customers.Rogers' Heaters has excess capacity.The following per unit data apply for sales to regular customers:

If Ms.Yukki wanted a long-term commitment for supplying this product,what price would most likely be quoted to her?

A)$290
B)$390
C)$260
D)$377
E)$507

Question 9

Use the information below to answer the following question(s).
Action Mopeds manufactures mopeds.The following information pertains to the company's normal operations per month:

What is the unit cost when establishing a long-run price for mopeds?

A)$309.50
B)$325.48
C)$444.50
D)$484.50
E)$470.00

Question 10

All costs are relevant in short-run pricing decisions.

Question 11

Special orders increase income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

Question 12

Managers have little discretion in setting prices in market situations which are not competitive.

Question 13

Use the information below to answer the following question(s).
Action Mopeds manufactures mopeds.The following information pertains to the company's normal operations per month:

What is the unit cost for establishing a minimum bid on a one-time-only special order of 1,000 mopeds from an overseas city if all cost relationships remain the same except for a one-time setup charge of $40,000?

A)$269.50
B)$309.50
C)$285.50
D)$360.50
E)$344.50

Question 14

Your company produces 700,000 widgets per year but has the capacity to produce 950,000 units.Company records show the following;full product costs = $85 per unit,which includes fixed manufacturing overhead of $11,and variable overhead of $4 per unit,and direct variable costs of $22,all based on the current 700,000 production run.If the company wanted to bid on a special one-time order,based on the above information only,what would be its minimum bid?

A)$59
B)$81
C)$63
D)$74
E)$85

Question 15

The three major influences on pricing decisions are

A)competition,costs,and customers.
B)competition,demand,and production efficiency.
C)continuous improvement,customer satisfaction,and a dual internal/external focus.
D)variable costs,fixed costs,and mixed costs.
E)economic,qualitative,and costs.

Question 16

Answer the following question(s)using the information below.
Rogers' Heaters is approached by Ms.Yukki,a new customer,to fulfill a large one-time-only special order for a product similar to one offered to regular customers.Rogers' Heaters has excess capacity.The following per unit data apply for sales to regular customers:

For Rogers' Heaters,what is the minimum acceptable price of this one-time-only special order?

A)$290
B)$390
C)$260
D)$507
E)$377

Question 17

Pricing for one-time-only special orders is,typically

A)a pricing decision using the time horizon.
B)a short-run decision.
C)a long-run decision.
D)higher in variable costs than usual.
E)based on fixed costs alone.

Question 18

The controller and sales manager are at odds over the pricing of a new product.What major influences should be considered in pricing the new product? Discuss each briefly.

Question 19

In less competitive markets where products can be differentiated by their features the pricing decision depends on the pricing strategies of competitors.

Question 20

Short-run pricing decisions include adjusting product mix and output volume in a competitive market.

Question 21

Answer the following question(s)using the information below.
Gerry's Generator Supply is approached by Mr.Gladstone,a new customer,to fulfill a large one-time-only special order for a product similar to one offered to regular customers.Gerry's Generator Supply has excess capacity.The following per unit data apply for sales to regular customers:

If Mr.Gladstone wanted a long-term commitment for supplying this product,what price would most likely be quoted to him?

A)$1,000
B)$1,200
C)$1,290
D)$1,400
E)$1,075

Question 22

Backwoods Incorporated manufactures rustic furniture.The cost accounting system estimates manufacturing costs to be $80 per table,consisting of 70% variable costs and 30% fixed costs.The company has surplus capacity available.It is Backwoods' policy to add a 50% markup to full costs.
Required:
a.Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables.What is the lowest price Backwoods should bid on this one-time-only special order?
b.A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style.Backwoods Incorporated is invited to submit a bid to the hotel chain.What is the lowest price per unit Backwoods should bid on this long-term order?

Question 23

Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions,but not long-term pricing decisions.

Question 24

Knowledge of long-run product costs helps guide decisions about entering or remaining in the market for a given product when in a highly competitive price-setting situation.

Question 25

Answer the following question(s)using the information below.
Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers.Welch Manufacturing has a policy of adding a 10% markup to full costs and currently has excess capacity.The following per unit data apply for sales to regular customers:

If the European customer wanted a long-term commitment for supplying this product,what price would most likely be quoted?

A)$66
B)$180
C)$155
D)$217
E)$198

Question 26

Answer the following question(s)using the information below.
Gerry's Generator Supply is approached by Mr.Gladstone,a new customer,to fulfill a large one-time-only special order for a product similar to one offered to regular customers.Gerry's Generator Supply has excess capacity.The following per unit data apply for sales to regular customers:

For Gerry's Generators,what is the minimum acceptable price of this one-time-only special order?

A)$900
B)$1,000
C)$1,075
D)$1,290
E)$1,200

Question 27

Answer the following question(s)using the information below.
Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers.Welch Manufacturing has a policy of adding a 10% markup to full costs and currently has excess capacity.The following per unit data apply for sales to regular customers:

What is the full cost of the product per unit?

A)$60
B)$180
C)$198
D)$66
E)$155

Question 28

Explain the differences between short-run pricing decisions and long-run pricing decisions.

Question 29

Long-run pricing is a strategic decision designed to build long-run relationships with customers in competitive markets.

Question 30

Use the information below to answer the following question(s).
Ferryman Products manufactures coffee tables.Ferryman Products has a policy of adding a 20% markup to full costs and currently has excess capacity.The following information pertains to the company's normal operations per month:

What is the Ferryman Products full product cost for long-run pricing purposes?

A)$134.75
B)$242.25
C)$262.25
D)$122.75
E)$222.25

Question 31

Muskoka Travel offers guided tours through the lake system.Muskoka Travel provides a guide,necessary equipment,and food for a fee of $75 per person per day.Currently the company is providing an average of 600 guide-days per month.Based on available equipment and guides the maximum capacity is 950 guide-days (customers taken on the equivalent of an all day tour)per month.
Variable costs per guide-day for the year were as follows:

Required:
A group of foreign tourists has offered Muskoka Travel a proposal of 300 guide-days in July if they will cut the fee to $67.50 per guide-day.They have their own food and do not want to use the Muskoka Travel menus.Muskoka Travel will incur $300 in additional costs for busing the tourists back and forth to the camp site.If fixed costs would not increase,should Muskoka Travel accept the special offer?

Question 32

Delgreco Products manufactures high-tech cell phones.Delgreco Products has a policy of adding a 30% markup to full costs and currently has excess capacity.The following information pertains to the company's normal operations per month:

Delgreco Products is approached by an overseas customer to fulfill a one-time-only special order for 1,000 units.All cost relationships remain the same except for a one-time setup charge of $15,000.No additional design,marketing,or distribution costs will be incurred.
Required:
a.What is the minimum acceptable bid per unit on this one-time-only special order?
b.What is the full product cost?

Question 33

When prices are set in a competitive marketplace,product costs are the most important influence on pricing decisions.

Question 34

Relevant costs for pricing decisions include manufacturing costs,but not costs from other value-chain functions.

Question 35

Schlickau Company manufactures basketball backboards.The following information pertains to the
company's normal operations per month:

Required:
a.For long-run pricing,what is the full-cost base per unit?
b.Schlickau Company is approached by an overseas city to fulfill a one-time-only special order for 1,000 units.All cost relationships remain the same except for an additional one-time setup charge of $40,000.No additional design,marketing,or distribution costs will be incurred.What is the minimum acceptable bid per unit on this one-time-only special order?

Question 36

At a management meeting,you just finished presenting your cost analysis report,showing unit costs last year for 60,000 widgets produced were $435.00.The sales manager then complained that she was going to lose a special overseas sale because the customer had indicated they could only pay $425.00.She knew from sources that no competitor would be bidding below $440,and she complained that if the company had better cost control,there would be more profit for everyone.The production manager also would like to take the extra job,since even with the extra production,the plant would be under-capacity.
Required:What type of information would you need in order to be able to determine if the extra order could be profitably produced if the selling price was held to $425 per unit?

Question 37

Companies that produce high quality products do not have to pay attention to the actions of their competitors.

Question 38

Use the information below to answer the following question(s).
Ferryman Products manufactures coffee tables.Ferryman Products has a policy of adding a 20% markup to full costs and currently has excess capacity.The following information pertains to the company's normal operations per month:

Ferryman Products is approached by an overseas customer to fulfill a one-time-only special order for 1,000 units.All cost relationships remain the same except for a one-time setup charge of $20,000.No additional design,marketing,or distribution costs will be incurred.What is the minimum acceptable bid per unit on this one-time-only special order?

A)$134.75
B)$457.25
C)$114.75
D)$161.70
E)$122.75

Question 39

Answer the following question(s)using the information below.
Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers.Welch Manufacturing has a policy of adding a 10% markup to full costs and currently has excess capacity.The following per unit data apply for sales to regular customers:

For Welch Manufacturing,what is the minimum acceptable price of this one-time-only special order?

A)$40
B)$55
C)$60
D)$66
E)$86

Question 40

Brady Lumber Company,a producer of oak lumber for furniture companies has an offer to supply a special load of lumber for an exporter.It will take three months to fill the order of 1,000,000 board metres.During the three months half of its production capacity will be utilized for the special order.The total fixed costs for the three months will be $6,000,000.Variable costs per 1,000 board metres will be $2,500.
The marketing manager believes that half of the capacity taken up by the special order can be utilized with regular business which will generate income of $240,000.
Required:
Determine the minimum price that needs to be charged for the special order.

Question 41

Explain the differences between short-run pricing decisions and long-run pricing decisions.

Question 42

For long-run pricing decisions,using stable prices has the advantage of

A)helping build buyer-seller relationships.
B)reducing the need to change cost structures frequently.
C)reducing competition.
D)minimizing the need to monitor competitors prices frequently.
E)increasing margins.

Question 43

Which of the following is TRUE concerning value-engineering?

A)The goal of value-engineering is to eliminate locked-in costs.
B)After a product's design has been value-engineered,costs are difficult to influence.
C)When and how costs are locked in are more important than when and how costs are incurred.
D)Value-engineering does not work when dealing with direct costs.
E)Value-engineering activities reduce both value-added and non-value-added costs.

Question 44

When are a product's direct materials cost most likely to be locked in?

A)when the product is designed
B)when purchasing commits to buying the materials
C)when the bill for the materials is paid
D)when the materials are used in production
E)when materials are received from the supplier

Question 45

Which of the following is TRUE of alternative long-run pricing approaches?

A)A market-based approach only considers how customers will react.
B)A cost-based approach only considers how customers will react.
C)A market-based approach only considers costs.
D)A market-based approach is more logical in a competitive market.
E)In cost-plus pricing,selling price ignores market forces when setting the markup.

Question 46

In a graph with cumulative costs per unit as the Y-axis,with two curves,one being the cumulative costs locked-in,and a second curve showing the cumulative costs per unit incurred in different business functions,which of the following is TRUE?

A)The graph will show the divergence between the amount of locked-in costs and costs incurred,by the end of the production cycle.
B)Locked-in costs rise much slower initially than the incurred cost,but joining the incurred cost line at the completion of the value chain functions.
C)The two cost lines will run parallel.
D)No differences unless the product is manufactured inefficiently.
E)Both curves deal with the same cumulative cost per unit.

Question 47

Taylor Stadium is evaluating ticket prices for its baseball games.Studies have shown that Monday and Tuesday ball games average less than half the fans of games on other days.The following information pertains to the stadium's normal operations per season.

The stadium is open for 5 hours on each day a game is played.The stadium is available for some type of use 300 days a year.All employees work by the hour except for the administrators.In addition,only one game is played per day and each fan would have only one ticket per game.
Required:
What is the unit cost when establishing a long-run price for ball games assuming all tickets are priced the same?

Question 48

Hitz Video Rental is evaluating rental prices.Historical data show that Friday and Saturday have twice the rentals of other days of the week.The following information pertains to the store's normal operations per week:

Required:
What is the unit cost when establishing a long-run price for rentals?

Question 49

A company uses a long-run time horizon to price its product,an electronic component used in aircraft.To produce a normal production run for a year of 100,000 units direct materials are $90,000;direct labour is $180,000;and,rent on leased equipment is $106,000 per year.Currently re-work is running at 4% of production,after testing.The company has the capacity to test 10 units per hour.Manufacturing Overhead has two cost drivers: testing (cost driver is testing hours at $2.50 per hour);and,rework (cost driver is units reworked at $80 per unit re-worked).
Calculate current total manufacturing costs for 100,000 units.

A)$320,000
B)$376,000
C)$396,000
D)$401,000
E)$721,000

Question 50

Most of a product's life-cycle costs are locked in by decisions made during the ________ business function of the value chain.

A)design
B)manufacturing
C)customer-service
D)marketing
E)research

Question 51

Reverse engineering has the objective of reducing costs while still satisfying customer needs.

Question 52

The Maize Eagles are evaluating ticket prices for its basketball games.Studies show that Friday and Saturday night games average more than twice the fans of games on other days.The following information pertains to the stadium's normal operations per season:

The stadium is open for 5 operating hours on each day a game is played.All employees work by the hour except for the administrators.A maximum of one game is played per day and each fan has only one ticket per game.
Required:
What is the unit cost when establishing a long-run price for ball games assuming all tickets are priced the same?

Question 53

Eliminating non-value added activities by reducing their cost drivers,is referred to as

A)value-added pricing.
B)value-added activity base pricing.
C)cost incurrence costing.
D)price engineering.
E)value engineering.

Question 54

Locked-in costs are costs that have been incurred.

Question 55

Target pricing includes: (1)developing a needed product, (2)choosing a target price, (3)deriving a target cost per unit,and (4)performing cost analysis.

Question 56

Value engineering is a time-and-motion system that can result in: improvements in product designs,changes in material specifications,or modifications in process methods.

Question 57

The strategy in which companies systematically evaluate all aspects of the value-chain business functions with the objective of reducing costs to meet customers' needs is referred to as

A)full costing.
B)value engineering.
C)designed-in costs.
D)value analysis.
E)cost incurrence.

Question 58

For setting long-term prices a company should use full product costs.Full product costs for pricing purposes

A)include direct costs only.
B)include all manufacturing costs only.
C)does not include fixed overhead.
D)equals manufacturing and selling costs.
E)include all direct costs plus an appropriate allocation of the indirect costs of all business functions.

Question 59

Valley West Amusement Park is evaluating its ticket prices.It is open during the summer months for 15 weeks.The following information pertains to last year's tourist season.
Costs are expected to remain the same for this year.

Required:
What is the unit cost when establishing a long-run price for tour tickets?

Question 60

Financial reporting systems emphasize cost incurrence by recognizing and recording costs only when a resource is sacrificed or consumed.

Question 61

Use the information below to answer the following question(s).
Pershing Company budgeted the following costs for the production of its one and only product,blades,for the next fiscal year:
Pershing has a target profit of $150,000.
What is the target profit percentage as a percentage of total manufacturing costs?

A)61%
B)21%
C)47%
D)27%
E)35%

Question 62

Use the information below to answer the following question(s).
Pershing Company budgeted the following costs for the production of its one and only product,blades,for the next fiscal year:
Pershing has a target profit of $150,000.
The target profit percentage for setting prices as a percentage of total costs would be

A)61%.
B)21%.
C)47%.
D)27%.
E)35%.

Question 63

Including unit fixed costs for pricing is often used because of its simplicity.

Question 64

Survey evidence suggest that most companies use which type of cost when making pricing decisions?

A)cost-plus
B)absorption product costing
C)variable product costs
D)variable manufacturing costs
E)manufacturing function costs

Question 65

Use the information below to answer the following question(s).
Pershing Company budgeted the following costs for the production of its one and only product,blades,for the next fiscal year:
Pershing has a target profit of $150,000.
The target profit percentage for setting prices as a percentage of total variable costs would be

A)47%.
B)33%.
C)29%.
D)38%.
E)61%.

Question 66

What is the primary reason a firm would adopt target costing?

Question 67

In target costing,what are at least two techniques used to achieve target costing goals?

Question 68

Which of the following best describes the cost-plus pricing approach?

A)Cost base + Markup component = Prospective selling price
B)Prospective selling price + Cost base = Markup component
C)Cost base + Gross margin = Prospective selling price
D)Variable cost + Fixed cost + Contribution margin = Prospective selling price
E)Cost base plus markup ÷ 100% = selling profit percentage

Question 69

Seneca Company has invested $1,000,000 in a plant to make gas pumps for service stations.The average long-run income desired from the plant is $150,000 annually.The annual cost base for each pump is $1,000.What should be the prospective selling price for each pump if the company uses a target return on investment as the markup base?

A)$1,150
B)$2,500
C)$16,000
D)$17,000
E)$17,500

Question 70

The target rate of return on investment is the target operating income that an organization must earn divided by invested capital.

Question 71

When target costing and target pricing are used together

A)the target cost is established first,then the target price.
B)the target cost per unit is the estimated long-run price per unit that enables a product or service to achieve the target profit per unit.
C)the target price is set to undercut the competition.
D)target costs are higher than current costs because of inflation over time.
E)target price is the estimated price for a product or service that a potential customer will be willing to pay.

Question 72

Describe the five steps in developing target pricing and target costs.

Question 73

A product's markup percentage would need to cover fixed manufacturing costs if

A)the company has only fixed manufacturing costs.
B)the company wants to break-even during the fiscal period.
C)the company wants to make a profit.
D)the cost base does not include fixed manufacturing costs.
E)the cost base includes fixed manufacturing costs as well as variable costs.

Question 74

CIMA Engineering uses a manufacturing costing system with one direct cost category (direct materials)and three indirect cost categories:
a.Setup,production order,and materials-handling costs that vary with the number of batches.
b.Manufacturing operations costs that vary with machine-hours.
c.Costs of engineering changes that vary with the number of engineering changes made.
In response to competitive pressures at the end of 2016,Medical Instruments used value-engineering
techniques to reduce manufacturing costs.Actual information for 2015 and 2016 is:

The management of CIMA Engineering wants to evaluate whether value engineering has succeeded in
reducing the target manufacturing cost per unit of one of its flow controllers by 10%.Actual results for 2015 and 2016 for the flow controller are:

Required:
a.Calculate the manufacturing cost for both years.
b.Did the company achieve the target manufacturing cost per unit in 2016? Explain.

Question 75

Explain the difference between locked in costs and costs incurred.Which of these types of costs does a traditional accounting system emphasize? At which stage of the value chain are most costs locked-in? At which stage of the value chain are most costs incurred? What implication does this have for good cost management?

Question 76

When the firm uses the target-costing approach to pricing,the target cost per unit is the difference between the per unit target price and the per unit target

A)contribution margin.
B)operating income.
C)production costs.
D)gross margin.
E)fixed costs.

Question 77

Use the information below to answer the following question(s).
Pershing Company budgeted the following costs for the production of its one and only product,blades,for the next fiscal year:
Pershing has a target profit of $150,000.
If total invested capital is $1,000,000,what is the company's target rate of return on investment?

A)15 %
B)20 %
C)25 %
D)30 %
E)35 %

Question 78

The current selling price for the Pluto,a mid-sized car,is $19,000.For next year it is anticipated that Pluto will have a $12,000 cost base.What is its prospective selling price,using cost-plus pricing,if the company desires a markup component of 15 percent?

A)$10,200
B)$13,800
C)$19,000
D)$30,000
E)$31,000

Question 79

The target pricing approach is easier when

A)products highly differentiated and the consumer life cycle is shorter.
B)products highly differentiated and the consumer life cycle is longer.
C)products are not well differentiated and the consumer life cycle is shorter.
D)products are not well differentiated and the consumer life cycle is longer.
E)little is known about market factors.

Question 80

Johnson Petroleum Company is considering pricing its 5,000 litre petroleum tanks using either variable manufacturing or full product costs as the base.The variable cost base provides a prospective price of $2,800 and the full cost base provides a prospective price of $2,850.The difference between the two prices is

A)the amount of profit to be included.
B)due to the fact that the variable cost base must estimate all fixed costs,other variable costs,and desired profit while the full cost base must estimate only desired profit.
C)known as price discrimination.
D)caused by the inability of most companies to estimate fixed cost per unit with any degree of reliability.
E)known as peak pricing.