Question 1

Activity-based pricing

Accepted Answer

Activity-based pricing charges customers for each service they use, rather than a lump sum for all services. This encourages customers to be mindful of the services they use and can lead to more efficient resource allocation for the seller. However, it may not necessarily result in lower prices for all customers, as those who use more services will pay more.

Question 2

Sunshine Travel is designing a travel mug and has determined that a price of $8 will be attractive in the marketplace.The company seeks to earn a profit of 30% percent of selling price, and estimates it can sell 21,000 mugs.Total fixed costs are expected to be $23,100.By how much will the target cost change per mug if the profit is raised to 40% instead of 30%?

Accepted Answer

The target cost per mug is $5.60. If the profit is raised to 40%, the target cost per mug will increase to $6.40. The difference is $0.80.

Question 3

Which one of the following is not assigned to individual customers when employing a customer profitability analysis?

Accepted Answer

Costs of designing a new product are not assigned to individual customers as they are not related to any specific customer's transactions. Rather, these costs are spread across all customers who purchase the new product. The other options (sales revenue, cost of goods sold, cost of filling the customer's orders) are all directly related to individual customer transactions and are typically used in customer profitability analysis.

Question 4

Tire Kingdom requires a 60% profit margin on it dirt bike racing tires.At a price of $78 per tire the company expects to sell 16,000 tires.How much is the company's target cost on each tire?

Accepted Answer

To find the target cost, use the formula: Cost = Selling Price / (1 + Profit Margin). Here, Cost = $78 / (1 + 0.60) = $78 / 1.60 = $48.75. However, the correct calculation should be $78 * (1 - 0.60) = $31.20.

Question 5

Mays Tools believes it can sell 80,000 of its proposed new Dirt Dodgers at a price of $50 each.If the company desires to make a profit of 60% of selling price, what is the target variable cost per Dirt Dodger?

Accepted Answer

The answer of Mays Tools believes it can sell 80,000...

Question 6

Light Bright believes it can sell 40,000 of its newly developed laser lights at a price of $24.00 each.There will be $680,000 in fixed costs associated with the laser light.If the company desires to make a profit of $100,000 on the laser light, what is the target variable cost for each laser light?

Accepted Answer

The answer of Light Bright believes it can sell 40,000...

Question 7

In which stage are most of the manufacturing costs for a product determined?

Accepted Answer

Most of the manufacturing costs for a product are determined during the design stage, where decisions are made regarding materials, production methods, and other factors that influence the cost of manufacturing the product. Therefore, option A is the best choice.

Question 8

Clinton Creations believes it can sell 10,000 of its proposed new waterproof camera at a price of $200 each.There will be annual fixed costs associated with developing, marketing and manufacturing the camera of $540,000.If the company desires to make a profit of 40%, how much is the target variable cost per camera?

Accepted Answer

To determine the target variable cost per camera, we need to first calculate the target revenue for selling 10,000 cameras at a price of $200 each:

Target revenue = 10,000 x $200 = $2,000,000

We then need to subtract the fixed costs from this target revenue to find the target contribution margin:

Target contribution margin = $2,000,000 - $540,000 = $1,460,000

Since the company desires a profit of 40%, we can write the profit equation as:

Profit = (Selling price - Variable cost) x Quantity - Fixed costs

where Selling price = $200, Quantity = 10,000 and Profit = 40% of Selling price x Quantity.

Solving for Variable cost, we get:

Variable cost = (Selling price x Quantity - Fixed costs - Profit) / Quantity

Substituting the values, we get:

Variable cost = ($200 x 10,000 - $540,000 - 0.4 x $200 x 10,000) / 10,000 = $66

Therefore, the target variable cost per camera is $66. The correct choice is (C).

Question 9

A company believes it can sell 8,000 units of its proposed new garage door opener at a price of $100 each.If the company desires to make a profit of 30% of selling price on the garage door opener, what is the target cost per opener?

Accepted Answer

The desired profit is 30% of the selling price, which is $100. Therefore, the target cost per opener should be 100 - (100 * 0.30) = $70 to achieve a 30% profit margin.

Question 10

A new product is being designed by an engineering team at Gray Security.Several managers and employees from the cost accounting department and the marketing department are also on the team to evaluate the product and determine the cost using a target costing methodology.An analysis of similar products on the market suggests a price of $135 per unit.The company requires a profit of 30% of selling price.How much is the target cost per unit?

Accepted Answer

Target cost per unit = selling price per unit - desired profit per unit
Target cost per unit = $135 - (30% of $135)
Target cost per unit = $135 - $40.50
Target cost per unit = $94.50

Therefore, the target cost per unit is $94.50, which is option D.

Question 11

A company believes it can sell 2,000,000 units of its proposed new bottle stopper at a price of $16.00 each.If the company desires to make a profit of $3,000,000 on the bottle stopper, what is the target cost for each bottle stopper?

Accepted Answer

The target cost per bottle stopper is calculated by subtracting the desired profit from the total revenue and then dividing by the number of units. Total revenue is 2,000,000 units * $16 = $32,000,000. Desired profit is $3,000,000. Therefore, target cost = ($32,000,000 - $3,000,000) / 2,000,000 units = $14.50.

Question 12

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability.Results for the year appear below: $\begin{array}{lrlr}\hline \text { Cost Pool } & \text { Cost } & \text { Cost Driver } & \text { Quantity } \
\hline \text { Processing electronic orders } & \$ 400,000 & \text { N umber of orders } & 40,000 \
\text { Processing non-electronic orders } & 120,000 & \text { N umber of orders } & 8,000 \
\text { Picking orders } & 240,000 & \text { N umber of different products ordered } & 120,000 \
\text { Packaging orders } & 180,000 & \text { N umber of items ordered } & 150,000 \
\text { Returns } & 15,000 & \text { Number of returns } & 3,000
\end{array}$ One customer of First Décor placed 30 electronic orders with a total selling price of $25,400.The direct cost of these orders is $17,200.The orders consist of five different products with a total of 2,200 items, and two returns.Using an activity-based costing method, how much are the indirect costs associated with serving this customer?

Accepted Answer

The indirect costs are calculated by allocating costs based on the cost drivers:  - Electronic orders: $ \frac{400,000}{40,000} \times 30 = 300 $  - Picking orders: $ \frac{240,000}{120,000} \times 5 = 10 $  - Packaging orders: $ \frac{180,000}{150,000} \times 2,200 = 2,640 $  - Returns: $ \frac{15,000}{3,000} \times 2 = 10 $  Total indirect costs = 300 + 10 + 2,640 + 10 = 2,960.

Question 13

Sunshine Travel is designing a travel mug and has determined that a price of $8 will be attractive in the marketplace.The company seeks to earn a profit of 30% percent of selling price, and estimates it can sell 21,000 mugs.Total fixed costs are expected to be $23,100.How much is the target cost per mug?

Accepted Answer

First, we need to calculate the target selling price:
Target Selling Price = $8 + ($8 x 30%) = $10.40

Next, we need to calculate the target cost per mug:
Total Target Cost = Target Selling Price x Units Sold
$218,400 = $10.40 x 21,000

Total Target Cost = Total Fixed Costs + Total Variable Costs
Total Variable Costs = Total Target Cost - Total Fixed Costs
Total Variable Costs = $218,400 - $23,100 = $195,300

Target Cost per Mug = Total Variable Costs / Units Sold
Target Cost per Mug = $195,300 / 21,000
Target Cost per Mug = $9.30

Therefore, the target cost per mug is $9.30, which is closest to choice B ($5.60). This means that Sunshine Travel will need to make sure their costs stay below $5.60 per mug in order to achieve their desired profit margin and selling price.

Question 14

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability.Results for the year appear below: $\begin{array}{lrlr}\hline \text { Cost Pool } & \text { Cost } & \text { Cost Driver } & \text { Quantity } \
\hline \text { Processing electronic orders } & \$ 400,000 & \text { N umber of orders } & 40,000 \
\text { Processing non-electronic orders } & 120,000 & \text { N umber of orders } & 8,000 \
\text { Picking orders } & 240,000 & \text { N umber of different products ordered } & 120,000 \
\text { Packaging orders } & 180,000 & \text { N umber of items ordered } & 150,000 \
\text { Returns } & 15,000 & \text { Number of returns } & 3,000
\end{array}$ If all costs were assigned to customers based on the number of items ordered, what would be the cost per item ordered?

Accepted Answer

The answer of First Décor has analyzed the indirect costs...

Question 15

For which of the following items might a customer be charged extra for an order under activity-based pricing?

Accepted Answer

Requesting an order be delivered in three separate shipments would require additional resources and time to coordinate and fulfill, making it a possible charge under activity-based pricing. Placing the order during non-peak times, using an automated order system, and tracking delivery via an online support utility are all activities that are typically included in the cost of the order and would not warrant additional charges under activity-based pricing.

Question 16

Which one of the following might result from performing a customer profitability analysis?

Accepted Answer

Customer profitability analysis helps identify unprofitable customers, which may lead to the decision to drop them to improve overall profitability.

Question 17

A company estimates that ordering costs are $2.00 per order, picking costs are $1.00 for each different item ordered, packing costs are $0.07 per item, and return costs are $40.00 per return.A customer orders $8,000 worth of goods with direct costs of $6,200.The customer places 70 orders, orders 24 unique items, 940 total items, and makes 7 returns.What is the customer profit?

Accepted Answer

To calculate the profit, we first need to calculate the total cost.

Total ordering cost = 70 orders x $2.00 per order = $140.00
Total picking cost = 24 unique items x $1.00 per item = $24.00
Total packing cost = 940 total items x $0.07 per item = $65.80
Total return cost = 7 returns x $40 per return = $280.00
Total direct cost = $6,200.00
Total cost = $140.00 + $24.00 + $65.80 + $280.00 + $6,200.00 = $6,709.80

Now, we can calculate the profit:

Profit = Total revenue - Total cost
Total revenue = $8,000.00
Profit = $8,000.00 - $6,709.80 = $1,290.20

Therefore, the best choice is B.

Question 18

Mason Kitchenware requires a 30% profit margin on the selling price of its jar openers.At a price of $16 per opener, the company expects to sell 8,000 openers.Total fixed costs are expected to be $28,000.How much is the target cost per jar opener?

Accepted Answer

First, we need to calculate the variable cost per unit:
Profit margin = 30% of Selling price
Profit margin = 30% x $16
Profit margin = $4.80

Selling price = Variable cost + Profit margin
$16 = Variable cost + $4.80
Variable cost = $11.20

Next, we can use the following formula to find the target cost per jar opener:
Target cost per opener = Total fixed costs / Expected units sold + Variable cost per unit

Target cost per opener = $28,000 / 8,000 + $11.20
Target cost per opener = $3.50 + $11.20
Target cost per opener = $14.70

However, we need to add the 30% profit margin to obtain the target selling price:
Target selling price = Target cost per opener + Profit margin
Target selling price = $14.70 + 30% x $14.70
Target selling price = $19.11

Therefore, the target cost per jar opener is $11.20.

Question 19

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability.Results for the year appear below: $\begin{array}{lrlr}\hline \text { Cost Pool } & \text { Cost } & \text { Cost Driver } & \text { Quantity } \
\hline \text { Processing electronic orders } & \$ 400,000 & \text { N umber of orders } & 40,000 \
\text { Processing non-electronic orders } & 120,000 & \text { N umber of orders } & 8,000 \
\text { Picking orders } & 240,000 & \text { N umber of different products ordered } & 120,000 \
\text { Packaging orders } & 180,000 & \text { N umber of items ordered } & 150,000 \
\text { Returns } & 15,000 & \text { Number of returns } & 3,000
\end{array}$ What is the cost allocation for two Internet orders for 22 items with 7 different products and one return?

Accepted Answer

The cost allocation for two Internet orders for 22 items with 7 different products and one return is $65.40. This is calculated as follows:Processing electronic orders: 2 orders x $400,000 / 40,000 orders = $20Picking orders: 7 different products x $240,000 / 120,000 products = $14Packaging orders: 22 items x $180,000 / 150,000 items = $31.20Returns: 1 return x $15,000 / 3,000 returns = $5Total cost allocation: $20 + $14 + $31.20 + $5 = $65.40

Question 20

Which one of the following is a goal of activity-based pricing?

Accepted Answer

The goal of activity-based pricing is to charge customers for the costs that they are creating, which means that it is more cost-effective for businesses while offering customers a level of fairness in terms of prices. By understanding the costs related to various activities, companies can perform a cost-benefit analysis on their customer base and make changes that help to bring more profits over time.

Quiz 8: Pricing Decisions