Chapter 13

The cost-plus pricing approach is generally in the form ________. 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

A) Cost base + Markup component = Prospective selling price

9) Which of the following is true of target costing? A) In target costing, all future costs are considered for long-run pricing. B) In target costing, cost is the starting point for determining the price of the product. C) In target costing, input from suppliers and distributors are not relevant. D) In target costing, a key goal is to minimize value added activities of a product.

A) In target costing, all future costs are considered for long-run pricing.

Which of the following can be used to arrive at the target rate of return on investment? A) dividing target annual operating income by invested capital B) multiplying target annual operating income by the rate of fixed preference dividend C) dividing invested capital by estimated dividend rate D) multiplying earnings available to equity stakeholders by price-equity ratio

A) dividing target annual operating income by invested capital

Which of the following statements is true regarding cost-plus pricing? A) It starts with a target price which is the estimated price for a product. B) A company uses a markup percentage that estimates a product price that covers full product costs and earns the required return on investment. C) It first determines product characteristics and target price on the basis of customer preferences and then computes a target cost. D) The cost-plus price chosen has already been studied for customer reaction to the price

B) A company uses a markup percentage that estimates a product price that covers full product costs and earns the required return on investment.

5) Place the following steps for the implementation of target costing in order: A = Derive a target cost B = Develop a target price C = Perform value engineering D = Determine target operating income A) B D A C B) B A D C C) A D B C D) A B C D

B) B A D C

10) In relation to target costing, which of the following best describes target cost per unit? A) It is the targeted cost of producing one unit to achieve the current year's budgeted profit. B) It is the estimated long-run cost of a product that enables the company to achieve its target operating income. C) It is the cost that can be achieved by ensuring that the company produced its products at maximum efficiency. D) It is the budgeted cost that the company estimates in producing a unit in the current budget period.

B) It is the estimated long-run cost of a product that enables the company to achieve its target operating income.

Which of the following is a disadvantage of using target costing? A) It may lead to an increase in all the non-value added cost of the product B) It may lead to a product being in development stage for a long time as the team repeatedly evaluates alternative designs. C) It may lead to increased employee participation in the cost reduction process of the organization thereby making it impossible to co-ordinate the process. D) It eliminates creativity in the manufacturing process as the focus is always on cost reduction and cost elimination.

B) It may lead to a product being in development stage for a long time as the team repeatedly evaluates alternative designs.

8) ________ identifies an estimated price customers are willing to pay and then computes the cost to be achieved to earn the desired profit. A) Cost-plus pricing B) Target costing C) Kaizen costing D) Peak-load costing

B) Target costing

Sales of Blair Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Blair Inc. can be sold only for $400 as opposed to the current market price charged of $500 per unit. Blair Inc. has decided to revise its sales price to $400. The annual sales target volume of the product after price revision is 200 units. Blair Inc. wants to earn 18% on its sales amount. 17) What are the target sales revenues? A) $94,400 B) $80,000 C) $65,600 D) $18,000 18) What is the target operating income? A) $16,992 B) $14,400 C) $11,808 D) $3,240 19) What is the total target cost? A) $77,408 B) $65,600 C) $53,792 D) $14,760 20) What is the target cost per unit? A) $387.04 B) $328.00 C) $268.96 D) $73.80

B) The target sales revenues is $80,000 ($400 × 200). The target operating income is $14,400 ($80,000 × 18%). B) The target sales revenues is $80,000 ($400 × 200). The target operating income is $14,400 ($80,000 × 18%). B) The target sales revenues is $80,000 ($400 × 200). The target operating income is $14,400 ($80,000 × 18%). B) The target sales revenues is $80,000 ($400 × 200). The target operating income is $14,400 ($80,000 × 18%). The target cost is $65,600 ($80,000 - $14,400). B) The target sales revenues is $80,000 ($400 × 200). The target operating income is $14,400 ($80,000 × 18%). The target cost is $65,600 ($80,000 - $14,400). The target cost per unit is $65,600 / 200 = $328

In cost-plus pricing, the markup component ________. A) is a rigid number B) is ultimately determined by the market C) provides a means to calculate the actual selling price D) is the end rather than the start of pricing decisions

B) is ultimately determined by the market

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

B) operating income

12) The product strategy in which companies first determine the price at which they can sell a new product and then design a product that can be produced at a low enough cost to provide adequate operating income is referred to as ________. A) cost-plus pricing B) target costing C) kaizen costing D) full costing

B) target costing

11) When target costing and target pricing are used together ________. A) the target cost is established first, then the target price B) the target cost is the estimated long-run cost that enables a product or service to achieve a desired profit C) the focus of target pricing is to undercut the competition D) target costs are generally higher than current costs

B) the target cost is the estimated long-run cost that enables a product or service to achieve a desired profit

1) Which of the following is true of target pricing? A) It is used for short-term pricing decisions. B) It is one form of cost-based pricing. C) Its estimates are based on customers' perceived value of the product. D) It is calculated by adding a markup component to the cost base.

C) Its estimates are based on customers' perceived value of the product.

After conducting a market research study, Ed Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $240. The annual target sales volume for interior doors is 20,000. Ed has target operating income of 20% of sales. 13) What are target sales revenues? A) $960,000 B) $3,840,000 C) $4,800,000 D) $5,760,000 14) What is the target operating income? A) $960,000 B) $3,840,000 C) $4,800,000 D) $5,760,000 15) What is the target cost? A) $5,760,000 B) $4,800,000 C) $3,840,000 D) $960,000 16) What is the target cost for each interior door? A) $288 B) $240 C) $192 D) $48

C) Target sales revenue = $240 × 20,000 = $4,800,000. A) Estimated sales revenue = $240 × 20,000 units = $4,800,000. Target operating income = $4,800,000 × 20% = $960,000. C) Estimated sales revenue = $240 × 20,000 units = $4,800,000. Target operating income = $4,800,000 × 20% = $960,000. Target cost = $4,800,000 - $960,000 = $3,840,000. C) Estimated sales revenue = $240 × 20,000 units = $4,800,000. Target operating income = $4,800,000 × 20% = $960,000. Target cost = $4,800,000 - $960,000 = $3,840,000. Target cost per unit = $3,840,000 / 20,000 units = $192.

4) Relevant costs for target pricing are ________. A) variable manufacturing costs B) variable manufacturing and variable nonmanufacturing costs C) all fixed costs D) all future costs, both variable and fixed

D) all future costs, both variable and fixed

Which of the following is explains the cost-plus approach to pricing decisions? A) arriving at a price for the product based on the competitive pricing prevalent in the market B) arriving at a price based on the perceived value to a customer given the cost of design and added features C) arriving at a price based on the demand and supply trends in the market D) arriving at a price that earns a specific return given the cost of the product

D) arriving at a price that earns a specific return given the cost of the product

Companies operating in competitive markets should ideally use cost-plus approach to pricing.

FALSE Explanation: Companies operating in competitive markets should ideally use market-plus approach to pricing.

In cost-plus pricing, the markup is a rigid number that determines the actual selling price.

FALSE Explanation: Managers use the cost-plus pricing formula as a starting point. The markup component is rarely a rigid number. Instead, it is flexible, depending on the behavior of customers and competitors.

Target cost per unit is arrived at by adding the target operating income to the target price of the product.

FALSE Explanation: Target cost per unit is the target price minus target operating income per unit.

Target pricing is a form of cost-based pricing. True or False

FALSE Explanation: Target pricing is a form of market-based pricing.

The target rate of return on investment is another way of referring to the markup percentage.

FALSE Explanation: The target rate of return on investment and the markup percentage are two different things.

One market-based pricing method is called the time and materials method.

FALSE Explanation: The time and materials method is a cost-plus pricing method. The price charged for materials equals the materials cost plus a markup and the price charged for labor equals the labor cost plus a markup. The markups are chosen to recover overhead costs and to earn a profit.

Developing a product that satisfies the need of the potential customers is the first step in implementing target pricing and target costing.

TRUE

Which of the following can be used to determine markup percentage in the case of cost-plus pricing? A) Target annual operating income / Invested capital B) Estimated annual dividend / Invested capital C) Target sales revenue / Target annual operating income D) Estimated annual dividend / Target annual operating income

Target annual operating income / Invested capital