Acctg 15

Use the following to answer questions 34-36: Dexter, Inc., which manufactures various lines of computer equipment, is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated production costs as follows: Variable costs: Manufacturing $450,000 Selling and administrative 100,000 Total variable costs $ 550,000 Fixed costs: Manufacturing $300,000 Selling and administrative 180,000 Total fixed costs 480,000 Total costs $1,030,000 The average amount of capital invested in the laptop product line is $900,000 and Dexter's target return on investment is 18%. 34. What price must Dexter charge if the company uses cost-plus pricing based on total cost? A. $868. B. $900. C. $1,000. D. $1,192. E. Some other amount. Answer: D LO: 3 Type: A 35. If Dexter uses cost-plus pricing based on absorption cost, the markup percentage the company must use would be: A. 15.72%. B. 21.64%. C. 29.56%. D. 58.93%. E. some other amount. Answer: D LO: 3 Type: A 36. What price must Dexter charge if the company uses cost-plus pricing based on total variable cost? A. $712. B. $900. C. $1,030. D. $1,192. E. Some other amount.

34 D. $1,192. 35 D. 58.93%. 36 D. 1192%.

49. Montana produces bicycles in a highly competitive market. During the past year, the company has added a 30% markup on the $250 manufacturing cost for one of its most popular models. A new competitor manufactures a similar model, has established a $300 selling price, and is seriously eroding Montana's market share. Management now desires to use a target-costing approach to remain competitive and is willing to accept a 20% return on sales. If target costing is used, which of the following choices correctly denotes (1) the price that Montana will charge and (2) company's target cost? Selling Price Target Cost A. $300 $240 B. $300 $250 C. $325 $240 D. $325 $250 E. Some other combination of selling price and target cost.

A. $300 $240

44. Which of the following features is typically absent in target costing? A. An approach that begins with the determination of a product or service's target cost. B. An approach that begins with the determination of a product or service's target selling price. C. A focus on the customer. D. A focus on product design. E. A focus on process design.

A. An approach that begins with the determination of a product or service's target cost.

39. Which of the following terms describes a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share? A. Penetration pricing. B. Price skimming. C. Customer pricing. D. Designed pricing. E. Market-share pricing.

A. Penetration pricing.

3. Which of the following is not a major influence on pricing decisions? A. Planning and control policies of the firm. B. Customer demand. C. Costs. D. Competitors. E. Political, legal, and image-related issues.

A. Planning and control policies of the firm.

16. Which of the following represents the cost-plus pricing formula? A. Price = cost + (markup percentage x cost). B. Price = cost + markup percentage. C. Price = markup percentage x cost. D. Price = cost ÷ markup percentage. E. Price = cost + (markup percentage + cost).

A. Price = cost + (markup percentage x cost).

62. If a firm has no excess capacity, which of the following is a sensible bidding strategy? A. Set a price to cover all costs. B. Base the bid on the incremental costs incurred because the job will contribute toward the company's profit. C. Base the bid solely on direct labor hours. D. Downplay the potential impact of competitors. E. Try to minimize the company's tax liability.

A. Set a price to cover all costs.

21. Aussie Company uses cost-plus pricing and has calculated total variable manufacturing cost, total absorption manufacturing cost, and total cost for one of its products. Which of these costs would be the smallest? A. Total variable manufacturing cost. B. Total absorption manufacturing cost. C. Total cost. D. There is no difference between choices "B" and "C." E. More information is needed to correctly answer the question.

A. Total variable manufacturing cost.

7. The curve that shows the change in total revenue that accompanies a change in quantity sold is called the: A. marginal revenue curve. B. average cost curve. C. profit curve. D. demand curve. E. revenue curve.

A. marginal revenue curve.

23. When determining the markup to be used in a cost-plus pricing formula, many firms base the markup on a target: A. return on investment. B. sales margin. C. capital turnover. D. earnings per share. E. debt-to-equity ratio.

A. return on investment.

St. Paul Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data: Annual overhead costs: Material handling and storage $ 15,000 Other overhead costs 75,000 Annual cost of materials used 187,500 Labor rate per hour, including fringe benefits 18 Hourly charge to achieve profit margin 11 58. The amount to be added to each dollar of material cost to obtain the total material charge is: A. $0.06. B. $0.08. C. $0.10. D. $0.13. E. some other amount.

B. $0.08.

25. The following data pertain to Quigley Enterprises: Variable manufacturing cost $60 Variable selling and administrative cost 10 Applied fixed manufacturing cost 30 Allocated fixed selling and administrative cost 5 What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 60%? A. $63. B. $168. C. $175. D. $280. E. Some other amount.

B. $168.

33. If the target profit is $60,000 for a volume of 480 units, fixed costs are $168,000, and the variable cost per unit is $450, then the markup percentage on variable cost would be: A. 104.56%. B. 105.56%. C. 106.00%. D. 106.45%. E. some other amount.

B. 105.56%.

32. Albany Company has average invested capital of $800,000 and a target return on investment of 15%. The total cost per unit is $20 based on a volume level of 25,000 units. Albany's markup percentage on total cost is: A. 9.375%. B. 24.0%. C. 47.5%. D. 62.5%. E. some other amount.

B. 24.0%.

61. If a firm has excess capacity, which of the following is a sensible bidding strategy? A. Set a price to cover all costs. B. Base the bid on the incremental costs incurred because the job will contribute toward the company's profit. C. Base the bid solely on direct labor hours. D. Downplay the potential impact of competitors. E. Allocate common fixed costs to individual jobs before preparing the bid.

B. Base the bid on the incremental costs incurred because the job will contribute toward the company's profit.

19. Consider the following statements about absorption-cost pricing formulas: I. Absorption-cost formulas consider a company's fixed manufacturing costs when establishing a selling price. II. Absorption-cost formulas are often justified on the grounds that a company must cover all of its costs in the long run. III. Absorption-cost data are the type that managers need when facing certain pricing decisions, such as whether or not to accept a special order. Which of the above statements is (are) true? A. II only. B. I and II. C. I and III. D. II and III. E. I, II, and III.

B. I and II.

37. Which of the following terms describes a pricing strategy in which a new product's initial price is set high and then eventually lowered to appeal to a broader range of customers? A. Penetration pricing. B. Price skimming. C. Customer pricing. D. Designed pricing. E. Market-share pricing.

B. Price skimming.

22. Which of the following formulas represents the markup percentage on total cost? A. Target profit ÷ annual volume. B. Target profit ÷ (annual volume x total cost per unit). C. (Annual volume x total cost per unit) ÷ target profit. D. Target profit ÷ variable cost. E. (Target profit x total cost per unit) ÷ annual volume.

B. Target profit ÷ (annual volume x total cost per unit).

17. If a company uses a cost-plus approach to pricing, it will find: A. there are several different definitions of cost and the higher the cost, the higher the markup percentage. B. there are several different definitions of cost and the higher the cost, the lower the markup percentage. C. there is one definition of cost, and there is no relationship between cost and the markup percentage used. D. there is one definition of cost, and there is no markup percentage with the cost-plus approach. E. it is in violation of generally accepted accounting principles (GAAP).

B. there are several different definitions of cost and the higher the cost, the lower the markup percentage.

63. Superior Company is involved in a competitive bidding situation. The following costs are anticipated for a project to be bid with the City of Southlake: Direct material $340,000 Direct labor 610,000 Allocated variable overhead 420,000 Allocated fixed cost 110,000 Which of the following cost figures should be used in setting a minimum bid price if Superior has excess capacity? A. $530,000. B. $950,000. C. $1,370,000. D. $1,480,000. E. Some other amount.

C. $1,370,000.

46. Franklin Electronics currently sells a camera for $240. An aggressive competitor has announced plans for a similar product that will be sold for $205. Franklin's marketing department believes that if the price is dropped to meet competition, unit sales will increase by 10%. The current cost to manufacture and distribute the camera is $175, and Franklin has a profit goal of 20% of sales. If Franklin meets competitive selling prices, what is the company's target cost? A. $41. B. $48. C. $164. D. $175. E. $192

C. $164.

65. Overland Company is involved in a competitive bidding situation. Variable costs related to the project total $520,000, and allocated fixed overhead is $95,000. Which of the following cost figures should be used in setting a minimum bid price if Overland has (1) excess capacity and (2) no excess capacity? Excess Capacity No Excess Capacity A. $0 $0 B. $520,000 $520,000 C. $520,000 $615,000 D. $615,000 $520,000 E. $615,000 $615,000

C. $520,000 $615,000

30. What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 40%? A. $462. B. $513. C. $567. D. $594. E. Some other amount.

C. $567.

27. What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 220%? A. $396.00 B. $495.00 C. $576.00 D. $643.50 E. Some other amount.

C. $576.00

29. What price will the company charge if the firm uses cost-plus pricing based on absorption cost and a markup percentage of 120%? A. $420. B. $459. C. $594. D. $672. E. Some other amount.

C. $594.

24. The following costs relate to Riley Company: Variable manufacturing cost, $42; variable selling and administrative cost, $10; applied fixed manufacturing overhead, $37; and allocated fixed selling and administrative cost, $12. If Riley uses absorption manufacturing-cost pricing formulas, the company's markup percentage would be computed on the basis of: A. $42. B. $52. C. $79. D. $101. E. some other amount.

C. $79.

42. The four tasks that follow take place in the concept known as target costing: 1—Value engineering. 2—Establish a target selling price. 3—Establish a target cost. 4—Establish a target profit. Which of the following choices depicts the correct sequence of these tasks? A. 1, 3, 4, 2. B. 3, 1, 4, 2. C. 2, 4, 3, 1. D. 2, 3, 1, 4. E. Some other sequence not listed above.

C. 2, 4, 3, 1.

18. Patterson and Clay Companies both use cost-plus pricing formulas and arrived at a selling price of $1,000 for the same product. Patterson uses absorption manufacturing cost as the basis for computing its dollar markup whereas Clay uses total cost. Which of the following choices correctly denotes the company that would have (1) the higher cost basis for deriving its dollar markup and (2) the higher markup percentage? Cost Basis Markup Percentage A. Patterson Patterson B. Patterson Clay C. Clay Patterson D. Clay Clay E. More information is needed to judge.

C. Clay Patterson

48. Quantum Enterprises currently sells a piece of luggage for $200. An aggressive competitor has announced plans for a similar product that will be sold for $170. Quantum's marketing department believes that if the price is dropped to meet competition, unit sales will increase by 10%. The current cost to manufacture and distribute the luggage is $130, and Quantum has a profit goal of 30% of sales. If Quantum meets competitive selling prices, what must happen to the company's manufacturing and distribution cost? A. Nothing, because the costs are within defined ranges and can actually increase by $10. B. Nothing, because the costs are within defined ranges and can actually increase by $23. C. Costs must decrease by $11. D. Costs must decrease by $39. E. None of the above.

C. Costs must decrease by $11.

11. Which of the following statements regarding price elasticity is false? A. The concept of price elasticity is an extension of the economic pricing model. B. Demand is elastic if a price change has a large negative impact on sales volume. C. Demand is elastic if price changes have no impact on sales volume. D. Measuring price elasticity is an important objective of market research. E. Demand is relatively inelastic if price changes have little impact on sales quantity.

C. Demand is elastic if price changes have no impact on sales volume.

13. Consider the following statements regarding the economic pricing model: I. The economic model is limited in use because a firm's demand curve is difficult to determine. II. The marginal revenue and marginal cost model is valid for all forms of market organization (perfect competition, oligopoly, and so forth). III. Cost accounting systems are not designed to measure the marginal changes in cost incurred as production and sales increase. Which of the above statements is (are) true? A. I only. B. III only. C. I and III. D. II and III. E. I, II, and III.

C. I and III.

50. Consider the following statements about activity-based costing and its use in pricing: I. A company that uses target costing generally would have little need for activity-based costing. II. Companies that use cost-plus pricing methods would have little need for activity-based costing. III. The use of activity-based costing will often lead to better pricing decisions by managers. Which of the above statements is (are) true? A. I only. B. II only. C. III only. D. I and III. E. I, II, and III.

C. III only.

67. Which of the following pricing practices is illegal? A. Penetration pricing. B. Price skimming. C. Predatory pricing. D. Cost-based pricing. E. Market-share pricing.

C. Predatory pricing.

40. Company A uses a pricing approach where the initial price for a product is set high and then lowered, and Company B uses an approach where initial prices are set low in an effort to gain market share. What terms best describe these practices? Company A Company B A. Predatory Skimming B. Penetration Predatory C. Skimming Penetration D. Skimming Predatory E. Predatory Penetration

C. Skimming Penetration

38. What is price skimming? A. The initial price is set low and kept constant. B. The initial price is set low and then raised. C. The initial price is set high and later lowered. D. The initial price is set high and kept constant. E. The initial price is set high and then raised.

C. The initial price is set high and later lowered.

51. Which of the following management tools is a key component of target costing? A. Management simulation. B. Linear programming. C. Value engineering. D. Goal programming. E. Performance reporting systems.

C. Value engineering.

2. Which of the following choices correctly denotes factors that can influence a company's pricing practices for goods and services? Market Conditions Costs Customer Demand A. No Yes Yes B. No Yes No C. Yes Yes Yes D. Yes Yes No E. Yes No Yes

C. Yes Yes Yes

6. On a graph where the horizontal axis represents quantity sold and the vertical axis represents selling price, the basic demand curve in a competitive market can be graphed: A. as a horizontal line. B. as a vertical line. C. as a downward sloping line to the right. D. as an upward sloping line to the right. E. in the same manner as the total revenue curve.

C. as a downward sloping line to the right.

55. With the time and material pricing method, the hourly time charge is typically set equal to: A. the hourly labor cost. B. the hourly labor cost + annual overhead. C. the hourly labor cost + an hourly overhead charge + an hourly charge to cover the profit margin. D. annual overhead + an hourly charge to cover the profit margin. E. the hourly labor cost + an hourly charge to cover the profit margin.

C. the hourly labor cost + an hourly overhead charge + an hourly charge to cover the profit margin.

St. Paul Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data: Annual overhead costs: Material handling and storage $ 15,000 Other overhead costs 75,000 Annual cost of materials used 187,500 Labor rate per hour, including fringe benefits 18 Hourly charge to achieve profit margin 11 59. If a particular job takes 20 hours of labor and $800 of materials, the price charged for the job is: A. $1,380. B. $1,444. C. $1,530. D. $1,594. E. some other amount.

D. $1,594.

26. The following data pertain to Lopez Enterprises: Variable manufacturing cost $70 Variable selling and administrative cost 20 Applied fixed manufacturing cost 40 Allocated fixed selling and administrative cost 15 What price will the company charge if the firm uses cost-plus pricing based on absorption manufacturing cost and a markup percentage of 110%? A. $84. B. $147. C. $210. D. $231. E. Some other amount.

D. $231.

St. Paul Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data: Annual overhead costs: Material handling and storage $ 15,000 Other overhead costs 75,000 Annual cost of materials used 187,500 Labor rate per hour, including fringe benefits 18 Hourly charge to achieve profit margin 11 57. The time charge per hour is: A. $19.50. B. $27.00. C. $29.00. D. $36.50. E. some other amount.

D. $36.50.

64. Parkside Recreation is exploring a competitive bidding situation. The firm, which currently has no excess capacity, estimates the following costs for a project to be performed for the Morningside School District: Direct material $220,000 Direct labor 130,000 Allocated variable overhead 91,000 Allocated fixed cost 40,000 Which of the following cost figures would be used in determining a minimum price if Parkside decides to bid on the Morningside project? A. $131,000. B. $350,000. C. $441,000. D. $481,000. E. Some other amount

D. $481,000.

28. What price will the company charge if the firm uses cost-plus pricing based on total variable cost and a markup percentage of 160%? A. $150. B. $384. C. $390. D. $624. E. Some other amount.

D. $624.

41. Beehler Company, which desires to enter the market with a new product, will perform the following tasks: 1—Design and engineer the product. 2—Determine the product's cost. 3—Determine the desired profit margin. 4—Determine the suggested selling price. If Beehler uses target costing, which task would the company perform first? A. 1. B. 2. C. 3. D. 4. E. None of the above.

D. 4.

60. Consider the following statements about competitive bidding: I. The higher the price that a company bids, the greater the profit if the firm gets the contract. II. Bidding a higher price increases the probability of obtaining a contract. III. A company that bids low to ensure acceptance of a contract may actually wind up bidding too low to make an acceptable profit. Which of the above statements is (are) true? A. I only. B. II only. C. III only. D. I and III. E. I, II, and III.

D. I and III.

47. Hughes currently sells a mixer for $850 that market leaders sell for $815. The current costs to manufacture and distribute the mixer total $530, and the company has a profit goal of 40% of sales. Hughes uses target costing in its efforts to be a leader in the marketplace. On the basis of this information, (1) what should Hughes consider to be the initial driver of the target-costing process and (2) what amount of cost reduction is needed for the company to achieve its goals? Initial Driver Cost Reduction A. Current price of $850 $20 B. Current price of $850 $41 C. Market leaders' price of $815 $20 D. Market leaders' price of $815 $41 E. Market leaders' price of $815 Some other amount

D. Market leaders' price of $815 $41

5. The curve that shows the relationship between the sales price and quantity sold is called the: A. marginal revenue curve. B. average cost curve. C. profit curve. D. demand curve. E. revenue curve.

D. demand curve.

9. If the volume sold reacts strongly to changes in price, demand: A. has no elasticity. B. has negative elasticity. C. is inelastic. D. is elastic. E. is unrealistic.

D. is elastic.

8. From an economic perspective, a company's profit-maximizing quantity is found where: A. the total cost curve intersects with the marginal cost curve. B. the total revenue curve intersects with the average revenue curve. C. the marginal revenue curve intersects with the demand curve. D. the marginal revenue curve intersects with the marginal cost curve. E. the marginal cost curve intersects with the demand curve.

D. the marginal revenue curve intersects with the marginal cost curve.

43. Mohawk Corporation manufactures a single product that has a cost of $350. The company uses a 70% markup on cost to arrive at a selling price of $595, which results in a price that virtually always exceeds that of the market leaders. If Mohawk changes to the approach known as target costing, the company will first: A. reduce its 70% markup rate. B. trim its $350 cost. C. attempt to re-engineer its product. D. undertake a thorough study of competitors' prices. E. change the markup so that it is based on sales rather than based on cost.

D. undertake a thorough study of competitors' prices.

56. Glendale Corporation uses time and material pricing. The repair department expects 20,000 direct labor hours of activity and has the following selected data: Labor and fringe benefit costs $800,000 Overhead costs (excludes material handling and storage) 480,000 Target profit 220,000 The company's time charge per hour is: A. $11. B. $24. C. $40. D. $64. E. $75.

E. $75.

1. Which of the following can influence a company's pricing decisions? A. Manufacturing costs. B. Competitors. C. Customer demand. D. Pricing laws. E. All of the above.

E. All of the above.

45. Which of the following is (are) a key feature of target costing? A. The use of cross-functional teams. B. A focus on the customer. C. A focus on product design. D. A focus on process design. E. All of the above.

E. All of the above.

10. Under which of the following condition(s) are prices said to be elastic? Price Change Change in Sales Volume A. Increase Sizable increase B. Increase Sizable decrease C. Decrease Sizable increase D. Decrease Sizable decrease E. Choices "B" and "C" are characteristic of elastic prices.

E. Choices "B" and "C" are characteristic of elastic prices.

12. Prices are said to be inelastic under which of the following conditions? Price Change Change in Sales Volume A. Increase Sizable decrease B. Increase Little impact C. Decrease Sizable increase D. Decrease Little impact E. Choices "B" and "D" are characteristic of inelastic prices.

E. Choices "B" and "D" are characteristic of inelastic prices.

15. Consider the following statements about why prices are often based on product costs: I. Companies sell many products and services, and cost-based approaches provide a simple and direct pricing method. II. The cost of a product or service provides a lower limit or floor, below which price should not be set in the long run. III. Determining a company's demand and marginal revenue curves is difficult, costly, and time consuming. Which of the above statements is (are) true? A. I only. B. III only. C. I and III. D. II and III. E. I, II, and III.

E. I, II, and III.

4. Consider the following statements about pricing: I. Prices are often determined by the market, subject to the constraint that costs must be covered in the long run. II. Prices are often based on costs, subject to the constraint that customers and competitors will exert an influence. III. A balance of market forces and cost is important when making pricing decisions. Which of the above statements is (are) true? A. I only. B. II only. C. I and III. D. II and III. E. I, II, and III.

E. I, II, and III.

53. Consider the following statements about time and material pricing: I. The time charge includes the direct cost of an employee's time. II. The time charge includes an amount to cover various overhead costs. III. The material charge includes a handling charge for material. Which of the above statements is (are) true? A. I only. B. I and II. C. I and III. D. II and III. E. I, II, and III.

E. I, II, and III.

66. Consider the following statements about pricing and the law: I. American antitrust laws restrict certain types of pricing behavior. II. The term "price discrimination" involves charging different prices to different customers for the same goods and services. III. Charging different prices to different customers for the same goods is permissible if price differences are based on cost differences of producing and/or selling the good. Which of the above statements is (are) true? A. I only. B. II only. C. I and II. D. II and III. E. I, II, and III.

E. I, II, and III.

52. Which of the following cost-reduction and process-improvement techniques is often used in conjunction with target costing? A. Linear programming. B. Deterministic simulations. C. Cost allocation. D. Budgetary padding. E. Value engineering.

E. Value engineering.

14. In a typical business, the firm's overall demand would be influenced by interactions of pricing policies and: A. the company's reputation. B. the quality of goods and services offered. C. competing goods and services. D. advertising and promotional campaigns. E. all of the above factors.

E. all of the above factors.

20. The difference between absorption manufacturing cost and total cost with respect to product pricing is caused by: A. variable manufacturing cost. B. applied fixed manufacturing cost. C. variable selling and administrative cost. D. allocated fixed selling and administrative cost. E. choices "C" and "D" above.

E. choices "C" and "D" above.

54. Under the time and material pricing method, a customer would be charged for: A. material costs. B. material and labor costs. C. material, labor, and overhead costs. D. material and labor costs, plus a profit margin. E. material, labor, and overhead costs, plus a profit margin.

E. material, labor, and overhead costs, plus a profit margin.