BUAD 281 Chapter 15

Hickory Manufacturing makes rocking chairs. Variable manufacturing costs are $55 per chair. Applied fixed manufacturing costs are $5.60 per chair. Variable selling and administrative costs are $12.60 per chair and allocated fixed selling and administrative expenses are $8.00 per chair. Hickory has determined it needs a 22% markup on absorption cost to meet stockholder expectations. If Hickory defines cost as absorption manufacturing cost, the price needed to meet shareholder expectations (rounded to the nearest cent) is ______.

$73.93

Hickory Manufacturing makes rocking chairs. Variable manufacturing costs are $55 per chair. Applied fixed manufacturing costs are $5.60 per chair. Variable selling and administrative costs are $12.60 per chair and allocated fixed selling and administrative expenses are $8.00 per chair. Hickory has determined that it needs a 22% markup on total variable cost to meet stockholder expectations. If Hickory defines cost as total variable cost, the price needed to meet shareholder expectations (rounded to the nearest cent) is ______.

$82.47

Hickory Manufacturing makes rocking chairs and expects to sell 3,000 this year. Variable manufacturing costs are $55 per chair. Fixed manufacturing costs are $72,000 per year. Variable selling and administrative costs are $12.60 per chair and fixed selling and administrative expenses are $104,000 per year. If the target profit is $90,000, the markup percentage on total variable cost is ______.

131.2% --> ($90,000+$72,000+$104,000)/(3,000x$67.6)

Hickory Manufacturing makes rocking chairs and expects to sell 10,000 per year. Total costs are $82 per chair and the target profit is $150,000 per year. The markup percentage Hickory must use to achieve this target profit is ______.

18.3% --> $150,000/(10,000x$82)

Anti-discrimination laws are an example of a(n) ______ constraint on pricing. a) legal b) political c) image d) competitive

A

Customer demand for a product is not influenced by product ______. a) net profit b) quality c) design d) selling price

A

In a graph, profit maximizing sales quantity is the intersection of the ______. a) marginal cost and marginal revenue curves b) marginal revenue curve and the demand curve c) total cost and total revenue curves d) demand curve and the marginal cost curve

A

In cost based pricing, prices are set by a) adding a markup to production costs b) market forces based on competition c) regulatory agencies based upon production costs

A

Production costs are used to request rate increases in ______ industries. a) regulated b) aircraft c) gasoline d) agricultural

A

The advantage of the variable cost plus formulas is they ______. a) do not obscure information about cost behavior b) they take into account market conditions c) identify the floor below which a price should not be set in the long run d) are an economic approach to setting prices

A

The cost definition in pricing formulas that provides the best definition of the floor below which prices should not be set is ______. a) total cost, both fixed and variable b) total variable cost c) total fixed cost d) variable manufacturing cost

A

The cost definition in pricing formulas that provides the best definition of the floor below which prices should not be set is ______. a) total cost, both fixed and variable b) total variable cost c) variable manufacturing cost d) total fixed cost

A

The profit maximizing price per unit is determined by the optimal quality as shown on the ______ curve. a) demand b) marginal revenue c) total revenue

A

The relationship between total cost and the quantity produced and sold is graphed by the ______ curve. a) total cost b) production c) marginal cost d) profit range

A

The relationship between total sales revenue and quantity sold is shown on the firm's ______ graph. a) total revenue curve b) marginal revenue curve c) price curve d) demand curve

A

The total cost curve is the graphical representation of the relationship between ______. a) total cost and the quantity produced and sold b) the sales price and the quantify of units demanded c) total sales revenue and quantity sold

A

Under target costing, the target ______. a) price is set first and then the target product cost is determined b) cost is set first and then the target price is determined c) profit is set first and then price and cost are determined simultaneously d) demand is determined first and then price and cost are determined simultaneously

A

With price-led costing, the price ______. a) at which a product can be sold is determined first and then a target profit is deducted to determine target cost b) at which a product can be produced is determined first and then a target profit is added to determine target price c) of raw materials and direct labor determine the price at which a product can be sold d) of a product is the lowest in the market in order to gain market share

A

Due to the cost-benefit trade off of gathering information, most pricing decisions are based on ______. a) the economic, profit maximizing, pricing model b) a combination of cost based formulas and economic factors c) marginal pricing strategies d) competitors prices only

B

Even though market considerations may ultimately determine the final product price, product costs ______. a) are used as a guide to determine the maximum profit to be earned b) set the floor below which the price cannot be set in the long run c) set the ceiling above which the price cannot be set in the long run d) are used to determine the change in total revenue that accompanies a change in quantity produced and sold

B

Price elasticity is the impact of price changes on __. a) total cost b) sales volume c) cost per unit d) production volume

B

Product costs are used in pricing ______. a) to determine the change in total revenue that accompanies a change in quantity produced and sold b) because they provide a quick and straight forward method for setting prices c) as a guide to determine the maximum profit to be earned d) to set the ceiling below which the price cannot be set in the long run

B

The profit maximizing price per unit is determined by the optimal quality as shown on the ______ curve. a) total revenue b) demand c) marginal revenue

B

The total revenue curve is the graphical representation of the relationship between ______. a) total sales revenue and total cost b) total sales revenue and quantity sold c) the sales price and the quantify of units demanded d) total cost and the quantity produced and sold

B

Using research to determine a price at which a new product can be sold and then, given the likely sales price, computing the cost for which the product must be manufactured is __ costing. a) product b) target c) penetration d) economic

B

A price taker company's product prices are ______. a) determined on a cost plus basis b) set by regulation c) totally determined by the market d) always set below that of the competition

C

Cost plus pricing is when product prices are set based on __. a) demand and marginal cost analysis b) cost plus desired profit c) cost plus a markup d) cost plus residual income

C

Management's evaluation of competitors actions will affect the company's ______. a) cost accounting systems b) performance measures c) marketing and pricing strategies d) management accounting systems

C

The total cost curve is the graphical representation of the relationship between ______. a) total sales revenue and quantity sold b) the sales price and the quantify of units demanded c) total cost and the quantity produced and sold

C

Using research to determine a price at which a new product can be sold and then, given the likely sales price, computing the cost for which the product must be manufactured is __ costing. a) economic b) product c) target d) penetration

C

When variable manufacturing cost pricing formulas are used, the markup must cover ______. a) all fixed manufacturing costs and a normal profit b) all fixed selling & administrative costs plus a normal profit c) all fixed costs and a normal profit d) a normal profit

C

Which of the following is a justification for using variable cost pricing? a) Variable costing information is used for external financial reporting. b) Consumers understand that a company must cover its costs and make a reasonable profit. c) Variable cost data is the type of information managers need to determine whether to accept or reject a special order price. d) There is a better understanding how competitors may set prices.

C

When major companies in an industry all agree to set prices at a high level, this is an illegal practice known as ______________.

Collusion

In a graph, profit maximizing sales quantity is the intersection of the ______. a) demand curve and the marginal cost curve b) marginal revenue curve and the demand curve c) total cost and total revenue curves d) marginal cost and marginal revenue curves

D

When absorption cost pricing formulas are used, the markup must cover ______. a) all costs plus a normal profit b) all fixed costs and a normal profit c) all fixed manufacturing costs and a normal profit d) a normal profit

D

When absorption cost pricing formulas are used, the markup must cover ______. a) all costs plus a normal profit b) all fixed manufacturing costs and a normal profit c) all fixed costs and a normal profit d) a normal profit

D

When variable manufacturing cost pricing formulas are used, the markup must cover ______. a) a normal profit b) all fixed selling & administrative costs plus a normal profit c) all fixed manufacturing costs and a normal profit d) all fixed costs and a normal profit

D

Which of the following is a disadvantage of variable cost pricing? a) Consumers understand that a company must cover its costs and make a reasonable profit. b) There is a better understanding how competitors may set prices. c) Variable costing information is used for external financial reporting. d) If selling prices are set too close to variable costs the company will fail to cover fixed costs and could go bankrupt.

D

With skimming pricing, the initial product price is set ______. a) low to saturate the market and discourage competition b) to maintain a reputation of exclusivity c) low in order to gain a large market share quickly d) high so short-term profits are reaped

D

True or false: The optimal approach to pricing and other decisions is likely to be based on the collection of marginal cost data.

False: Due to the cost-benefit trade-off, the optimal approach is likely based on a combination of economic considerations and product cost information.

The impact of price changes on on sales volume is called the ___________ ____________.

Price elasticity

True or false: Target costing is market driven.

True: Since target costing is based upon the price a customer is willing to pay less a target profit, the customer is driving the cost at which the product must be manufactured.

True or false: Cost accounting systems are not designed to measure the marginal changes in costs incurred as production and sales increase unit by unit.

True: This would be very costly and most mangers believe that the improvement in pricing decisions would be minimal.

Target costing involves __. a) designing products to be manufactured for the allowable cost b) using absorption manufacturing costs to set product prices c) determining the cost of the product first and then the sales price d) identifying the sales price of the product first and then determining maximum allowable cost

a and d

The skimming pricing strategy ______. a) ends as the product gains acceptance and the price is gradually lowered to appeal to a broader range of buyers b) is often used for unique products c) results in a small initial product market d) lowers the price rapidly to increase market share

a, b, and c

To be successful at target costing, firms must ______. a) aggressively seek customer feedback b) determine the price customers are willing to pay for a certain level of quality c) design products to meet customer demand d) focus first on product cost and then on pricing

a, b, and c

To help determine customer demand, companies use ______. a) test-marketing campaigns b) customer surveys c) feedback from sales personnel d) product costing analysis e) advertising campaigns

a, b, and c

Areas where target costing focuses on cost control include ______. a) process design b) product design c) customer satisfaction d) life cycle costs

a, b, and d

Which of the following are justifications for using absorption cost or total cost pricing? a) Absorption costing information is used for external financial reporting. b) There is a better understanding how competitors may set prices. c) If selling prices are set too close to absorption or total costs the company will fail to cover fixed costs and could go bankrupt. d) Customers understand the price must cover all costs and a reasonable profit margin.

a, b, and d

To meet competition in the long run, companies must ______. a) consider customer reactions to pricing b) always set prices below the competition c) predict competitive reactions to product design d) carefully define their product

a, c, and d

The price setting formulas that keeps managers focused on the concept that price must cover all costs and a normal profit margin is ______ cost plus. a) variable manufacturing b) total c) absorption d) total variable

b and c

When products prices are determined totally by the market, companies ______. a) are guaranteed profits as market prices will always exceed production costs b) are considered price takers c) may experience periods of loss when production costs exceed the market

b and c

Challenges of the economic pricing model are ______. a) total product cost can not be estimated b) it is not appropriate for all forms of market organization c) demand is difficult to predict due to the number factors that affect it d) marginal costs are difficult to measure

b, c, and d

Challenges of the economic pricing model are ______. a) total product cost can not be estimated b) marginal costs are difficult to measure c) it is not appropriate for all forms of market organization d) demand is difficult to predict due to the number factors that affect it

b, c, and d

Cost plus pricing formulas are used in pricing ______. a) because they show how customer demand will respond to pricing changes b) to save the time of top management in routine tasks of updating prices for existing products c) to establish a starting point in the process of determining a price d) because they are simple and can be applied mechanically

b, c, and d

When focused on cost, engineers can improve product design by ______. a) evaluating the product design from the ground up b) evaluating the cost paid for each component c) specifying the direct components and other elements necessary for production d) creating or changing the design to make the manufacturing easier

c and d

Product price based on cost plus a markup is often called _________-_________ pricing.

cost-plus

In specifying a product's target cost, analysts must be careful to incorporate all of a product's _______________-___________ costs.

life-cycle