Deck 8: Pricing Decisions

Question 1

The target costing process begins with the design of the product.

Answer 1

False

Question 2

The most difficult part of using cost-plus pricing is determining the demand function.

Answer 2

False

Question 3

A demand function is the relation between price and quantity demanded.

Answer 3

True

Question 4

A company cannot increase profits if it accepts a special order at a price below its incremental variable cost.

Question 5

Fixed costs will affect a special order decision when the selling company is at capacity.

Question 6

As long as fixed costs increase by less than the excess of incremental revenue over incremental cost, the acceptance of a special order will increase a company's net income.

Question 7

The first step in the target costing process is to estimate how much a product will cost to develop.

Question 8

The most difficult part of determining the profit-maximizing price is determining the demand function.

Question 9

A company should accept all orders for which a company has the capacity to produce.

Question 10

The selling price that maximizes revenues is the price that will also maximize profit.

Question 11

Cost-plus pricing is the pricing method that begins with a careful analysis of competing products and customer needs and wants.

Question 12

In order for a special order to be accepted, the full cost of the product must be covered.

Question 13

Charging a higher price per unit causes an increase in profits for the company because the selling price is larger than the variable cost.

Question 14

When evaluating a special order, only costs that are incremental in nature should be a part of the analysis.

Question 15

Product cost can be easily adjusted after the design phase is complete as long as production has not begun.

Question 16

A company using cost-plus pricing starts with an estimate of the cost and adds a markup to arrive at a price that allows for a reasonable level of profit.

Question 17

Even though the same percentage markup may be applied to all customers, some customers may be more profitable than others.

Question 18

A company should never price a product below full cost.

Question 19

Cost-plus pricing is circular for the manufacturing industry in that demand must be estimated to determine the fixed manufacturing costs per unit before the cost is marked up to obtain a selling price, which has a major impact on the quantity demanded.

Question 20

Generally, the higher the price, the lower the quantity demanded.

Question 21

Target costing establishes selling prices based on the full cost of the product.

Question 22

Suppliers adopting activity-based pricing may encourage customers to limit the variety of goods they purchase to mitigate the price to be charged.

Question 23

What should be maximized when setting the price for a product?

A) Total revenue
B) Contribution margin per unit
C) Net income
D) The number of units of product sold

Question 24

Which of the following statements about prices and profit is true?

A) Higher prices always lead to lower profits because fewer units will be sold.
B) Higher prices always lead to lower demand and higher profits.
C) Higher prices combine with lower demand to change the level of profits.
D) Higher prices will be offset by lower demand so profits will stay constant.

Question 25

Activity-based pricing is utilized when a customer buying products is charged for the full cost of a product or service plus a markup added to the cost.

Question 26

Which of the following statements about price, demand, and profit is generally true?

A) As price increases, demand decreases.
B) As demand increases, profit decreases.
C) As price increases, demand increases.
D) As price decreases, demand decreases.

Question 27

In activity-based pricing, customers are offered separate prices for separate items or services they choose in addition to the price of goods they purchase.

Question 28

What occurs to the quantity demanded as the price decreases?

A) It will increase.
B) It will decrease.
C) It will remain constant.
D) It will increase and then decrease.

Question 29

Which of the following factors is considered in a product pricing decision made using cost-plus pricing?

A) Price customers are willing to pay
B) Selling and administrative costs
C) Competitors' actions
D) Fixed cost per unit

Question 30

Rosetone Retail sells one product with a variable cost of $3.50 per unit. The demand at different prices to be charged is shown below: $\begin{array}{ll}\text { Units Demanded } & \text { Unit Price } \\10,000 & \$ 9 \\15,000 & \$ 8 \\20,000 & \$ 7 \\25,000 & \$ 6\end{array}$ If fixed costs are $42,000, what price should Rosetone charge in order to maximize profits?

A) $9
B) $8
C) $7
D) $6

Question 31

In a CPM system, costs are allocated to customers, who are the cost objectives.

Question 32

Target cost is computed by determining the appropriate selling price and then subtracting desired profit from it.

Question 33

Winslow Carpet produces and sells berber carpet by the yard with a variable cost of $16 per yard. Total fixed costs are $280,000. The following chart represents the estimated demand at various price levels. $$\begin{array} { c c } \text { Yards Demanded } & \text { Unit Price } \\57,000 & \$ 25 \\67,500 & \$ 24 \\72,500 & \$ 23 \\86,000 & \$ 21\end{array}$$ Which price will generate the largest profit for Winslow Carpets?

A) $25
B) $24
C) $23
D) $21

Question 34

Prices developed using target costing are based on competing products and customer needs and wants.

Question 35

Which of the following stays constant when the price per unit changes?

A) Demand
B) Contribution margin per unit
C) Total fixed costs
D) Profit

Question 36

Activity-based pricing uses ABC concepts to determine one optimum uniform price to charge all customers.

Question 37

Which one of the following does economic theory suggest?

A) Set a price that allows profit maximization
B) Set a price that allows the minimum number of units to be sold at the highest unit price
C) Set a price that will maximize revenues
D) Set a price that will maximize market share

Question 38

A customer's profitability is calculated by dividing the sales revenue generated from each customer by the cost of goods sold for each customer.

Question 39

In effect, a CPM system uses ABC to allocate costs to customers instead of to products and services.

Question 40

When order processing costs do not vary based on the size of the order, a customer who makes large, infrequent orders is generally more profitable than a customer who makes small, more frequent orders, for the same quantity and price.

Question 41

Right Air Supply sells a specialized air filter that has a variable cost of $10 each. Fixed costs are estimated to be $700,000 across all levels of sales shown below: $$\begin{array} { c c } \text { Units Demanded } & \text { Unit Price } \\80,000 & \$ 35 \\90,000 & \$ 33 \\100,000 & \$ 31 \\110,000 & \$ 30 \\120,000 & \$ 28\end{array}$$ What price should Right Air Supply charge to maximize profits?

A) $35
B) $33
C) $31
D) $30
E) $28

Question 42

Vanana Tees sells its cool-zone t-shirts for $24 each. Unit product costs are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 4.50 \\\text { Direct labor } & 1.80 \\\text { Manufacturing overhead } & 3.50 \\\text { Total } & \$ 9.80\end{array}$ A special order to purchase 1,200 shirts was recently received. There is enough capacity to fill the order. Filling this order will not disrupt current operations. Vanana expects to incur an additional $1.10 per unit for additional labor costs due to a slight modification the buyer wants made to the shirts. The manufacturing overhead costs consist of 30% allocated fixed costs. In negotiating a price, how much is Vanana Tees' minimum acceptable selling price per t-shirt?

A) $6.30
B) $8.75
C) $9.85
D) $7.35

Question 43

Calico Joe Fabrics sells a single product. The company estimates total fixed costs at $360,000 with demand, price, and total variable costs as follows:
$$\begin{array} {| c | c | c | } \hline \text { Units Demanded } & \text { Unit Price } & \text { Total Variable Costs } \\\hline 7,000 & \$ 31 & \$ 1,606,000 \\83,000 & 30 & 1,826,000 \\93,000 & 29 & 2,046,000 \\103,000 & 28 & 2,266,000 \\113,000 & 27 & 2,486,000\\\hline\end{array}$$
What price should Calico Joe Fabrics charge to maximize profits?

A) $31
B) $30
C) $29
D) $28
E) $27

Question 44

Calico Joe Fabrics sells a single product. The company estimates total fixed costs at $360,000 with demand and unit variable costs at various activity levels as follows:
$$\begin{array} {| c | c | c | } \hline \text { Units Demanded } & \text { Unit Price } & \text { Total Variable Costs } \\\hline 7,000 & \$ 31 & \$ 1,606,000 \\83,000 & 30 & 1,826,000 \\93,000 & 29 & 2,046,000 \\103,000 & 28 & 2,266,000 \\113,000 & 27 & 2,486,000\\\hline\end{array}$$
How would you best describe Calico's variable cost per unit over the range shown?

A) It is constant.
B) It is increasing as volume increases.
C) It is decreasing as volume increases.
D) There is not enough information provided to determine the answer.

Question 45

Ramsey Foods has analyzed its customer and order handling data for the past year and has determined the following costs: $\begin{array}{lr}\text { Order processing cost per order } & \$ 5.50 \\\text { Additional costs if order must be expedited (Per order) } & \$ 6.00 \\\text { Customer technical support calls (Per call) } & \$ 3.50 \\\text { Rel ationship management costs (Per customer per year) } & \$ 1,900\end{array}$ In addition to these costs, product costs amount to 75% of sales. In the prior year, Ramsey had the following experience with one of its customers, Turnkey Enterprises: $$\begin{array} { l l } \text { Sales } & \$ 18,000 \\\text { Number of orders } & 28 \\\text { Percent of orders marked rush } & 25 \% \\\text { Calls to technical support } & 14\end{array}$$
Calculate the profit earned on the Turnkey Enterprises account.

A) $2,355
B) $4,153
C) $4,482
D) $2,229

Question 46

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: $$\begin{array} { c c } \text { Unit Price } & \text { Unit Demand } \\\$ 45 & 7,200 \\\$ 44 & 7,800 \\\$ 43 & 8,400 \\\$ 42 & 8,800\end{array}$$ What price should Maker Sun Chairs charge in order to maximize its profit?

A) $45
B) $44
C) $43
D) $42

Question 47

Right Air Supply sells a specialized air filter that has a variable cost of $10 each. Fixed costs are estimated to be $700,000 across all levels of sales shown below: $$\begin{array} { c c } \text { Units Demanded } & \text { Unit Price } \\80,000 & \$ 35 \\90,000 & \$ 33 \\100,000 & \$ 31 \\110,000 & \$ 30 \\120,000 & \$ 28\end{array}$$ What information given, if any, is not relevant to the price maximization decision?

A) The selling prices
B) The variable costs per unit
C) The quantities demanded
D) The total fixed costs

Question 48

Palm Decor sells a single product that has variable costs of $12 per unit. The company estimates the following demand at various unit prices:
$$\begin{array} { | c | c | } \hline \text { Units Demanded } & \text { Unit Price } \\\hline 31,000 & \$ 19 \\37,000 & 18 \\44,000 & 17 \\56,000 & 16 \\60,000 & 15\\\hline\end{array}$$
What price should Palm Decor charge to maximize profits?

A) $19
B) $18
C) $17
D) $16

Question 49

Dollar Deals sells a single product that has a unit variable cost of $9 per unit. The company's total fixed costs are $220,000. The company estimates demand at various activity levels as follows: $$\begin{array} { c c } \text { Units Demanded } & \text { Unit Price } \\54,000 & \$ 15 \\65,000 & \$ 14 \\72,000 & \$ 13 \\82,000 & \$ 12\end{array}$$ What price should Dollar Deals charge to maximize profits?

A) $15
B) $14
C) $13
D) $12

Question 50

Right Air Supply sells a specialized air filter that has a variable cost of $10 each. Fixed costs are estimated to be $700,000 across all levels of sales shown below: $$\begin{array} { c c } \text { Units Demanded } & \text { Unit Price } \\80,000 & \$ 35 \\90,000 & \$ 33 \\100,000 & \$ 31 \\110,000 & \$ 30 \\120,000 & \$ 28\end{array}$$ What price should Right Air Supply charge to maximize revenues?

A) $35
B) $33
C) $31
D) $28

Question 51

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: $$\begin{array} { c c } \text { Unit Price } & \text { Unit Demand } \\\$ 45 & 7,200 \\\$ 44 & 7,800 \\\$ 43 & 8,400 \\\$ 42 & 8,800\end{array}$$ What is the anticipated profit at a price of $43?

A) $134,400
B) $14,400
C) $194,400
D) $361,200

Question 52

Wilkes Manufacturing sells one product with a variable unit cost of $18. The company knows that the price charged will affect demand. Fixed costs are $275,000. If sales exceed 50,000 units, the company will need to lease additional manufacturing space and equipment at an additional cost of $100,000 per year. The following chart represents the estimated demand at various price levels: $$\begin{array} { c c } \text { Units Demanded } & \text { Unit Price } \\25,000 & \$ 30 \\50,000 & \$ 28 \\75,000 & \$ 25 \\100,000 & \$ 23\end{array}$$ Based on this information which of the following statements is true?

A) Selling the units at $23 will generate the largest profit.
B) Selling the units at either $23 or $28 will generate a profit of $225,000.
C) Selling the units at either $25 or $28 will generate a profit of $225,000.
D) Selling the units at $28 will generate the largest profit.

Question 53

Testor Paints sells varnish with a variable cost of $6.50 per gallon. The company is unsure which price to charge in order to maximize profits. The price charged will also affect the demand. $$\begin{array} { c c } \text { Gallons Demanded } & \text { Unit Price Per Gallon } \\20,000 & \$ 11 \\30,000 & \$ 10 \\40,000 & \$ 9 \\50,000 & \$ 8\end{array}$$ If fixed costs are $80,000 and the chart above represents the demand at various prices, what price should be charged in order to maximize profits?

A) $11
B) $10
C) $9
D) $8

Question 54

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: $$\begin{array} { c c } \text { Unit Price } & \text { Unit Demand } \\\$ 45 & 7,200 \\\$ 44 & 7,800 \\\$ 43 & 8,400 \\\$ 42 & 8,800\end{array}$$ What is the anticipated profit at a price of $42?

A) $12,000
B) $132,000
C) $249,600
D) $369,600

Question 55

Calico Joe Fabrics sells a single product. The company estimates total fixed costs at $360,000 with demand and unit variable costs at various activity levels as follows:
$$\begin{array} {| c | c | c | } \hline \text { Units Demanded } & \text { Unit Price } & \text { Total Variable Costs } \\\hline 7,000 & \$ 31 & \$ 1,606,000 \\83,000 & 30 & 1,826,000 \\93,000 & 29 & 2,046,000 \\103,000 & 28 & 2,266,000 \\113,000 & 27 & 2,486,000\\\hline\end{array}$$
How much profit will Calico Joe Fabrics have if a price of $26 is charged and demand is 120,000?

A) $120,000
B) $3,120,000
C) $480,000
D) $2,760,000

Question 56

Allstate HVAC recently developed a low-end electronic thermostat that it plans on selling via a cable channel marketing program. The cable program's fee for selling the item is 20% of revenue. For this fee, the program will advertise the thermostat over six 10-minute segments in September. Allstate's fixed costs of producing the thermostats are $110,000 per production run. The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered. Variable production costs are $25 per unit. In addition, it will cost approximately $5 per unit to ship the thermostats to customers. Production time will be less than three weeks. Henry Kristen, a product manager at Allstate, is charged with recommending a price for the thermostat. Based on his experience with similar items, focus group responses, and survey information, he has estimated the number of units that can be sold at various prices: $\begin{array}{lr}\text { UnitPrice } & \text { Quantity } \\\$ 90 & 5,000 \\\$ 77 & 8,000 \\\$ 65 & 11,000 \\\$ 62 & 13,000\end{array}$ At which price should the company sell it products?

A) $90
B) $77
C) $65
D) $62

Question 57

Tong Chin is the manager of an Asian restaurant. She is considering four price levels for an all-you-can-eat buffet. Her estimate of price and quantity demanded are: $\begin{array}{ll}\text { Buffet Meal Price } &\text { Meals Demanded }\\\$ 17.00 & 3,200 \\\$ 16.00 & 3,700 \\\$ 15.00 & 4,000 \\\$ 14.00 & 4,400\end{array}$ Monthly operating costs include $16,400 of fixed costs and average variable costs of $9.40 per meal. Which price will yield the largest monthly profit?

A) $17
B) $16
C) $15
D) $14

Question 58

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: $$\begin{array} { c c } \text { Unit Price } & \text { Unit Demand } \\\$ 45 & 7,200 \\\$ 44 & 7,800 \\\$ 43 & 8,400 \\\$ 42 & 8,800\end{array}$$ How much is the contribution margin at a price of $45?

A) $324,000
B) $129,600
C) $12,600
D) $9,600

Question 59

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: $$\begin{array} { c c } \text { Unit Price } & \text { Unit Demand } \\\$ 45 & 7,200 \\\$ 44 & 7,800 \\\$ 43 & 8,400 \\\$ 42 & 8,800\end{array}$$ What is the anticipated revenue at a price of $44?

A) $343,200
B) $132,600
C) $12,600
D) $387,200

Question 60

Allstate HVAC recently developed a low-end electronic thermostat that it plans on selling via a cable channel marketing program. The cable program's fee for selling the item is 20% of revenue. For this fee, the program will advertise the thermostat over six 10-minute segments in September. Allstate's fixed costs of producing the thermostats are $110,000 per production run. The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered. Variable production costs are $25 per unit. In addition, it will cost approximately $5 per unit to ship the thermostats to customers. Production time will be less than three weeks. Henry Kristen, a product manager at Allstate, is charged with recommending a price for the thermostat. Based on his experience with similar items, focus group responses, and survey information, he has estimated the number of units that can be sold at various prices: $$\begin{array} { l l } \text { UnitPrice } & \text { Quantity } \\\hline \$ 74.99 & 15,000 \\\$ 63.99 & 20,000 \\\$ 54.99 & 25,000 \\\$ 49.99 & 35,000\end{array}$$ At what price is profit maximized?

A) $74.99
B) $63.99
C) $54.99
D) $49.99

Question 61

Cinotti Bread Depot bakes and sells each bagel for $1.25. The cost of producing 600,000 bagels in the prior year was: $$\begin{array} { l r } \text { Revenues } & \$ 750,000 \\\text { Direct materials } & 330,000 \\\text { Direct labor } & 66,000 \\\text { Manufacturing overhead - fixed } & 132,000 \\\text { Manufacturing overhead - variable } & 84,000\end{array}$$ At the start of the current year, Cinotti received a special order for 15,000 bagels to be sold for $1.10 per bagel. The company estimates it will incur an additional $700 in total fixed costs in order to lease a special machine needed to bake the bagels in the customer's logo shape. Also, this order will not affect any of its other operations. Should the company accept the special order?

A) No, profit will decrease by $2,950
B) No, profit will decrease by $2,250
C) Yes, profit will increase by $3,800
D) Yes, profit will increase by $500

Question 62

When deciding to accept or reject a special order, which of the following costs is most likely to be irrelevant?

A) The wages of direct labor to make the order
B) Depreciation on the machinery used to make the order
C) The raw material used to make the order
D) The electricity used to run the machine to make the order

Question 63

Which of the following statements is true of fixed costs of production in determining whether to accept or reject a special order?

A) They are increased in proportion to the amount that production increases when a special order is accepted.
B) They are often considered relevant if the plant is operating at capacity.
C) If the order can be completed without creating additional fixed costs, they are relevant.
D) They are always relevant in the decision.

Question 64

Element Boards makes skateboard wheels. Budget information regarding the current period is given below: $\begin{array}{lr}\text { Revenue (200,000 wheels at } \$ 3.00) & \$ 600,000 \\\text { Direct materials } & 120,000 \\\text { Direct labor } & 220,000 \\\text { Variable manufacturing overhead } & 50,000 \\\text { Fixed manufacturing overhead } & 70,000\end{array}$ The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of $2.75 per wheel. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company's orders. However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. What is the incremental income (loss) associated with accepting the special order?

A) ($2,300)
B) $2,700
C) ($2,700)
D) ($200)

Question 65

P&T Furniture has a capacity to produce 40,000 oak shelves per year and is currently selling all 40,000 shelves for $32 each. Bates Hotel has approached P&T about buying 1,200 shelves for a new hotel it is building and is willing to pay $26 each. The shelves can be packaged in bulk, saving P&T $1.50 per shelf compared to the normal packaging cost. Normally, the shelves have a unit variable cost of $27. The annual fixed costs of $450,000 will be unaffected by the special order and it will not affect any of its other operations. What is the minimum price per shelf that P&T should accept for this special order?

A) $27.00
B) $25.50
C) $30.50
D) $32.00

Question 66

P&T Furniture has a capacity to produce 40,000 oak shelves per year and is currently selling 36,000 shelves for $32 each. Bates Hotel has approached P&T about buying 1,200 shelves for a new hotel it is building and is willing to pay $26 for each shelf. The shelves can be packaged in bulk, saving P&T $1.50 per shelf compared to the normal packaging cost. Normally, the shelves have a unit variable cost of $27. The annual fixed costs of $450,000 will be unaffected by the special order and it will not affect any of its other operations. What would be the impact on profits if P&T accepts this special order?

A) Profits will decrease by $6,000.
B) Profits will increase by $31,200.
C) Profits will increase by $600.
D) Profits will decrease by $1,200.

Question 67

Bell Supply House produces recycled paper that it sells by the case. Budgeted amounts for the coming year are as follows: $\begin{array}{lr}\text { Revenues (20,000 cases at } \$ 12 \text { each) }&&\$240,000\\\text { Direct material } & \$ 40,000 \\\text { Direct labor } & 70,000 \\\text { Variable manufacturing overhead } & 50,000 \\\text { Fixed manufacturing overhead } & 30,000 &190,000\\\hline \text { Net income }&&\$50,000\end{array}$ LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case. This special order will have additional variable costs of $0.35 per case due to delivery costs. Bell Supply House has the capacity to produce this order and it will not affect any of its other operations. How much is the incremental profit (loss) associated with the special order?

A) $8,300
B) $9,000
C) ($21,000)
D) ($11,700)

Question 68

Bell Supply House produces recycled paper that it sells by the case. Budgeted amounts for the coming year are as follows: $\begin{array}{l}\text { Revenues ( } 20,000 \text { cases at } \$ 12 \text { each) }&&\$240,000\\\text { Direct material } & \$ 40,000 \\\text { Direct labor } & 70,000 \\\text { Variable manufacturing overhead } & 50,000 \\\text { Fixed manufacturing overhead } & 30,000&190,000\\\text { Net income }&&\$50,000\end{array}$ LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case. This special order will have additional variable costs of $0.35 per case due to delivery costs. Bell Supply House has the capacity to produce this order and it will not affect any of its other operations. How much is the incremental revenue associated with accepting this special order?

A) $8,300
B) $25,000
C) $165,000
D) $9,000

Question 69

Why is cost-plus pricing criticized?

A) It includes selling and administrative costs in determining the product cost.
B) It does not consider the fixed manufacturing overhead in determining the product cost.
C) It is inherently circular for manufacturing firms.
D) It requires a high level of technical expertise to price products using this method.

Question 70

Element Boards makes skateboard wheels. Budget information regarding the current period is given below: $\begin{array}{lr}\text { Revenue }(200,000 \text { wheels at } \$ 3.00) & \$ 600,000 \\\text { Direct materials } & 120,000 \\\text { Direct labor } & 220,000 \\\text { Variable manufacturing overhead } & 50,000 \\\text { Fixed manufacturing overhead } & 70,000\end{array}$ The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of $2.75 per wheel. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company's orders. However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. What is the incremental cost associated with accepting the special order?

A) $16,500
B) $11,700
C) $18,800
D) $16,700

Question 71

Accent Furniture has a capacity of 30,000 desk chairs per year and is currently selling all 30,000 for $240 each. Country Bank has approached Accent for buying 800 chairs for only $210 each. Accent has a normal variable cost of $165 per chair, including $50 per unit in direct labor per chair. Accent can produce the special order on an overtime shift. This would result in direct labor being paid overtime at 150% of the normal pay rate. The annual fixed costs will be unaffected by the special order and it will not affect any of its other operations. What will be the impact on profits of accepting the order?

A) Profit will decrease by $24,000.
B) Profit will increase by $16,000.
C) Profit will increase by $36,000.
D) Profit will decrease by $4,000.

Question 72

Bell Supply House produces recycled paper that it sells by the case. Budgeted amounts for the coming year are as follows: $\begin{array}{lr}\text { Revenues ( } 20,000 \text { cases at } \$ 12 \text { each) }&&\$240,000\\\text { Direct material } & \$ 40,000 \\\text { Direct labor } & 70,000 \\\text { Variable manufacturing overhead } & 50,000 \\\text { Fixed manufacturing overhead } & 30,000&190,000\\\text { Net income }&&\$50,000\end{array}$ LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case. This special order will have additional variable costs of $0.35 per case due to delivery costs. Bell Supply House has the capacity to produce this order and it will not affect any of its other operations. How much is the incremental cost of accepting the special order?

A) $16,000
B) $46,000
C) $16,700
D) $19,000

Question 73

Which of the following is relevant in deciding whether to accept or reject a special order?

A) The impact the order will have on existing business
B) The price that will be charged on the special order
C) The impact the order will have on existing business and the price that will be charged on the special order
D) None of these answer choices are correct.

Question 74

Sky Blue Plans provides financial planning for senior citizens. The costs of preparing 800 financial plans in the prior year were: $$\begin{array} { l r } \text { Directlabor } & \$ 400,000 \\\text { Variable overhead } & 296,000 \\\text { Fixed overhead } & 250,000 \\\text { Total cost } & \$ 946,000\end{array}$$ At the start of the current year, the company received an offer from MooseHaven, a retirement home for Moose members. MooseHaven wants Sky Blue Plans to prepare financial plans for its 150 assisted living citizens. Sky Blue has the capacity to prepare up to 1,000 plans in a given year, so this special order would not take away revenue from any of Sky Blue's current clients. MooseHaven is willing to pay $880 per plan. What will be the effect on Sky Blue Plan's profit if it agrees to prepare plans for the 150 citizens of MooseHaven?

A) Profit will increase by $1,500.
B) Profit will decrease by $45,375.
C) Profit will increase by $132,000.
D) Profit will decrease by $1,500.

Question 75

In accepting a special order, which one of the following is not considered?

A) Whether production capacity exists to complete the order
B) Whether demand for other products will be affected
C) Whether the fixed costs of production will increase
D) Whether the contribution margin per unit is greater for products in the special order than the contribution margin for the same products sold to regular customers

Question 76

To what amount does a company set a price equal if it uses a cost-plus approach to pricing?

A) Total costs incurred
B) Variable product costs plus a markup for profit
C) Estimated total costs plus a markup for profit
D) Total variable costs plus a share of the fixed costs

Question 77

Tenna Electronics sells arc monitors for $55 per unit. Unit product costs are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 14 \\\text { Direct labor } & 20 \\\text { Manufacturing overhead } &3 \\\text { Total } & \$ 37\end{array}$ A special order to purchase 15,000 arc monitors was recently received from a customer. There is enough capacity to fill the order and filling this order would not disrupt current operations. Tenna will incur an additional $2 per arc monitor for additional labor costs due to a slight modification the buyer wants made to the original product. One-third of the manufacturing overhead costs is fixed and will be incurred no matter how many units are produced. In negotiating a price, how much is the minimum selling price that Tenna Electronics should accept for this special order?

A) $34
B) $39
C) $38
D) $36

Question 78

Which of the following must be true for a company to accept a special order?

A) Variable costs must be less than the contribution margin.
B) Incremental revenues must be greater than incremental costs.
C) Opportunity costs must be greater than total revenue.
D) Total fixed costs must stay constant.

Question 79

Wagner Enterprises is contemplating accepting a special order. The company determined that the order will cause an increase in fixed costs. Should the order be accepted?

A) No, as any increase in fixed costs will reduce the company's profit
B) Yes, as long as the total revenue is greater than the associated variable costs
C) Yes, if the increase in fixed costs is less than the incremental revenue
D) Yes, if the incremental revenue is greater than the total incremental costs

Question 80

Element Boards makes skateboard wheels. Budget information regarding current period operations reflecting the sale of 200,000 wheels appears below: $\begin{array}{lr}\text { Revenue }(200,000 \text { wheels at } \$ 3.00) & \$ 600,000 \\\text { Direct materials } & 120,000 \\\text { Direct labor } & 220,000 \\\text { Variable manufacturing overhead } & 50,000 \\\text { Fixed manufacturing overhead } & 70,000\end{array}$ The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of $2.75 per wheel. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company's orders. However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. What is the incremental revenue associated with accepting the special order?

A) $616,500
B) $200
C) $16,700
D) $16,500