Deck 9: Pricing

Question 1

There are two approaches for determining a transfer price: cost-based and market-based.

Answer 1

False

Question 2

Divisions within vertically integrated companies normally sell goods only to other divisions within the same company.

Answer 2

False

Question 3

A problem with a cost-based transfer price is that it does not provide adequate incentive for the selling division to control costs.

Answer 3

True

Question 4

The difference between the target price and the desired profit is the target cost of the product.

Question 5

The market-based transfer price approach produces a higher total contribution margin to the company than the cost-based approach.

Question 6

In time and material pricing, the material charge is based on the cost of direct materials used and a material loading charge for related overhead costs.

Question 7

If a cost-based transfer price is used, the transfer price must be based on variable cost.

Question 8

In the formula for a minimum transfer price, opportunity cost is the contribution margin of goods sold externally.

Question 9

The number of transfers between divisions that are located in different countries has decreased as companies rely more on outsourcing.

Question 10

In a competitive environment, the company must set a target cost and a target selling price.

Question 11

Differences in tax rates between countries can complicate the determination of the appropriate transfer price.

Question 12

In most cases, a company sets the price instead of it being set by the competitive market.

Question 13

The cost-plus pricing model gives consideration to the demand side-whether customers will pay the target selling price.

Question 14

The material loading charge is expressed as a percentage of the total estimated costs of materials for the year.

Question 15

Sales volume plays a large role in determining per unit costs in the cost-plus pricing approach.

Question 16

In a competitive market, a company is forced to act as a price taker and must emphasize minimizing and controlling costs.

Question 17

Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division.

Question 18

The first step for time and material pricing is to calculate the material loading charge.

Question 19

The cost-plus pricing approach establishes a cost base and adds a mark-up to this base to determine a target selling price.

Question 20

A negotiated transfer price should be used when an outside market for the goods does not exist.

Question 21

The absorption cost approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost.

Question 22

In most cases, prices are set by the

A)customers.
B)competitive market.
C)largest competitor.
D)selling company.

Question 23

The mark-up percentage in the variable cost-plus approach is calculated by dividing the desired ROI/unit plus fixed costs/unit by the variable costs/unit.

Question 24

Factors that can affect pricing decisions include all of the following except

A)cost considerations.
B)environment.
C)pricing objectives.
D)all of these are factors.

Question 25

The cost-plus pricing approach's major advantage is

A)it considers customer demand.
B)that sales volume has no effect on per unit costs.
C)it is simple to calculate.
D)it can be used to determine a product's target cost.

Question 26

A company must price its product to cover its costs and earn a reasonable profit in

A)all cases.
B)its early years.
C)the long run.
D)the short run.

Question 27

Bryson Company has just developed a new product.The following data are available for this product: The target selling price for this product is

A)$190.
B)$150.
C)$130.
D)$100.

Question 28

All of the following are correct statements about the target price except it

A)is the price the company believes would place it in the optimal position for its target audience.
B)is used to determine a product's target cost.
C)is determined after the company has identified its market and does market research.
D)is determined after the company sets its desired profit amount.

Question 29

Under the variable cost-plus approach, the cost base consists of all of the variable costs associated with a product except variable selling and administrative costs.

Question 30

In cost-plus pricing, the target selling price is calculated as

A)variable cost per unit + desired ROI per unit.
B)fixed cost per unit + desired ROI per unit.
C)total unit cost + desired ROI per unit.
D)variable cost per unit + fixed manufacturing cost per unit + desired ROI per unit.

Question 31

Prices are set by the competitive market when

A)the product is specially made for a customer.
B)there are no other producers capable of manufacturing a similar item.
C)a company can effectively differentiate its product from others.
D)a product is not easily distinguished from competing products.

Question 32

The first step in the absorption cost approach is to calculate the mark-up percentage used in setting the target selling price.

Question 33

All of the following are correct statements about the cost-plus pricing approach except that it

A)is simple to calculate.
B)considers customer demand.
C)includes only variable costs in the cost base.
D)will only work when the company sells the quantity it budgeted.

Question 34

In the cost-plus pricing approach, the desired ROI per unit is calculated by multiplying the ROI percentage by

A)fixed costs.
B)total assets.
C)total costs.
D)variable costs.

Question 35

In cost-plus pricing, the mark-up percentage is calculated by dividing the desired ROI per unit by the

A)fixed cost per unit.
B)total cost per unit.
C)total manufacturing cost per unit.
D)variable cost per unit.

Question 36

In time and material pricing, a material loading charge covers all of the following except

A)purchasing costs.
B)related overhead.
C)desired profit margin.
D)all of these are covered.

Question 37

Because absorption cost data already exists in general ledger accounts, it is cost effective to use it for pricing.

Question 38

Use the following information for questions
Red Grass Company produces high definition television sets.The following information is available for this product:
The target selling price for this television is

A)$240.
B)$400.
C)$440.
D)$540.

Question 39

The following per unit information is available for a new product of Blue Ribbon Company: Blue Ribbon Company's mark-up percentage would be

A)9%.
B)10%.
C)30%.
D)65%.

Question 40

Use the following information for questions
Red Grass Company produces high definition television sets.The following information is available for this product:
Red Grass Company's mark-up percentage would be

A)140%.
B)75%.
C)40%.
D)35%.

Question 41

All of the following are correct statements about the market-based approach except that it

A)assumes that the transfer price should be based on the most objective inputs possible.
B)provides a fairer allocation of the company's contribution margin to each division.
C)produces a higher company contribution margin than the cost-based approach.
D)ensures that each division manager is properly motivated and rewarded.

Question 42

A firm's transfer pricing policy should accomplish all of the following except

A)promote goal congruence.
B)maintain divisional autonomy.
C)provide accurate performance evaluation.
D)maximize the taxes paid in a foreign country.

Question 43

The transfer price approach that will result in the largest contribution margin to the buying division is the

A)cost-based approach.
B)market-based approach.
C)negotiated price approach.
D)time and material pricing approach.

Question 44

Use the following information for questions
The following data are available for Wheels 'N Spokes Repair Shop for 2012: The desired profit margin is $15 per labour hour.The material loading charge is 35% of invoice cost.It is estimated that 4,000 labour hours will be worked in 2012.
In January 2012, Wheels 'N Spokes repairs a bicycle that uses parts of $200.Its material loading charge on this repair would be

A)$35.
B)$70.
C)$235.
D)$270.

Question 45

Use the following information for questions
The following data are available for Wheels 'N Spokes Repair Shop for 2012: The desired profit margin is $15 per labour hour.The material loading charge is 35% of invoice cost.It is estimated that 4,000 labour hours will be worked in 2012.
In March 2012, Wheels 'N Spokes repairs a bicycle that takes three hours to repair and uses parts of $70.The bill for this repair would be

A)$244.50.
B)$289.50.
C)$304.50.
D)$349.50.

Question 46

The transfer price approach that conceptually should work the best is the

A)cost-based approach.
B)market-based approach.
C)negotiated price approach.
D)time and material pricing approach.

Question 47

In the formula for the minimum transfer price, opportunity cost is the __________ of the goods sold externally.

A)variable cost
B)total cost
C)selling price
D)contribution margin

Question 48

When a cost-based transfer price is used, the transfer price may be based on any of the following except

A)fixed cost.
B)full cost.
C)variable cost.
D)all of these may be used.

Question 49

The transfer price approach that is often considered the best approach because it generally provides the proper economic incentives is the

A)cost-based approach.
B)market-based approach.
C)negotiated price approach.
D)time and material pricing approach.

Question 50

In time and material pricing, the charge for a particular job is the sum of the labour charge and the

A)materials charge.
B)material loading charge.
C)materials charge + desired profit.
D)materials charge + the material loading charge.

Question 51

All of the following are correct statements about the cost-based transfer price approach except that it

A)can understate the actual contribution to profit by the selling division.
B)can reduce a division manager's control over the division's performance.
C)bases the transfer price on standard cost instead of actual cost.
D)provides incentive for the selling division to control costs.

Question 52

The last step in determining the material loading charge percentage is to

A)estimate annual costs for purchasing, receiving, and storing materials.
B)estimate the total cost of parts and materials.
C)divide material charges by the total estimated costs of parts and materials.
D)add a desired profit margin on the materials themselves.

Question 53

Negotiated transfer pricing is not always used because of each of the following reasons except that

A)market price information is sometimes not easily obtainable.
B)a lack of trust between the negotiating divisions may lead to a breakdown in the negotiations.
C)negotiations often lead to different pricing strategies from division to division.
D)opportunity cost is sometimes not determinable.

Question 54

The negotiated transfer price approach should be used when

A)the selling division has available capacity and is willing to accept less than the market price.
B)an outside market for the goods does not exist.
C)no market price is available.
D)any of these situations exist.

Question 55

The general formula for the minimum transfer price is: minimum transfer price equals

A)fixed cost + opportunity cost.
B)external purchase price.
C)total cost + opportunity cost.
D)variable cost + opportunity cost.

Question 56

The first step for time and material pricing is to calculate the

A)charge for obtaining materials.
B)charge for holding materials.
C)labour charge per hour.
D)charges for a particular job.

Question 57

The labour charge per hour in time and material pricing includes all of the following except

A)an allowance for a desired profit.
B)charges for labour loading.
C)selling and administrative costs.
D)overhead costs.

Question 58

All of the following are approaches for determining a transfer price except the

A)cost-based approach.
B)market-based approach.
C)negotiated approach.
D)time and material approach.

Question 59

Use the following information for questions
The following data are available for Wheels 'N Spokes Repair Shop for 2012: The desired profit margin is $15 per labour hour.The material loading charge is 35% of invoice cost.It is estimated that 4,000 labour hours will be worked in 2012.
Wheels 'N Spokes' labour charge in 2012 would be

A)$50.
B)$65.
C)$70.
D)$85.

Question 60

Assuming the selling division has available capacity, a negotiated transfer price should be within the range of

A)fixed cost per unit and the external purchase price.
B)total cost per unit and the external purchase price.
C)variable cost per unit and the external purchase price.
D)variable cost per unit and the opportunity cost.

Question 61

Use the following information for questions
The Wood Division of Fir Products, Inc.manufactures wood mouldings and sells them externally for $110.Its variable cost is $40 per unit, and its fixed cost per unit is $14.Fir's president wants the Wood Division to transfer 5,000 units to another company division at a price of $54.
Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer price it should accept is

A)$14.
B)$40.
C)$54.
D)$110.

Question 62

Hen Company has developed a new product, egg crates that prevent breakage.The cost per crate is $50 and the company expects to sell 1,000 crates per year.Hen Company has invested $1,000,000 in equipment to produce the crates and desires a 10% return on investment.What is Hen Company's selling price for one egg crate?

A)$110
B)$150
C)$100
D)$250

Question 63

Hen Company has developed a new product, egg crates that prevent breakage.The cost per crate is $50 and the company expects to sell 1,000 crates per year.Hen Company has invested $1,000,000 in equipment to produce the crates and desires a 10% return on investment.What is Hen Company's desired mark-up percentage?

A)10%
B)20%
C)100%
D)200%

Question 64

The absorption cost approach is used by most companies for all of the following reasons except that

A)absorption cost information is readily provided by a company's cost accounting system.
B)absorption cost provides the most defensible bases for justifying prices to interested parties.
C)basing prices on only variable costs could encourage managers to set too low a price to boost sales.
D)this approach is more consistent with cost-volume-profit analysis.

Question 65

In the absorption cost approach, the mark-up percentage covers the

A)desired ROI only.
B)desired ROI and selling and administrative expenses.
C)desired ROI and fixed costs.
D)selling and administrative expenses only.

Question 66

Transfers between divisions located in countries with different tax rates

A)simplify the determination of the appropriate transfer price.
B)are decreasing in number as more companies "localize" operations.
C)encourage companies to report more income in countries with low tax rates.
D)all of these are correct.

Question 67

Partridge Co.has produced a product with a total unit cost of $60 and a desired ROI per unit of $25.If Partridge Co.'s target selling price is $85, what is its percentage mark-up on cost?

A)141.67%
B)100%
C)50%
D)41.67%

Question 68

Under the absorption cost approach, all of the following are included in the cost base except

A)direct materials.
B)fixed manufacturing overhead.
C)selling and administrative costs.
D)variable manufacturing overhead.

Question 69

The mark-up percentage in the absorption cost approach is calculated by dividing the sum of the desired ROI per unit and

A)fixed costs per unit by manufacturing cost per unit.
B)fixed costs per unit by variable costs per unit.
C)selling and administrative expenses per unit by manufacturing cost per unit.
D)selling and administrative expenses per unit by variable costs per unit.

Question 70

All of the following are correct statements about transfers between divisions located in countries with different tax rates except that

A)differences in tax rates across countries complicate the determination of the appropriate transfer price.
B)many companies prefer to report more income in countries with low tax rates.
C)companies must pay income tax in the country where income is generated.
D)a decreasing number of transfers are between divisions located in different countries.

Question 71

In the variable cost-plus approach, the mark-up percentage covers the

A)desired ROI only.
B)desired ROI and fixed costs.
C)desired ROI and selling and administrative expenses.
D)fixed costs only.

Question 72

Which of the following is consistent with generally accepted accounting principles?

A)Absorption cost approach
B)Variable cost-plus approach
C)Variable-cost approach
D)Both absorption cost and variable cost-plus approach

Question 73

The reasons for using the variable cost-plus approach include all of the following except this approach

A)avoids arbitrary allocation of common fixed costs to individual product lines.
B)is more consistent with cost-volume-profit analysis.
C)provides the most defensible bases for justifying prices to all interested parties.
D)provides the type of data managers need for pricing special orders.

Question 74

The maximum transfer price from the buying division's standpoint is the

A)total cost + opportunity cost.
B)variable cost + opportunity cost.
C)external purchase price.
D)external purchase price + opportunity cost.

Question 75

The first step in the absorption cost approach is to calculate the

A)desired ROI per unit.
B)mark-up percentage.
C)target selling price.
D)unit manufacturing cost.

Question 76

Management of the Catering Company would like the Food Division to transfer 10,000 cans of its final product to the Restaurant Division for $80.The Food Division sells the product to customers for $150 per unit.The Food Division's variable cost per unit is $55 and its fixed cost per unit is $25.The Food Division is currently operating at full capacity.What is the minimum transfer price the Food Division should accept?

A)$25
B)$55
C)$80
D)$150

Question 77

Cuff budgets sales of its truck tires at $160 per tire and estimates that 10,000 tires can be sold during the coming year.Variable costs per tire are $60 and Cuff desires a profit of $30 per tire.The target cost per tire is

A)$160.
B)$130.
C)$80.
D)$100.

Question 78

Under the variable cost-plus approach, the cost base includes all of the following except

A)fixed manufacturing costs.
B)variable manufacturing costs.
C)total fixed costs.
D)variable selling and administrative costs.

Question 79

The mark-up percentage denominator in the variable cost-plus approach is the

A)desired ROI per unit.
B)fixed costs per unit.
C)manufacturing cost per unit.
D)variable costs per unit.

Question 80

Use the following information for questions
The Wood Division of Fir Products, Inc.manufactures wood mouldings and sells them externally for $110.Its variable cost is $40 per unit, and its fixed cost per unit is $14.Fir's president wants the Wood Division to transfer 5,000 units to another company division at a price of $54.
Assuming the Wood Division does not have any available capacity, the minimum transfer price it should accept is

A)$14.
B)$40.
C)$54.
D)$110.