Deck 15: Target Costing and Cost Analysis for Pricing Decisions

Question 1

A firm typically uses only one of the three cost-plus pricing formulas.

Answer 1

False

Question 2

Skimming pricing is another name for penetration pricing.

Answer 2

False

Question 3

Under the time and material pricing approach, the company determines one charge for the labor used on a job, another charge for the materials, and then averages the two to apply one charge for everything.

Answer 3

False

Question 4

The marginal revenue curve shows the relationship between the change in total revenue that accompanies a change in quantity sold.

Question 5

In a competitive bidding situation where all of the companies submitting bids offer a roughly equivalent product or service, the amount of variable overhead becomes the sole criterion for selecting the contractor.

Question 6

Setting prices requires a balance between cost considerations and market forces.

Question 7

Penetration pricing is a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share.

Question 8

Due to cost-based pricing, an organization or industry can price its products below their production costs indefinitely.

Question 9

Matton 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 Matton changes to the approach known as target costing, the company will first undertake a thorough study of competitors' prices.

Question 10

When activity-based costing is integrated with target costing, a product's projected costs always go up.

Question 11

Time and material pricing is used widely by construction companies.

Question 12

Cost distortion can occur under the target-costing approach.

Question 13

Value engineering is an outgrowth of target costing.

Question 14

When a firm has excess capacity, a price that covers the incremental costs incurred because of the job will contribute toward covering the company's fixed cost and profit.

Question 15

Target costing involves four key principles.

Question 16

In many cases, traditional, volume based product costing may overcost low-volume and complex products, while undercosting high-volume and relatively simple products.

Question 17

When a computer-integrated manufacturing (CIM) system is used, the process of target costing sometimes is computerized.

Question 18

Much of the historical development of the target-costing approach has taken place in German industry.

Question 19

The revenue curve shows the relationship between the sales price and quantity sold.

Question 20

If a company uses a cost-plus approach to pricing, it will find that there are several different definitions of cost and the higher the cost, the higher the markup percentage.

Question 21

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.

Question 22

In a cost-plus approach to pricing:

A) there is an inverse relationship between the magnitude of the cost basis and the markup percentage.
B) there is a direct relationship between the magnitude of the cost basis and the markup percentage.
C) the cost basis used must include fixed manufacturing overhead.
D) "plus" refers to the addition of allocated administrative overhead to the direct manufacturing costs.
E) "plus" refers to the addition of allocated fixed manufacturing overhead to the variable manufacturing costs.

Question 23

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.

Question 24

The law prohibits price discrimination of quoting different prices to different customers for the same product or service, but it permits predatory pricing to establish initial markets.

Question 25

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.

Question 26

The curve that shows the relationship between the total sales revenue and quantity sold is called the:

A) marginal revenue curve.
B) average cost curve.
C) profit curve.
D) demand curve.
E) revenue curve.

Question 27

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.

Question 28

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.

Question 29

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.

Question 30

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).

Question 31

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 these factors.

Question 32

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.

Question 33

Durango Industries employs cost-plus pricing formulas to derive selling prices for its various products. If the formulas are all used correctly, which of the following cost bases will result in the highest selling price?

A) Variable manufacturing cost.
B) Absorption manufacturing cost.
C) Total variable cost.
D) Total cost.
E) None of these because if the formulas are applied correctly, all should result in the same selling price through the use of varying markups.

Question 34

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.

Question 35

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.

Question 36

One of the Congressional acts that restricts certain types of pricing behavior is the Robinson-Patman Act.

Question 37

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 answers are correct.

Question 38

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.

Question 39

Which of the following represents the cost-plus pricing formula?

A) Price = cost + (markup percentage * cost).
B) Price = cost + markup percentage.
C) Price = markup percentage * cost.
D) Price = cost / markup percentage.
E) Price = cost + (markup percentage + cost).

Question 40

The curve that shows the change in total cost that accompanies a change in quantity produced and sold is called the:

A) marginal revenue curve.
B) marginal cost curve.
C) profit curve.
D) average revenue curve.
E) revenue curve.

Question 41

Use the following information to answer the following Questions
The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available:



-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) None of the answers is correct.

Question 42

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) both variable selling and administrative cost and allocated fixed selling and administrative cost.

Question 43

The following costs relate to Tower Company: Variable manufacturing cost, $30; variable selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated fixed selling and administrative cost, $4.

- If Tower uses absorption manufacturing-cost pricing formulas, the company's markup percentage would be computed on the basis of:

A) $30.
B) $38.
C) $45.
D) $57.
E) None of the answers is correct.

Question 44

When determining the markup to be used in a cost-plus pricing formula, many companies 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.

Question 45

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.

Question 46

The following costs relate to Tower Company: Variable manufacturing cost, $30; variable selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated fixed selling and administrative cost, $4.

-If Tower uses total-cost pricing formulas, the company's markup percentage would be computed on the basis of:

A) $30.
B) $38.
C) $45.
D) $57.
E) None of the answers is correct.

Question 47

Use the following information to answer the following Questions
The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available:



-What price will the company charge if the firm uses cost-plus pricing based on total variable cost and a markup percentage of 120%?

A) $420.
B) $459.
C) $594.
D) $672.
E) None of the answers is correct.

Question 48

The following data pertain to Frontier Enterprises:

What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 110%?

A) $84.
B) $147.
C) $210.
D) $231.
E) None of the answers is correct.

Question 49

The following data pertain to Laramie Enterprises:

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) None of the answers is correct.

Question 50

Use the following information to answer the following Questions
The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available:



-What price will the company charge if the firm uses cost-plus pricing based on total manufacturing cost and a markup percentage of 160%?

A) $150.
B) $384.
C) $390.
D) $624.
E) None of the answers is correct.

Question 51

Use the following information to answer the following Questions
Longwood, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows:

The average amount of capital invested in the laptop product line is $900,000 and Longwood’s target return on investment is 18%.


-What price must Longwood charge if the company uses cost-plus pricing based on total variable cost?

A) $712.
B) $900.
C) $1,030.
D) $1,192.
E) None of the answers is correct.

Question 52

Fantasy Transport 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. Fantasy's markup percentage on total cost is:

A) 9.375%.
B) 24.0%.
C) 47.5%.
D) 62.5%.
E) None of the answers is correct.

Question 53

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) None of the answers is correct.

Question 54

Collins 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 total absorption manufacturing cost and total cost.
E) More information is needed to correctly answer the question.

Question 55

Use the following information to answer the following Questions
Longwood, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows:

The average amount of capital invested in the laptop product line is $900,000 and Longwood’s target return on investment is 18%.


-What price must Longwood charge if the company uses cost-plus pricing based on total cost?

A) $868.
B) $900.
C) $1,000.
D) $1,192.
E) None of the answers is correct.

Question 56

Which of the following formulas represents the markup percentage on total cost?

A) Target profit / annual volume.
B) Target profit / (annual volume * total cost per unit).
C) (Annual volume * total cost per unit) /target profit.
D) Target profit /variable cost.
E) (Target profit * total cost per unit) / annual volume.

Question 57

Use the following information to answer the following Questions
Longwood, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows:

The average amount of capital invested in the laptop product line is $900,000 and Longwood’s target return on investment is 18%.


-If Longwood 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) None of the answers is correct.

Question 58

Use the following information to answer the following Questions
The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available:



-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) None of the answers is correct.

Question 59

Musik Corporation uses a 140% markup on total cost and recently computed a selling price of $1,560 for a particular product. On the basis of this information, the product's total cost is:

A) $650.00.
B) $910.00.
C) $1,114.29.
D) $2,184.00.
E) None of the answers is correct.

Question 60

The following data pertain to Ronaldo Enterprises:

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) None of the answers is correct.

Question 61

Use the following information to answer the following Questions
Ralph’s Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data:



-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) None of the answers is correct.

Question 62

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.

Question 63

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.

Question 64

Charter 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 Charter 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.

Question 65

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.

Question 66

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.

Question 67

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 answers are correct.

Question 68

Inse Corporation uses time and material pricing. The repair department expects 20,000 direct labor hours of activity and has the following selected data:

The company's time charge per hour is:

A) $11.
B) $24.
C) $40.
D) $64.
E) $75.

Question 69

Rudy 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. Rudy'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 Rudy has a profit goal of 30% of sales. If Rudy 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 answers is correct.

Question 70

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.

Question 71

Flagler Electronics currently sells a camera for $240. An aggressive competitor has announced plans for a similar product that will be sold for $205. Flagler'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 Flagler has a profit goal of 20% of sales. If Flagler meets competitive selling prices, what is the company's target cost?

A) $41.
B) $48.
C) $164.
D) $175.
E) $192.

Question 72

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.

Question 73

The four tasks that follow take place with 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.

Question 74

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.

Question 75

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.

Question 76

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.

Question 77

Use the following information to answer the following Questions
Ralph’s Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data:



-The time charge per hour is:

A) $19.50.
B) $27.00.
C) $29.00.
D) $36.50.
E) None of the answers is correct.

Question 78

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.

Question 79

Charlene 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 Charlene uses target costing, which task would the company perform first?

A) 1.
B) 2.
C) 3.
D) 4.
E) None of the answers is correct.

Question 80

Use the following information to answer the following Questions
Ralph’s Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data:



-Assuming there is no profit markup on material cost, 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) None of the answers is correct.