Deck 8: Pricing and Other Product Management Decisions

Question 1

A value chain approach to management involves pursuing the goal of maximizing the value, while minimizing the cost, of a product or service to final customers.

Answer 1

True

Question 2

Virtual integration is the use of information technology and partnership concepts to allow two or more entities along a value chain to act as if they were a single economic entity.

Answer 2

True

Question 3

Cost-based pricing systems invariably involve pricing products based on their full absorption costs.

Answer 3

False

Question 4

When using a cost-based price, the denominator in the calculation always includes the costs included in the base plus the desired profit.

Question 5

Target costing is a method of costing, developed by the manufacturers of Ford automobiles, that begins with the estimated price customers are willing to pay for a product, and then subtracts the desired profit to determine the cost targets that must be met.

Question 6

Target costing is generally more beneficial with products that have a short life cycle, rather than a long life cycle.

Question 7

Kaizen costing is the Japanese term for continuous improvement.

Question 8

Kaizen costing is an alternative to target costing.

Question 9

Benchmarking is just a more elegant term for corporate espionage.

Question 10

Benchmarking is actually just a formalized approach to determining best practices by companies in the same industry and in other industries.

Question 11

Developing a value chain from the perspective of the final customer requires:

A) Working backwards to the basic raw materials
B) Working forward from mid-production
C) Providing response mailers with sold products
D) Providing the lowest price in the industry

Question 12

Which of the following actions is most likely to result from a company exploiting value-enhancing opportunities across the value chain?

A) Decreasing the number of suppliers relied upon for delivering input products and services
B) Increasing the number of processes involved in producing a product
C) Reducing the quality of the product or service provided
D) Increasing the amount of inventory carried during the fiscal period

Question 13

From a value chain perspective, value is defined by which of the following?

A) Only the costs associated with producing a product
B) The amount of worth the final customer places on a product or service
C) All costs necessary to deliver a product or service to the end user.
D) All costs associated with the life of a product or service (including all upstream and downstream costs)

Question 14

Collections of related activities intended to achieve a common purpose are called:

A) Value chains
B) Processes
C) Activity groups
D) Activities

Question 15

An activity is:

A) A unit of work
B) Typically not part of a process
C) Made up of several units of work
D) Unrelated to a process

Question 16

Value chain concepts view relationships with suppliers as representing:

A) An extended business partner
B) A formal corporate merger
C) Complex logistical problems
D) An opportunity to gain a competitive bargaining position over the supplier

Question 17

A value-added approach focuses an organization's perspective on:

A) External suppliers and customers
B) A narrow market niche
C) Internal activities and costs
D) Governmental regulations

Question 18

In a cost-based pricing approach, the last amount to be determined is:

A) Variable cost
B) Manufacturing cost
C) Sales price
D) Discretionary fixed cost

Question 19

For cost-based pricing in multiple-product companies, which of the following is most likely to be used as a possible cost basis?

A) Direct materials costs
B) Variable selling costs
C) Administrative costs
D) Corporate overhead costs

Question 20

Cost-based pricing has traditionally been widely used because:

A) Cost data are cheap.
B) Cost-based prices are defensible.
C) Revenues must exceed fixed costs if the firm is to remain in business.
D) Cost/benefit analysis is critical to such decisions.

Question 21

Which of the following is not a drawback to cost-based pricing?

A) Cost-based pricing requires accurate cost assignments.
B) The greater the portion of unassigned costs, the greater the likelihood of overpricing and underpricing individual products.
C) Cost-based pricing assumes goods or services are relatively scarce, and customers who want a product or service are, generally, willing to pay the price.
D) In a competitive environment, cost-based approaches decrease the time and cost of bringing new products to market.

Question 22

Blake Sales Co. has predicted the following costs for this year for 500,000 units:
What is the markup on variable manufacturing costs needed to break even?

A) 218.75 percent
B) 212.50 percent
C) 150.00 percent
D) 350.00 percent

Question 23

Catherine Co. has predicted the following costs for this year for 345,000 units:
What is the markup on selling and administrative costs needed to break even?

A) 133.0 percent
B) 300.0 percent
C) 350.0 percent
D) 120.0 percent

Question 24

Tootsie Manufacturing Company has the following budgeted costs for 10,000 units:
What is the markup on fixed costs needed to obtain a target profit of $75,000?

A) 300.0 percent
B) 360.0 percent
C) 150.0 percent
D) 425.0 percent

Question 25

Tootsie Manufacturing Company has the following budgeted costs for 10,000 units:
What is the markup on variable costs needed to break even?

A) 41.67 percent
B) 150.4 percent
C) 33.3 percent
D) 300.0 percent

Question 26

Tootsie Manufacturing Company has the following budgeted costs for 10,000 units:
What is the initial selling price needed to obtain a target profit of $100,000 using the variable cost markup method?

A) $30.75
B) $60.50
C) $31.20
D) $55.00

Question 27

Zach Company has predicted the following costs for this year for 100,000 units:
What is the markup on variable costs needed to achieve a target profit of $35,000?

A) 388 percent
B) 430 percent
C) 440 percent
D) 200 percent

Question 28

Sam Company has predicted the following costs for this year for 25,000 units:
What is the initial selling price needed to obtain a target profit of $25,000 using the variable cost markup method?

A) $ 5.00
B) $14.70
C) $15.00
D) $ 4.50

Question 29

Ricardo Company has predicted the following costs for this year for 50,000 units:
What is the manufacturing cost markup needed to obtain a target profit of $100,000?

A) 10.4 percent
B) 33.5 percent
C) 40.0 percent
D) 34.5 percent

Question 30

Pedro Company has predicted the following costs for this year for 50,000 units:
What is the initial selling price needed to obtain a target profit of $50,000 using the manufacturing cost markup method?

A) $14.00
B) $15.50
C) $ 8.00
D) $16.00

Question 31

George Carlin is considering the production of a new line of jeans. Based on preliminary market research, management has decided that each pair of jeans should be priced at $200. Furthermore, management believes that the profit margin should be 25 percent of sales revenue.
What is the target cost?

A) $ 50.00
B) $150.00
C) $112.00
D) $127.50

Question 32

Austin Boots Inc. is considering the production of a new line of boots. Based on preliminary market research, management has decided that each pair of boots should be priced at $300. Furthermore, management believes that the profit margin should be 30 percent of sales revenue.
What is the target cost?

A) $210.00
B) $225.50
C) $260.00
D) $157.50

Question 33

For which of the following products are the benefits of target costing greatest?

A) Those with long market life cycles
B) Those with multiple customer uses
C) Those where pricing is not a sensitive issue to customers
D) Those with relatively short life cycles

Question 34

An awareness of the impact of today's actions on tomorrow's costs is a concept that underlies which of the following notions?

A) Marginal revenue
B) Target pricing
C) Kanban systems
D) Life-cycle costs

Question 35

Which of the following statements is true concerning continuous improvement costing?

A) It is also referred to as Kaizen costing
B) It is a prerequisite for target pricing
C) It calls for the establishment of cost reduction targets for products or services
D) Both A and C

Question 36

The word "Kaizen" is Japanese for:

A) Materials pull
B) Materials push
C) Continuous improvement
D) Little car

Question 37

Foresight Company manufactures binoculars. The actual costs for 2016 and 2017 were as follows:
Beginning in 2017, Foresight implemented a continuous improvement program that required a first-year cost reduction target of a 5 percent reduction of the 2016 base.

-Foresight's continuous improvement target for plastic cases in 2017 was:

A) $4.00
B) $3.80
C) $3.72
D) $4.40

Question 38

Foresight Company manufactures binoculars. The actual costs for 2016 and 2017 were as follows:
Beginning in 2017, Foresight implemented a continuous improvement program that required a first-year cost reduction target of a 5 percent reduction of the 2016 base.

-Foresight's continuous improvement target for lens sets in 2017 was:

A) $15.75
B) $17.20
C) $16.15
D) $16.00

Question 39

Foresight Company manufactures binoculars. The actual costs for 2016 and 2017 were as follows:
Beginning in 2017, Foresight implemented a continuous improvement program that required a first-year cost reduction target of a 5 percent reduction of the 2016 base.

-Foresight's continuous improvement target for direct labor in 2017 was:

A) $32.00
B) $30.00
C) $29.40
D) $30.40

Question 40

Foresight Company manufactures binoculars. The actual costs for 2016 and 2017 were as follows:
Beginning in 2017, Foresight implemented a continuous improvement program that required a first-year cost reduction target of a 5 percent reduction of the 2016 base.

-Foresight's continuous improvement target for indirect variable manufacturing costs in 2017 was:

A) $8.00
B) $7.60
C) $8.40
D) $7.44

Question 41

__________________ calls for establishing cost reduction targets for products or services that an organization is currently providing to customers.

A) Target costing
B) Kaizen costing
C) Process reengineering
D) Activity-based costing

Question 42

Assume that EEG Company wanted to reduce the cost of materials handling in each of its stores, and management set a target reduction of 5 percent per year.
If a given store has current annual materials handling costs of $100,000 and expected an increase next year due to 20 percent growth, the budget for next year would be:

A) $114,000
B) $196,000
C) $230,000
D) $225,400

Question 43

________________ is a systematic approach to identifying the best practices to help an organization take action to improve performance.

A) Target costing
B) ISO 9000
C) Activity-based management
D) Benchmarking

Question 44

Which of the following statements about benchmarking is true?

A) Benchmarking does not provide measurements that are useful in setting goals.
B) Benchmarking can help to overcome resistance to change.
C) Benchmarking causes employees to think suggested changes are impossible.
D) Benchmarking is more efficient than other alternatives.

Question 45

All of the following are typical steps in benchmarking, except:

A) Decide what to benchmark
B) Plan the benchmark project.
C) Limit benchmarking only to competitors
D) Understand your own performance

Question 46

All of the following statements about benchmarking are true, except:

A) Benchmarking can be a psychological tool that helps overcome resistance to change.
B) Benchmarking provides measurements that are useful in setting goals.
C) Benchmarking is a systematic approach to identifying the best practices to help an organization take action to improve performance.
D) Benchmarking should be focused only on studying competitors.

Question 47

Levi manufacturing makes profits with varying pricing structures, but it wants to determine the minimum markup percentage for all products based on manufacturing costs that will ensure that it does not fall below break-even point. It has estimated the following costs, for the coming year, for its planned production of all products.
The markup percentage required for Levi Company to break even is:

A) 60.00%
B) 31.25%
C) 35.75 %
D) 40.00 %

Question 48

Electronics Inc. is considering producing a new MP3 player that will offer several new features, including wireless earphones and wireless download of music and videos from any computer to the device. After much market research, it has determined that the appropriate target price for the new product is $500.
To achieve its normal minimum profit margin of 25 percent, Electronics must be able to produce the product at a maximum total cost of:

A) $108
B) $375
C) $ 72
D) $ 18

Question 49

The predicted 2017 costs for Alpha Motors are as follows:
Average total assets for 2017 are predicted to be $5,000,000.
If management desires a 6 percent rate of return on total assets, the markup percentages based on total variable costs would be:

A) 162.5 percent
B) 192.5 percent
C) 182.5 percent
D) 155.2 percent

Question 50

The predicted 2017 costs for Beta Motors are as follows:
Average total assets for 2017 are predicted to be $7,000,000.
If the company desires a 10 percent rate of return on total assets, the markup percentage on total manufacturing costs for unassigned costs would be:

A) 192.5 percent
B) 190.0 percent
C) 180.0 percent
D) 250.0 percent

Question 51

The predicted 2017 costs for Gamma Motors are as follows:
Average total assets for 2017 are predicted to be $5,000,000.
If the company desires a 10 percent rate of return on total assets, what is the markup percentage on total manufacturing costs for the desired profit?

A) 192.5 percent
B) 200.0 percent
C) 180.0 percent
D) 150.0 percent

Question 52

Quicken Loans has been displeased with the costs of servicing its consumer loans. Assume that it has decided to implement a Kaizen-based cost improvement program. For 2017, assume that Quicken Loans incurred the following costs ($ millions):
For the next two years, Quicken expects an increase in consumer loans of 5 percent annually with related increases in costs.
If the company has a continuous improvement goal of 2 percent each year, the budgeted amount for loan processing for 2018 will be:

A) $11,155
B) $12,348
C) $16,464
D) $16,800

Question 53

Quicken Loans has been displeased with the costs of servicing its consumer loans. Assume that it has decided to implement a Kaizen-based cost improvement program. For 2017, assume that Quicken Loans incurred the following costs ($ millions):
For the next two years, Quicken expects an increase in consumer loans of 5 percent annually with related increases in costs.
If the company has a continuous improvement goal of 2 percent each year, the budgeted amount for Customer relations for 2018 will be:

A) $1,480
B) $2,058
C) $1,960
D) $2,100

Question 54

Quicken Loans has been displeased with the costs of servicing its consumer loans. Assume that it has decided to implement a Kaizen-based cost improvement program. For 2017, assume that Quicken Loans incurred the following costs ($ millions):
For the next two years, Quicken expects an increase in consumer loans of 5 percent annually with related increases in costs.
If the company has a continuous improvement goal of 2 percent each year, the budgeted amount for loan processing for 2018 will be:

A) $12,348
B) $12,600
C) $11,760
D) $12,000

Question 55

Johnson Products Co. has predicted the following costs for this year for 150,000 units:
Calculate the markup on variable costs needed to achieve a target profit of $100,000.

Question 56

Valent Co. has predicted the following costs for this year for 300,000 units:
Calculate the manufacturing cost markup needed to obtain a target profit of $950,000.

Question 57

Kent Manufacturing Company has the following budgeted costs for 10,000 units:
Calculate the markup on manufacturing costs needed to obtain a target profit of $145,000.

Question 58

Olena Corporation sells a product for $500 per unit. Its market share is 20 percent. The marketing manager believes that the market share can be increased to 30 percent with a reduction in price to $400. The product is currently earning a profit of $50 per unit. The president of Olena Corporation believes that the $50 profit per unit must be maintained.
Calculate the target cost per unit?

Question 59

Alex Corporation sells a product for $300 per unit. Its market share is 20 percent. The marketing manager believes that the market share can be increased to 30 percent with a reduction in price to $200. The product is currently earning a profit of $40 per unit. The president of Alex Corporation believes that the $40 profit per unit must be maintained.
Calculate the target cost per unit?

Question 60

Merlin Manufacturing Company has the following budgeted costs for 10,000 units:
Calculate the markup on variable costs needed to break even.

Question 61

Justin Manufacturing Company has the following budgeted costs for 20,000 units:
What is the initial selling price needed to obtain a target profit of $73,000 using the manufacturing cost markup method?

Question 62

Oma Company has the following budgeted costs for 10,000 units:
Required:
a. What is the markup on variable costs needed to break even?
b. What is the markup on variable costs needed to obtain a target profit of $75,000?
c. What is the markup on manufacturing costs needed to obtain a target profit of $75,000?

Question 63

Portland Corporation sells a product for $200 per unit. Its market share is 35 percent of the units sold. The marketing manager believes that the market share can be increased to 40 percent of the units sold with a reduction in price to $175. The product is currently earning a profit of $30 per unit. The president of Portland Corporation believes that his company needs to maintain the same profit level per unit. The total market for the product has annual sales of 10,000 units.
Required:
a. How many dollars does Portland Corporation currently sell of the product each year?
b. What is the target price per unit?
c. What is the target cost per unit?

Question 64

Good Deal Electronics, Inc. manufactures two products, DVD Recorders and DVD Players, both on the same assembly line. The predicted sales are 10,000 DVD Recorders and 12,500 DVD Players. The predicted costs for the year 2017 are as follows:
Each product uses 50 percent of the materials costs. Based on manufacturing time, 60 percent of the other costs are assigned to the DVD Recorders, and 40 percent of the other costs are assigned to DVD Players. The management of Good Deal Electronics desires an annual profit of $175,000.
Required:
a. What price should Good Deal Electronics charge for each DVD Recorder if management believes the Recorders should sell for 50 percent more than the DVD Players? (Rounded to 2 decimal places.)
b. What is the total profit per product?
c. Based on your answer to requirement (b), how should the company evaluate the status of the two products?

Question 65

Carolyn Corporation has predicted the following costs for this year for 25,000 units:
Required:
a. What is the markup on variable costs needed to achieve a target profit of $110,000?
b. What is the initial unit selling price needed to obtain a target profit of $110,000 using the variable cost markup method?
c. What is the manufacturing cost markup needed to obtain a target profit of $110,000?
d. What is the initial unit selling price needed to obtain a target profit of $110,000 using the manufacturing cost markup method?

Question 66

Dream Company sells a product for $400 per unit. Its market share is 25 percent of the units sold. The marketing manager believes that the market share can be increased to 38 percent of the units sold with a reduction in price to $325. The product is currently earning a profit of $75 per unit. The president of Dream Company believes that his company needs to maintain the same profit level per unit. The total market for the product has annual sales of 6,000 units.
Required:
a. How many units does Dream Company currently sell of the product?
b. What is the target price per unit?
c. What is the target cost per unit?

Question 67

John Black has surveyed a group of companies on their needs for computer keyboards and the prices the companies are willing to pay. Based on this survey, he has developed an idea for a fatigue reducing keyboard that can be reasonably priced at $500. John believes that this particular product should allow a profit of 25 percent of the product's cost.
Calculate John Black's target cost for his keyboard.

Question 68

Define value chain. What is the relationship among a value chain, processes, and activities?

Question 69

Describe continuous improvement costing as it relates to target costing.

Question 70

Describe how continuous improvement costing is accomplished.

Question 71

Describe benchmarking? What advantage is derived from benchmarking against firms other than competitors?