Deck 13: Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing

Question 1

Many firms choose to achieve target cost through redesign of the product or service because they recognize that design decisions:

A)Are life cycle costs with high downstream costs and benefits.
B)Account for much of the total product life cycle costs.
C)Impact costs at the manufacturing stage of the life cycle.
D)Are critical success factors in most firms.

Answer 1

B

Question 2

The goals of coordinating manufacturing processes, reducing the amount of inventory, and improving overall productivity is particularly important in a:

A)Standard cost system.
B)Just-in-time system.
C)Normal costing system.
D)Activity based costing system.
E)Total quality management system.

Answer 2

B

Question 3

Which of the following is a method of reducing cost by identifying parts in different products that are common and interchangeable?

A)Target costing.
B)Value chain analysis.
C)Concurrent engineering.
D)Group technology.
E)Theory of constraints.

Answer 3

D

Question 4

When a firm determines the desired cost for a product or service, given a competitive market price, in order to earn a desired profit, the firm is exercising:

A)Target costing.
B)Life cycle costing.
C)Variable costing.
D)Absorption costing.
E)Competitive costing.

Question 5

Generally, firms will price a product more competitively at which stages of the product's sales life cycle?

A)Product introduction and Growth.
B)Maturity and Decline.
C)Throughout the cycle.
D)At the end of the life cycle.

Question 6

The theory of constraints (TOC) approach is strategically important in dynamic markets because it leads to:

A)A more responsive and flexible manufacturing environment.
B)Better customer relationships.
C)Quicker data accessibility.
D)Faster setup times.

Question 7

Throughput margin is defined as sales less:

A)Direct labor costs.
B)Direct material costs.
C)Direct labor and material costs.
D)Processing costs.
E)Manufacturing costs.

Question 8

The theory of constraints (TOC) emphasizes which of the following?

A)Developing competitive constraints.
B)Finding and eliminating design constraints.
C)Removing bottlenecks from the production process.
D)Improving overall production efficiency.

Question 9

The sequence of activities within the firm which begins with research and development, followed by design, and manufacturing, marketing/distribution, and customer service is the:

A)Sales life cycle.
B)Target life cycle.
C)Market life cycle.
D)Critical life cycle.
E)Cost life cycle.

Question 10

Henry Ford was an early pioneer in the use of:

A)the theory of constraints.
B)target costing.
C)life cycle costing.
D)just-in-time manufacturing.

Question 11

Activity-based costing (ABC) and the theory of constraints (TOC) are viewed as methods that are:

A)Substitutions for one another.
B)Complementary.
C)Auxiliary.
D)Responsive.
E)Parallel.

Question 12

Which one of the following is not one of the five steps in TOC analysis?

A)Identify the binding constraint(s).
B)Determine the most efficient utilization for each binding constraint.
C)Manage the flow through the binding constraint.
D)Identify those responsible for bottlenecks and make adjustments as needed.
E)Redesign the manufacturing process for flexibility and fast throughput.

Question 13

____________________ is an important first step in value engineering because it identifies critical consumer preferences that will define the product's desired functionality:

A)Consumer analysis.
B)Sales force analysis.
C)Design analysis.
D)R&D analysis.
E)Market place analysis.

Question 14

Which one of the following is true concerning TOC?

A)Option A
B)Option B
C)Option C
D)Option D
E)Option E

Question 15

Reduced time-to-market, reduced expected service cost, and ease-of-manufacture are critical success factors at which stage of the cost life cycle?

A)R&D.
B)Product planning and scheduling.
C)Product design.
D)Manufacturing.

Question 16

Many firms are finding it is difficult to compete successfully on cost leadership or differentiation alone, and they must, in fact, compete on both:

A)Cost and design.
B)Price and functionality.
C)Cost and price.
D)Design and functionality.
E)Cost and functionality.

Question 17

The sequence of phases in the product or service's life in the market - from the introduction of the product or service to the growth in sales and finally maturity, decline, and withdrawal from the market is the:

A)Sales life cycle.
B)Target life cycle.
C)Market life cycle.
D)Critical life cycle.
E)Cost life cycle.

Question 18

Concurrent engineering relies on an integrated approach, in which the engineering/design process takes place throughout the cost life cycle using cross-functional teams. Strategically, this concurrent approach should give a firm all of the following except:

A)Flexibility in refining its design.
B)Ability to quickly incorporate customer suggestions.
C)Cost savings because of time saved.
D)More detailed analysis of product functionality.

Question 19

During which stage of the sales life cycle of a product do sales continue to increase but at a decreasing rate, and competition tends to focus on cost?

A)Maturity.
B)Decline.
C)Inflation.
D)Growth.
E)Introduction.

Question 20

Which of the following are computer-based databases that include comprehensive information about the firm's cost drivers?

A)Cost tables.
B)Cost databases.
C)Cost driver tables.
D)Excel tables.

Question 21

To achieve the target cost, Lens Care plans to reduce materials handling costs. How many parts must be removed from B-13 in order to achieve the target cost for B-13 (round up to whole units)?

A)11
B)46
C)34
D)28
E)53

Question 22

The product cost for model B-13 is:

A)$1,457.82.
B)$1,293.32.
C)$1,159.34.
D)$905.31.
E)$980.91.

Question 23

The current cost per unit is:

A)$588.
B)$523.
C)$465.
D)$637.
E)$445.

Question 24

Which is the most profitable product if there is a constraint on labor time, so that total demand for all products cannot be met?

A)Product X.
B)Product Y.
C)Product Z.
D)More than one of the products has equal total throughput margin per labor minute.
E)There isn't enough information to answer the question.

Question 25

The management accountant at Jang Manufacturing Co. collected the following data in preparation for a life-cycle analysis on one of its products, a leaf blower: The stage of the sales life cycle the product is in is:

A)Introduction.
B)Growth.
C)Maturity.
D)Decline.
E)Withdrawal.

Question 26

Which of the following is a theory of constraints (TOC) measure of product profitability that equals price less materials cost, including all purchased components and materials handling costs?

A)Takt time.
B)Throughput margin.
C)Profitability margin.
D)Price analysis.

Question 27

TwoShaft Inc. manufactures a wide variety of parts for recreational boating, including boat engines. The component is purchased by OEM (Original Equipment Manufacturers) such as Mercury and Honda, for use in the larger and more powerful outboards. The units sell for $660, and sales volume averages 32,000 units per year. Recently, TwoShaft's major competitor lowered the price of the equivalent part to $590. The market was very competitive, and TwoShaft realized it had to meet the new price or lose significant market share. The controller assembled the following data for the most recent year: The target cost for maintaining current market share and profitability is (round to nearest cent):

A)$466.61.
B)$417.12.
C)$396.61.
D)$390.61.
E)$460.61.

Question 28

In order to reduce costs so as to reach the desired target cost, Quality Industries should also focus on reducing the cost of:

A)Direct materials
B)Direct labor
C)Machine setups
D)Mechanical assembly

Question 29

Profit before taxes for the Bskin product, per life-cycle income statements, is:

A)$175,000.
B)$425,000.
C)$522,500.
D)$207,500.
E)$332,500.

Question 30

If the profit per unit is maintained, the target cost per unit is:

A)$489.
B)$557.
C)$516.
D)$424.
E)$345.

Question 31

The current profit per unit is:

A)$503.
B)$674.
C)$616.
D)$524.
E)$694.

Question 32

To achieve the target cost, Lens Care plans to reduce materials handling costs. How many parts must be removed from B-13 in order to achieve the target cost for B-13 (round up to whole units)?

A)11
B)46
C)34
D)28
E)53

Question 33

How many JM50 machines can Bryan Inc. manufacture per month (assume an average 30-day month)?

A)4,320,000 juicers.
B)3,600,000 juicers.
C)3,000,000 juicers.
D)3,200,000 juicers

Question 34

The profit margin based on manufacturing cost for model B-13 is:

A)$481.68.
B)$314.69.
C)$239.09.
D)$317.18.
E)$338.16.

Question 35

Profit before taxes for the Askin product, per life-cycle income statements, is:

A)$175,000.
B)$425,000.
C)$522,500.
D)$207,500.
E)$332,500.

Question 36

The management accountant at Iang Manufacturing Co. collected the following data in preparation for a life-cycle analysis on one of its products, a leaf blower: The stage of the sales life cycle the product is in is:

A)Introduction.
B)Growth.
C)Maturity.
D)Decline.
E)Withdrawal.

Question 37

If the market price for B-13 and F-32 are reduced to $1,695 and $1,095 respectively, and Lens Care wants to maintain market share and profitability, what is the target cost for B-13 and F-32 (round to nearest whole dollar)?

A)Option A
B)Option B
C)Option C
D)Option D
E)Option E

Question 38

Which is the most profitable product if there is no constraint on labor time?

A)Product X.
B)Product Y.
C)Product Z.
D)More than one of the products has equal total throughput margin per labor minute.
E)There isn't enough information to answer the question.

Question 39

The profit margin based on manufacturing cost for model F-32 is:

A)$481.68.
B)$314.69.
C)$239.09.
D)$317.18.
E)$338.16.

Question 40

The product cost for model F-32 is:

A)$1,457.82.
B)$1,293.32.
C)$1,159.34.
D)$905.31.
E)$980.91.

Question 41

When comparing Activity-based costing (ABC) and the Theory of Constraints (TOC), the approach each method takes toward profitability analysis is:

A)TOC takes a short-term approach and ABC takes a long-term approach.
B)TOC takes a long-term approach and ABC takes a short-term approach.
C)Both TOC and ABC take a short-term approach.
D)Both TOC and ABC take a long-term approach.

Question 42

During the sales life cycle, which is an example of what happens during the maturity phase?

A)Sales and price decline, as do the number of competitors.
B)Sales continue to increase but at a decreasing rate. The number of competitors and product variety decline.
C)Sales increase rapidly along with an increase in product variety.
D)Sales rise slowly as customers become aware of the new product or service. Product variety is limited.

Question 43

Which function(s) is/are the bottleneck(s)?

A)Exterior construction and pulp filter insertion.
B)Pulp filter insertion.
C)Painting.
D)Packaging.
E)Exterior construction.

Question 44

If the profit per unit is maintained, the target cost per unit is:

A)$105.
B)$195.
C)$205.
D)$300.
E)$250.

Question 45

During the sales life cycle, which is an example of what happens during the growth phase?

A)Sales and price decline, as do the number of competitors.
B)Sales continue to increase but at a decreasing rate. The number of competitors and product variety decline.
C)Sales increase rapidly along with an increase in product variety.
D)Sales rise slowly as customers become aware of the new product or service. Product variety is limited.

Question 46

What is the least amount of monthly capacity you would have to add to the bottleneck(s) to shift the bottleneck to a different process?

A)2,000,001 juicers per month.
B)600,001 juicers per month.
C)1,320,001 juicers per month.
D)50,001 juicers per month

Question 47

The current profit per unit is:

A)$250.
B)$300.
C)$400.
D)$450.
E)$475.

Question 48

What is the target cost if target profit is 20% of sales and ECC must meet the competitive price of $220?

A)$168.50.
B)$176.00.
C)$184.25.
D)$190.00.

Question 49

Target cost can be defined as:

A)Manufacturing cost - sales price.
B)Competitive price - desired profit.
C)Desired profit - market price.
D)Target price - manufacturing cost.

Question 50

Place the phases of the cost life cycle (value chain) in the correct order from upstream to downstream activities.

A)Manufacturing, R&D, Design, Customer Service, Marketing & Distribution.
B)Design, R&D, Marketing & Distribution, Manufacturing, Customer Service.
C)Customer Service, Design, R&D, Manufacturing, Marketing & Distribution.
D)R&D, Design, Manufacturing, Marketing & Distribution, Customer Service.
E)Marketing & Distribution, Customer Service, Design, R&D, Manufacturing.

Question 51

Which of the following is the speed at which units must be manufactured to meet customer demand?

A)Production time.
B)Manufacturing time.
C)Takt time.
D)Throughput time.

Question 52

Assuming sales and marketing are not correct in their estimation and the volume of sales is not changed and ECC meets the competitive price, what is the target cost if ECC wants to maintain its same income level?

A)$210.
B)$200.
C)$190.
D)$180.

Question 53

Irrespective of the competitor's price, what is EEC's required selling price if the target profit is 25% of sales and current costs cannot be reduced?

A)$280.00.
B)$292.50.
C)$299.00.
D)$308.50.

Question 54

During the sales life cycle, which is an example of what happens during the introduction phase?

A)Sales and price decline, as do the number of competitors.
B)Sales continue to increase but at a decreasing rate. The number of competitors and product variety decline.
C)Sales increase rapidly along with an increase in product variety.
D)Sales rise slowly as customers become aware of the new product or service. Product variety is limited.

Question 55

What cost management technique does this case illustrate?

A)Target costing.
B)Theory of constraints.
C)Life-cycle costing.
D)ABC analysis.

Question 56

Which of the following is a common form of value engineering in which the design team prepares several possible designs of the product, each having similar features with different levels of performance and different costs?

A)Cost analysis.
B)Variable design engineering.
C)Cost-based value engineering.
D)Functional analysis.
E)Design analysis.

Question 57

In order to reduce costs so as to reach the desired target cost, Quality Chairs should also focus on reducing the cost of:

A)Direct materials
B)Direct labor
C)Machine setups
D)Mechanical assembly

Question 58

Which of the following phases are included in the sales life cycle?

A)Option A
B)Option B
C)Option C
D)Option D

Question 59

Place the five steps in implementing a target costing approach in the proper order: 1 - Determine desired profit
2 - Use kaizen costing and operational control to reduce costs
3 - Determine the market price
4 - Use value engineering to identify ways to reduce product costs
5 - Calculate the target cost at market price less desired profit

A)3, 2, 1, 4, 5.
B)2, 5, 4, 1, 3.
C)4, 5, 1, 3, 2.
D)3, 1, 5, 4, 2.
E)5, 3, 2, 1, 4.

Question 60

The current cost per unit is:

A)$250.
B)$300.
C)$400.
D)$450.
E)$475.

Question 61

What price will the company charge if the firm uses cost-plus pricing based on total variable cost and a markup percentage of 150%?

A)$405.00.
B)$540.00.
C)$675.
D)$900.00.
E)Some other amount.

Question 62

If Johnson determines price using a 40% markup of full manufacturing cost, the price is:

A)$262.50
B)$306.00
C)$375.00
D)$364.29
E)$330.00

Question 63

If Johnson determines price using a desired gross margin percentage of 50%, the price is:

A)$262.50
B)$306.00
C)$375.00
D)$364.29
E)$330.00

Question 64

Cling Co. produces and sells three products (X, Y, and Z). The following data relate to the three products. Labor is a fixed cost. Required:
1. Which is the most profitable product if there is no labor constraint?
2. Which is the most profitable product if there is a labor constraint?

Question 65

Pat Baldwin owns and operates Outstanding Quality Rentals (OQR). OQR offers kayak rentals and shuttle service on the Petaholee River. Customers can rent kayaks at one station and enter the river there. They can then exit at one of two designated locations to catch a shuttle to return them to their vehicles. Following are the costs involved in providing this service each year. OQR began business three years ago with a $36,000 expenditure for a fleet of 50 kayaks. These are expected to last seven more years, at which time a new fleet will be purchased. Pat is satisfied with the steady average rentals per year of 9,900.
Required:
What price should Pat charge per rental for the business to make a thirty percent life cycle profit?

Question 66

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

A)$445.50.
B)$850.50.
C)$660.
D)$1260.
E)Some other amount.

Question 67

Baldwin produces bicycles in a highly competitive market. During the past year, the company has added a 20% markup on the $300 manufacturing cost for one of its most popular models. A new competitor recently entered the market with a competitive model that is priced at $320, seriously eroding Baldwin's market share. Management now desires to use a target-costing approach to remain competitive and is willing to accept a 20% return on sales. If target costing is used, which of the following choices correctly denotes (1) Baldwin's selling price and (2) Baldwin's target cost?

A)Option A
B)Option B
C)Option C
D)Option D
E)Option E

Question 68

If Johnson determines price using a 20% markup of life cycle cost, the price is:

A)$262.50
B)$306.00
C)$375.00
D)$364.29
E)$330.00

Question 69

Which of the following is a common type of value engineering in which the performance and cost of each major function or feature of the product is examined?

A)Cost analysis.
B)Variable design engineering.
C)Cost-based value engineering.
D)Functional analysis.
E)Design analysis.

Question 70

David Corporation manufactures a single product that has a cost of $250. The company uses a 60% markup on manufacturing cost to arrive at a selling price of $400, which results in a price that is higher than that of the leading competitors. If David adopts the approach known as target costing, the company will first:

A)Reduce the 60% markup rate.
B)Re-engineer the product.
C)Obtain a better understanding of the competitors' prices.
D)Reduce the $250 cost.
E)Change to a markup on life cycle cost rather than manufacturing cost.

Question 71

Caldwell Company desires to enter a market with a new product. As part of this process the following tasks will be performed: 1. Determine a desired profit margin.
2) Use Kaizen costing.
3) Design and engineer the product.
4) Determine the product's cost.
5) Determine the suggested selling price.
Which task would Caldwell Company perform first if it plans to use target costing?

A)Determine a desired profit margin.
B)Use Kaizen costing.
C)Design and engineer the product.
D)Determine the product's cost.
E)Determine the suggested selling price.

Question 72

What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 200%?

A)$810.
B)$450.
C)$540.
D)$675.
E)Some other amount.

Question 73

If Johnson determines price so as to receive a desired return on assets of 15%, the price is:

A)$262.50
B)$306.00
C)$375.00
D)$364.29
E)$330.00

Question 74

If Johnson determines price using a desired return on life cycle costs of 30%, the price is:

A)$262.50
B)$306.00
C)$375.00
D)$364.29
E)$330.00

Question 75

Precision Instruments, Inc. is a national firm manufacturing a full line of surgical tools for veterinarians. Recent technological developments have produced a significantly higher grade of steel to make surgical instruments and tools. All of Precision's specialized equipment is designed and calibrated to produce surgical tools using current surgical steel stock. Precision's management wants to begin using the new grade of surgical steel, but recognizes the need to redesign and calibrate existing production equipment and/or purchase newly designed production equipment. Redesign of existing equipment can be done in-house, but requires components from the Swedish manufacturer of the equipment. New equipment will also come from Sweden, but its cost is almost double that paid seven years ago for the existing equipment.
Required:
Identify the constraints Precision will face as it chooses to upgrade existing equipment or purchase new equipment. There is considerable market pressure to shift to use of the new steel stock for production of surgical tools.

Question 76

A type of strategic pricing based on analytical methods is used to:

A)Optimally determine the best price.
B)Utilize knowledge of the sales life cycle in setting price.
C)More accurately determine life cycle costs as a basis for setting price.
D)Employ improved design methods that reduce cost and improve price.

Question 77

Jared Monsma, Weekend Golfer's vice president for marketing, has concluded from his market analysis that sales have been dwindling for the standard golf cart because of aggressive pricing by competitors. Weekend Golfers sells these golf carts online for $3,000, whereas the competition sells a comparable cart online in the $2,900 range. Jared has determined that dropping the price to $2,850 would regain the firm's annual market share of 8,000 golf carts. Cost data based on sales of 8,000 gas golf carts follow:

Question 78

What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 30%?

A)$180.
B)$121.50.
C)$780.
D)$526.50.
E)Some other amount.

Question 79

DualShaft Inc. manufactures a wide variety of parts for recreational boating, including boat engines. The component is purchased by OEM (original equipment manufacturers) such as Mercury and Honda, for use in the larger and more powerful outboards. The units sell for $790, and sales volume averages 38,000 units per year. Recently, DualShaft's major competitor lowered the price of the equivalent part to $710. The market was very competitive, and DualShaft realized it had to meet the new price or lose significant market share. The controller assembled the following data for the most recent year. Required:
1. Calculate the target cost for maintaining current market share and profitability.
2. How should the company attempt to reduce cost to meet the new target cost?

Question 80

The five tasks that follow take place with the concept known as target costing: 1. Use value engineering to identify ways to reduce product cost.
2) Determine the market price.
3) Determine the desired profit.
4) Use kaizen costing and operational control to reduce costs.
5) Calculate the target cost at market price less desired profit.
Which of the following choices depicts the correct sequence of these tasks?

A)1, 2, 3, 4, 5
B)2, 3, 5, 1, 4
C)3, 2, 5, 4, 1
D)3, 2, 5, 1, 4
E)5, 3, 2, 4, 1