Deck 12: Pricing Decisions and Cost Management

Question 1

When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions.

Answer 1

False

Question 2

Which of the following factors should NOT be considered when pricing a special order?

A)the likely bids of competitors
B)the incremental cost of one unit of product
C)revenues that will be lost on existing sales if prices are lowered
D)stable pricing to earn the desired long-run return

Answer 2

D

Question 3

Companies that produce high quality products do NOT have to pay attention to the actions of their competitors.

Answer 3

False

Question 4

Companies must always examine their pricing:

A)based on the supply of the product
B)based on the cost of producing the product
C)through the eyes of their customers
D)through the eyes of their competitors

Question 5

In markets with little or no competition, the key factor affecting price is the customers' willingness to pay, not costs or competitors.

Question 6

Claudia Geer, controller, discusses the pricing of a new product with the sales manager, James Nolan. What major influences must Claudia and James consider in pricing the new product? Discuss each briefly.

Question 7

Competitors:

A)with alternative products can force a company to lower its prices
B)can gain a competitive pricing advantage with knowledge of your costs and operating policies
C)may span international borders
D)All of these answers are correct.

Question 8

Short-term pricing decisions:

A)use costs that may be irrelevant for long-term pricing decisions
B)are more opportunistic
C)tend to decrease prices when demand is strong
D)have a time horizon of more than one year

Question 9

The cost of producing a product:

A)in highly competitive markets controls pricing
B)affects the willingness of a company to supply a product
C)for pricing decisions includes manufacturing costs, but not product design costs
D)None of these answers are correct.

Question 10

The only competition a firm must be concerned about when setting prices are those in the local market.

Question 11

In a competitive market with differentiated products like cameras, the key factor(s)affecting pricing decisions is/are the:

A)customer's willingness to pay
B)price charged for alternative products
C)cost of producing and delivering the product
D)All of these answers are correct.

Question 12

In a noncompetitive environment, the key factor affecting pricing decisions is the:

A)customer's willingness to pay
B)price charged for alternative products
C)cost of producing and delivering the product
D)All of these answers are correct.

Question 13

Relevant costs for pricing a special order include:

A)existing fixed manufacturing overhead
B)nonmanufacturing costs that will not change even if the special order is accepted
C)additional setup costs for the special order
D)All of these answers are correct.

Question 14

Three major influences on pricing decisions are:

A)competition, costs, and customers
B)competition, demand, and production efficiency
C)continuous improvement, customer satisfaction, and supply
D)variable costs, fixed costs, and mixed costs

Question 15

Companies should only produce and sell units as long as:

A)there is customer demand for the product
B)the competition allows it
C)the revenue from an additional unit exceeds the cost of producing it
D)there is a generous supply of low-cost direct materials

Question 16

Companies must always examine pricing decisions through the eyes of their customers.

Question 17

Fluctuations in exchange rates between different currencies can influence the:

A)cost of products using foreign suppliers
B)pricing of alternative products offered by foreign competitors
C)demand for products of foreign competitors
D)All of these answers are correct.

Question 18

Prices are decreased when demand is weak and competition is strong and increased when demand is strong and competition is weak.

Question 19

Relevant costs for pricing decisions include manufacturing costs, but NOT costs from other value-chain functions.

Question 20

Too high a price may:

A)deter a customer from purchasing a product
B)increase demand for the product
C)indicate supply is too plentiful
D)decrease a competitor's market share

Question 21

Answer the following questions using the information below:
Marcia Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Marcia Manufacturing has a policy of adding a 20% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:

What is the full cost of the product per unit?

A)$60
B)$180
C)$198
D)$66

Question 22

Answer the following questions using the information below:
Rogers' Heaters is approached by Ms. Sushi, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Rogers' Heaters has excess capacity. The following per unit data apply for sales to regular customers:

For Rogers' Heaters, what is the minimum acceptable price of this one-time-only special order?

A)$580
B)$780
C)$520
D)$1,014

Question 23

In a one-time-only special order, variable manufacturing costs are irrelevant.

Question 24

Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions, but NOT long-term pricing decisions.

Question 25

Answer the following questions using the information below:
Caruso Cool manufactures single room sized air conditioners. The cost accounting system estimates manufacturing costs to be $190 per air conditioner, consisting of 75% variable costs and 25% fixed costs. The company has surplus capacity available. It is Caruso Cool's policy to add a 30% markup to full costs.
A medium sized motel chain is currently expanding and has decided to create more rooms and air condition all of its rooms, which are currently not air conditioned. Caruso Cool is invited to submit a bid to the motel chain. What per unit price will Caruso Cool MOST likely bid for this special order of 50 units?

A)$190.00 per unit
B)$142.50 per unit
C)$247.00 per unit
D)$250.00 per unit

Question 26

Answer the following questions using the information below:
Caruso Cool manufactures single room sized air conditioners. The cost accounting system estimates manufacturing costs to be $190 per air conditioner, consisting of 75% variable costs and 25% fixed costs. The company has surplus capacity available. It is Caruso Cool's policy to add a 30% markup to full costs.
Caruso is invited to bid on a one-time-only special order to supply 50 air conditioners. What is the lowest price Caruso should bid on this special order?

A)$9,500
B)$7,125
C)$12,500
D)$12,350

Question 27

For pricing decisions, full product costs:

A)include all costs that are traceable to the product
B)include all manufacturing and selling costs
C)include all direct costs plus an appropriate allocation of the indirect costs of all business functions
D)allow for the highest possible product prices

Question 28

Answer the following questions using the information below:
Gerry's Generator Supply is approached by Mr. Sandman, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Gerry's Generator Supply has excess capacity. The following per unit data apply for sales to regular customers:

Before accepting this one-time-only special order, Gerry's Generators wants to know how much profit would be made on the order:
B)Loss of $150
C)$0
D)$430

Question 29

Long-run pricing decisions:

A)have a time horizon of less than one year
B)include adjusting product mix in a competitive environment
C)and short-run pricing decisions generally have the same relevant costs
D)use prices that include a reasonable return on investment

Question 30

A price-bidding decision for a one-time-only special order includes an analysis of all:

A)manufacturing costs
B)cost drivers related to the product
C)direct and indirect variable costs of each function in the value chain
D)fixed manufacturing costs

Question 31

Short-run pricing decisions include adjusting product mix in a competitive environment.

Question 32

Answer the following questions using the information below:
Black Forrest manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $240 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Black Forrest policy to add a 50% markup to full costs.
Black Forrest is invited to bid on a one-time-only special order to supply 200 rustic tables. What is the lowest price Black Forrest should bid on this special order?

A)$43,200
B)$14,400
C)$24,000
D)$28,800

Question 33

Answer the following questions using the information below:
Ferryman Products manufactures coffee tables. Ferryman Products has a policy of adding a 20% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

Ferryman Products is approached by an overseas customer to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for a one-time setup charge of $20,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order?

A)$134.75
B)$154.76
C)$222.25
D)$161.70

Question 34

Answer the following questions using the information below:
Marcia Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Marcia Manufacturing has a policy of adding a 20% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:

For Marcia Manufacturing, what is the minimum acceptable price of this one-time-only special order?

A)$40
B)$55
C)$60
D)$66

Question 35

Answer the following questions using the information below:
Gerry's Generator Supply is approached by Mr. Sandman, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Gerry's Generator Supply has excess capacity. The following per unit data apply for sales to regular customers:

For Gerry's Generators, what is the minimum acceptable price of this one-time-only special order?

A)$1,800
B)$2,000
C)$2,150
D)$2,580

Question 36

Backwoods Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $80 per table, consisting of 70% variable costs and 30% fixed costs. The company has surplus capacity available. It is Backwoods' policy to add a 50% markup to full costs.
a. Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Backwoods should bid on this one-time-only special order?
b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Backwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Backwoods should bid on this long-term order?

Question 37

Answer the following questions using the information below:
Rogers' Heaters is approached by Ms. Sushi, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Rogers' Heaters has excess capacity. The following per unit data apply for sales to regular customers:

Before accepting this one-time-only special order, Rogers' Heaters should consider the impact on:

A)current plant capacity
B)long-term customers
C)competitors
D)All of these answers are correct.

Question 38

Answer the following questions using the information below:
Delgreco Products manufactures high-tech cell phones. Delgreco Products has a policy of adding a 30% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

A short-run pricing decision typically has a time horizon of less than:

A)one year
B)two years
C)five years
D)None of these answers is correct.

Question 39

Long-run pricing:

A)needs to cover only incremental costs
B)only utilizes the market-based approach to pricing and not the cost-based approach
C)is a strategic decision
D)strives for flexible pricing that can respond to temporary changes in demand

Question 40

Answer the following questions using the information below:
Delgreco Products manufactures high-tech cell phones. Delgreco Products has a policy of adding a 30% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

Delgreco Products is approached by an overseas customer to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for a one-time setup charge of $15,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order?

A)$180.00
B)$92.50
C)$65.00
D)$234.00

Question 41

Answer the following questions using the information below:
Rogers' Heaters is approached by Ms. Sushi, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Rogers' Heaters has excess capacity. The following per unit data apply for sales to regular customers:

If Ms. Sushi wanted a long-term commitment for supplying this product, what price would most likely be quoted to her?

A)$580
B)$780
C)$520
D)$1,014

Question 42

Relevant costs for target pricing are:

A)variable manufacturing costs
B)variable manufacturing and variable nonmanufacturing costs
C)all fixed costs
D)all future costs, both variable and fixed

Question 43

Relevant costs of a bidding decision should EXCLUDE revenues lost on lower-priced sales to existing customers.

Question 44

Customers prefer stable and predictable prices over a long time horizon.

Question 45

For long-run pricing decisions, using stable prices has the advantage of:

A)minimizing the need to monitor competitor's prices frequently
B)reducing the need to change cost structures frequently
C)reducing competition
D)helping to build buyer-seller relationships

Question 46

Answer the following questions using the information below:
Black Forrest manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $240 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Black Forrest policy to add a 50% markup to full costs.
A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Black Forrest is invited to submit a bid to the hotel chain. What per unit price will Black Forrest most likely bid on this long-term order?

A)$144 per unit
B)$216 per unit
C)$360 per unit
D)$240 per unit

Question 47

Product cost analysis is important even if market forces set prices.

Question 48

Companies that operate in non competitive environments offering products or services that differ from each other can charge a very high price for their products and services.

Question 49

Two different approaches to pricing decisions are market based and cost based.

Question 50

Answer the following questions using the information below:
Ferryman Products manufactures coffee tables. Ferryman Products has a policy of adding a 20% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

For long-run pricing of the coffee tables, what price will most likely be used by Berryman?

A)$134.76
B)$161.70
C)$222.25
D)$266.70

Question 51

Answer the following questions using the information below:
Gerry's Generator Supply is approached by Mr. Sandman, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Gerry's Generator Supply has excess capacity. The following per unit data apply for sales to regular customers:

If Mr. Sandman wanted a long-term commitment for supplying this product, what price would most likely be quoted to him?

A)$2,000
B)$2,150
C)$2,580
D)$2,800

Question 52

Answer the following questions using the information below:
Marcia Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Marcia Manufacturing has a policy of adding a 20% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:

If the European customer wanted a long-term commitment for supplying this product, what price would most likely be quoted?

A)$66.00
B)$180.00
C)$216.00
D)$236.00

Question 53

Answer the following questions using the information below:
Delgreco Products manufactures high-tech cell phones. Delgreco Products has a policy of adding a 30% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

For long-run pricing of the cell phones, what price will MOST likely be used by Delgreco?

A)$180.00
B)$92.50
C)$65.00
D)$234.00

Question 54

Companies that operate in non competitive environments offering products or services that differ from each other use a market-based approach when making their long-run pricing decisions.

Question 55

To understand how competitors might price competing products, a company:

A)needs to understand the competitor's technologies and financial conditions
B)may get information from suppliers that service the competitor
C)may use reverse engineering
D)All of these answers are correct.

Question 56

Schlickau Company manufactures basketball backboards. The following information pertains to the company's normal operations per month:
Required:
a. For long-run pricing, what is the full-cost base per unit?
b. Schlickau Company is approached by an overseas city to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for an additional one-time setup charge of $40,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order?

Question 57

Target pricing:

A)is used for short-term pricing decisions
B)is one form of cost-based pricing
C)estimates are based on customers' perceived value of the product
D)relevant costs are all variable costs

Question 58

Explain the differences between short-run pricing decisions and long-run pricing decisions.

Question 59

The department usually in the best position to identify customers' needs is the:

A)production department
B)sales and marketing department
C)design department
D)distribution department

Question 60

Answer the following questions using the information below:
Delgreco Products manufactures high-tech cell phones. Delgreco Products has a policy of adding a 30% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month:

Which one of the following activities would most likely be considered a long-run pricing decision?

A)one-time-only special order pricing
B)product mix adjustments in a competitive market
C)setting prices to generate a reasonable rate of return on investment
D)changing prices in response to weak demand

Question 61

Answer the following questions using the information below:
Block Island TV currently sells large televisions for $360. It has costs of $280. A competitor is bringing a new large television to market that will sell for $300. Management believes it must lower the price to $300 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 100,000 televisions per year.
What is the target cost if target operating income is 25% of sales?

A)$75
B)$90
C)$225
D)$270

Question 62

Answer the following questions using the information below:
After conducting a market research study, Ed Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. Ed has target operating income of 20% of sales.
What are target sales revenues?

A)$1,920,000
B)$4,000,000
C)$2,400,000
D)None of these answers is correct.

Question 63

All of the following are associated with target costing EXCEPT:

A)value engineering
B)the markup component
C)all value-chain business functions
D)cross-functional teams

Question 64

Value engineering may result in all of the following EXCEPT:

A)improved product design
B)changes in materials specifications
C)increases in the quantity of nonvalue-added cost drivers
D)the evaluation of all business functions within the value chain

Question 65

Value-added costs:

A)are costs that a customer is unwilling to pay for
B)include maintenance and repairs of the manufacturing equipment
C)are reduced through improved efficiencies
D)if eliminated, increase profitability

Question 66

Answer the following questions using the information below:
After conducting a market research study, Ed Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. Ed has target operating income of 20% of sales.
What is the target cost?

A)$1,800,000
B)$1,920,000
C)$2,520,000
D)$2,016,000

Question 67

The product strategy in which companies first determine the price at which they can sell a new product and then design a product that can be produced at a low enough cost to provide adequate operating income is referred to as:

A)cost-plus pricing
B)target costing
C)kaizen costing
D)full costing

Question 68

To design costs out of products is a goal of:

A)cost-plus pricing
B)target costing
C)kaizen costing
D)peak-load costing

Question 69

All of the following are true regarding target costing EXCEPT:

A)improvements are implemented in small incremental amounts
B)customer input is essential to the target costing process
C)input is requested from suppliers and distributors
D)a key goal is to minimize costs over the product's useful life

Question 70

Answer the following questions using the information below:
After conducting a market research study, Ed Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. Ed has target operating income of 20% of sales.
What is the target cost for each interior door?

A)$96
B)$116
C)$120
D)$90

Question 71

When target costing and target pricing are used together:

A)the target cost is established first, then the target price
B)the target cost is the estimated long-run cost that enables a product or service to achieve a desired profit
C)the focus of target pricing is to undercut the competition
D)target costs are generally higher than current costs

Question 72

Answer the following questions using the information below:
After conducting a market research study, Ed Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. Ed has target operating income of 20% of sales.
What is the target operating income?

A)$480,000
B)$600,000
C)$384,000
D)$360,000

Question 73

Place the following steps for the implementation of target costing in order:

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

Question 74

Answer the following questions using the information below:
Block Island TV currently sells large televisions for $360. It has costs of $280. A competitor is bringing a new large television to market that will sell for $300. Management believes it must lower the price to $300 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 100,000 televisions per year.
What is the change in operating income if marketing is correct and only the sales price is changed?

A)$2,200,000
B)$600,000
C)$(2,200,000)
D)$(5,800,000)

Question 75

Answer the following questions using the information below:
Frank's Computer Monitors, Inc., currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Frank's sales are currently 10,000 monitors per year.
What is the target cost if operating income is 25% of sales?

A)$56.25
B)$67.50
C)$168.75
D)$202.50

Question 76

Answer the following questions using the information below:
After conducting a market research study, Harry Products decided to produce an electric coffee pot to complement its line of kitchen products. It is estimated that the new coffee pot can be sold at a target price of $23. The annual target sales volume for the coffee pot is 300,000. Potter has target operating income of 18% of sales.
What is the target cost for each coffee pot?

A)$17.75
B)$18.86
C)$21.08
D)$23.00

Question 77

Answer the following questions using the information below:
After conducting a market research study, Harry Products decided to produce an electric coffee pot to complement its line of kitchen products. It is estimated that the new coffee pot can be sold at a target price of $23. The annual target sales volume for the coffee pot is 300,000. Potter has target operating income of 18% of sales.
What are the target sales revenues?

A)$690,000
B)$6,900,000
C)$600,000
D)$6,000,000

Question 78

Answer the following questions using the information below:
After conducting a market research study, Harry Products decided to produce an electric coffee pot to complement its line of kitchen products. It is estimated that the new coffee pot can be sold at a target price of $23. The annual target sales volume for the coffee pot is 300,000. Potter has target operating income of 18% of sales.
What is the target operating income?

A)$1,200,000
B)$600,000
C)$621,000
D)$1,242,000

Question 79

Answer the following questions using the information below:
After conducting a market research study, Harry Products decided to produce an electric coffee pot to complement its line of kitchen products. It is estimated that the new coffee pot can be sold at a target price of $23. The annual target sales volume for the coffee pot is 300,000. Potter has target operating income of 18% of sales.
What is the total target cost?

A)$1,242,000
B)$5,658,000
C)$6,900,000
D)$500,000

Question 80

Answer the following questions using the information below:
Block Island TV currently sells large televisions for $360. It has costs of $280. A competitor is bringing a new large television to market that will sell for $300. Management believes it must lower the price to $300 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 100,000 televisions per year.
What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)?

A)$225.00
B)$227.27
C)$246.68
D)$280.00