Deck 18: Pricing and Profitability Analysis

Question 1

Figure 18-1 The Bayview Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles).Bayview sold 1,000,000 cases last year to the following types of customers:
The supermarket chains order electronically through EDI which costs $25,000 annually.Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle.
The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000.Sales commissions of 10% are paid.
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case.Bad debt expense averages 10% of sales.

-
Refer to Figure 18-1.What is the profit per case for drugstore chains?

A) $4.50 per case
B) $2.20 per case
C) $2.35 per case
D) $2.15 per case

Answer 1

$2.15 per case

Question 2

Which of the following is true regarding expenses related to specific market structure types?

A) Monopolistic competition and oligopolies are the only structures where costs of differentiation have an impact.
B) Both monopolies and monopolistic competition structures normally must expend legal and lobbying costs.
C) In perfect competition and monopolistic competition, differentiation costs have an impact.
D) In perfect competition and oligopolies, there are no special expenses related to the structure of the organization.

Answer 2

A

Question 3

Figure 18-1 The Bayview Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles).Bayview sold 1,000,000 cases last year to the following types of customers:
The supermarket chains order electronically through EDI which costs $25,000 annually.Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle.
The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000.Sales commissions of 10% are paid.
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case.Bad debt expense averages 10% of sales.

-
Refer to Figure 18-1.What customer type has the least total cost per case ?

A) local pharmacies
B) drugstore chains
C) supermarket chains
D) gas station chains

Answer 3

drugstore chains

Question 4

Which of the following is NOT an example of a market structure?

A) oligopoly
B) monopoly
C) barrier market
D) perfectly competitive

Question 5

Anderson Company manufactures a variety of toys and games.John Boone, president, is disappointed in the sales of a new board game.The game sold only 10,000 units in 2011 when 30,000 were projected.Sales for 2012 look no better.At $100 per game, it is not a hot seller.Direct costs of the board game are $56 variable cost and $100,000 fixed.John is considering several options.Option One: Cut the price to $70 and perhaps sell 15,000 units.Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000.Anticipated volume for this option is 10,000 units.Option Three: Cut the price to $80 and include a $10 mail-in rebate offer.It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed.

- What is the profit (loss) from Option Two?

A) $600,000
B) $100,000
C) $40,000
D) ($100,000)

Question 6

Which of the following markets is characterized by the following: many firms in the industry, a somewhat unique product, fairly easy entry into the industry, and spending for differentiation of the product?

A) perfectly competitive market
B) monopolistic competition
C) monopoly
D) oligopoly

Question 7

Monopolistic competition is best defined as

A) a structure that has many buyers and sellers, but the products are differentiated on some basis.
B) a structure where customers are willing to pay a little more for the unique feature that appeals to them.
C) a structure that combines perfect competition and monopoly, but is closer to a competitive situation.
D) all of these.

Question 8

Which of the following markets is characterized by the following: many buyers and sellers, a homogeneous product, easy entry into and exit from the industry, and all firms are price takers?

A) perfectly competitive market
B) monopolistic competition
C) monopoly
D) oligopoly

Question 9

Which of the following markets is characterized by the following: only a few firms in the industry, a fairly unique product, difficult entry into the industry, and spending for differentiation of the product?

A) perfectly competitive market
B) monopolistic competition
C) monopoly
D) oligopoly

Question 10

Anderson Company manufactures a variety of toys and games.John Boone, president, is disappointed in the sales of a new board game.The game sold only 10,000 units in 2011 when 30,000 were projected.Sales for 2012 look no better.At $100 per game, it is not a hot seller.Direct costs of the board game are $56 variable cost and $100,000 fixed.John is considering several options.Option One: Cut the price to $70 and perhaps sell 15,000 units.Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000.Anticipated volume for this option is 10,000 units.Option Three: Cut the price to $80 and include a $10 mail-in rebate offer.It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed.

- What is the profit (loss) from Option One?

A) $1,050,000
B) $210,000
C) $950,000
D) $110,000

Question 11

Which of the following markets is characterized by the following: a single firm in the industry, a unique product, and difficult entry into the industry?

A) perfectly competitive market
B) monopolistic competition
C) monopoly
D) oligopoly

Question 12

Fill in the correct responses for the blanks with letters:

A) (a)very low, (b)many, (c)high, (d)very unique
B) (a)very low, (b)few, (c)high, (d)not unique
C) (a)very high, (b)few, (c)low, (d)fairly unique
D) (a)low, (b)one, (c)high, (d)very unique

Question 13

The following information pertains to three different products being sold by Andy Company:

-Which products have an inelastic demand curve?

A) Product A
B) Product B
C) Product C
D) both Product A and Product C

Question 14

Which type of expenses does a monopoly usually incur that are different from the other types of market structures?

A) marketing costs such as advertising, positioning, discounting, and coupons
B) costs of differentiation such as advertising, rebates, coupons
C) no special expenses
D) legal and lobbying expenditures

Question 15

Anderson Company manufactures a variety of toys and games.John Boone, president, is disappointed in the sales of a new board game.The game sold only 10,000 units in 2011 when 30,000 were projected.Sales for 2012 look no better.At $100 per game, it is not a hot seller.Direct costs of the board game are $56 variable cost and $100,000 fixed.John is considering several options.Option One: Cut the price to $70 and perhaps sell 15,000 units.Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000.Anticipated volume for this option is 10,000 units.Option Three: Cut the price to $80 and include a $10 mail-in rebate offer.It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed.

-Which option is preferred?

A) Option One
B) Option Two
C) Option Three
D) Options One and Three are equally preferred.

Question 16

Figure 18-1 The Bayview Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles).Bayview sold 1,000,000 cases last year to the following types of customers:
The supermarket chains order electronically through EDI which costs $25,000 annually.Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle.
The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000.Sales commissions of 10% are paid.
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case.Bad debt expense averages 10% of sales.

-
Refer to Figure 18-1.What is the total cost per case for drugstore chains?

A) $2.17 per case
B) $2.20 per case
C) $2.35 per case
D) $2.45 per case

Question 17

Anderson Company manufactures a variety of toys and games.John Boone, president, is disappointed in the sales of a new board game.The game sold only 10,000 units in 2011 when 30,000 were projected.Sales for 2012 look no better.At $100 per game, it is not a hot seller.Direct costs of the board game are $56 variable cost and $100,000 fixed.John is considering several options.Option One: Cut the price to $70 and perhaps sell 15,000 units.Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000.Anticipated volume for this option is 10,000 units.Option Three: Cut the price to $80 and include a $10 mail-in rebate offer.It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed.

- What is the profit (loss) from Option Three?

A) $215,000
B) $1,200,000
C) $110,000
D) ($60,000)

Question 18

Figure 18-1 The Bayview Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles).Bayview sold 1,000,000 cases last year to the following types of customers:
The supermarket chains order electronically through EDI which costs $25,000 annually.Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle.
The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000.Sales commissions of 10% are paid.
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case.Bad debt expense averages 10% of sales.

-
Refer to Figure 18-1.What customer type is the most profitable ?

A) local pharmacies
B) drugstore chains
C) supermarket chains
D) gas station chains

Question 19

Which of the following correctly describes the slope of the demand and supply curves?

A) upward sloping downward sloping
B) no slope upward sloping
C) downward sloping no slope
D) downward sloping upward sloping

Question 20

The following information pertains to three different products being sold by Andy Company:

- Which products have an elastic demand curve?

A) Product A
B) Product B
C) Product C
D) all of these

Question 21

The following information pertains to Mayberry Corporation:

-Absorption costing net income would be _______________ variable costing net income.

A) $150,000 greater than
B) $150,000 less than
C) $240,000 less than
D) $240,000 greater than

Question 22

Jamie Corporation had the following information:

- What would be the price for a product that has a cost of $500, assuming that the markup is based on cost of goods sold?

A) $834
B) $625
C) $708
D) $2,000

Question 23

Which of the following is a FALSE statement about target costing?

A) Target costing is a method of determining the cost of a product or service based on the price that customers are willing to pay.
B) The cost is calculated by subtracting the desired profit from the target price.
C) Target costing is an interactive process.
D) Target costing is cost driven.

Question 24

_______________ is the pricing of a new product at a low initial price to build market share quickly.

A) Penetration pricing
B) Predatory pricing
C) Price skimming
D) Target costing

Question 25

The following information pertains to Mayberry Corporation:

-What is the value of the ending inventory using the absorption costing method?

A) $240,000
B) $360,000
C) $600,000
D) $420,000

Question 26

Eastwood Company has the following information for 2011: There were no beginning inventories.
What is the ending inventory for Eastwood using the absorption costing method?

A) $300,000
B) $180,000
C) $120,000
D) $80,000

Question 27

Farr Company had the following information:

- What is the markup based on cost of goods sold?

A) 50.0%
B) 100.0%
C) 37.5%
D) 62.5%

Question 28

_______________ is said to occur when firms with market power price products "too high."

A) Predatory prices
B) Price discrimination
C) Price gouging
D) Penetration pricing

Question 29

Steele Corporation has the following information for January, February, and March 2011: There were no beginning inventories for January 2011, and all units were sold for $50.Costs are stable over the three months.
What is the February ending inventory for Steele Corporation using the absorption costing method?

A) $39,000
B) $45,000
C) $135,000
D) $300,000

Question 30

___________ refers to charging different prices to different customers for essentially the same product.

A) Gouging
B) Price discrimination
C) Skimming
D) Penetration pricing

Question 31

Jamie Corporation had the following information:

- What is the markup based on materials?

A) 400.0%
B) 185.7%
C) 42.9%
D) 71.4%

Question 32

Gage Company had the following information: What is the markup on Cost of Goods sold?

A) .1833
B) .6667
C) .3611
D) none of these

Question 33

_______________ on the international market is called dumping.

A) Price discrimination
B) Predatory pricing
C) Price skimming
D) Penetration pricing

Question 34

After the 2006 tornado in Oklahoma City, OK, businesses were trying to sell lumber for 50 percent above their regular prices.This is an example of

A) predatory prices.
B) price discrimination.
C) price gouging.
D) penetration pricing.

Question 35

Perry Products is thinking of expanding their product line.Their current income statement is as follows: The cost of the new product is $95 per unit made up of $50 of direct materials, $35 of direct labor and $10 of overhead per unit.What is the bid price assuming Perry utilizes a mark-up on direct materials?

A) $70
B) $133
C) $119
D) $19.77

Question 36

Price skimming occurs in which of the following life-cycle stages?

A) Introduction
B) Growth
C) Maturity
D) Decline

Question 37

Which of the following statements is FALSE?

A) The markup is a percentage applied to base cost.
B) The markup is an absolute rule.
C) A major advantage of markup pricing is that standard markups are easy to apply.
D) The markup can be calculated using a variety of bases.

Question 38

The Robinson-Patman Act allows price discrimination under which of the following circumstances?

A) if revenues justify it
B) if the competitive situation demands it
C) if the costs remain the same for all customers
D) The Robinson-Patman Act does not allow price discrimination under any situation.

Question 39

Farr Company had the following information:

- What is the markup based on prime costs?

A) 300.0%
B) 133.3%
C) 50.0%
D) 166.7%

Question 40

_______________ is where a higher price is charged at the beginning of a product's life cycle.

A) Penetration pricing
B) Predatory pricing
C) Price skimming
D) Target costing

Question 41

When production is less than sales volume, net income under absorption costing will be _______________ profits using variable costing procedures.

A) greater than
B) less than
C) equal to
D) randomly different than

Question 42

Toshi Company incurred the following costs in manufacturing desk calculators: During the period, the company produced and sold 1,000 units.
What is the inventory cost per unit using absorption costing?

A) $104
B) $70
C) $84
D) $32

Question 43

The following information pertains to Stark Corporation: What is the value of ending inventory using the variable costing method?

A) $310,000
B) $250,000
C) $200,000
D) $390,000

Question 44

All of the following costs are included in inventory under absorption costing EXCEPT

A) direct materials.
B) direct labor.
C) fixed selling expenses.
D) fixed factory overhead.

Question 45

Which of the following statements is TRUE?

A) Absorption costing net income exceeds variable costing net income when units produced and sold are equal.
B) Variable costing net income exceeds absorption costing net income when units produced exceed units sold.
C) Absorption costing net income exceeds variable costing net income when units produced are less than units sold.
D) Absorption costing net income exceeds variable costing net income when units produced are greater than units sold.

Question 46

Eastwood Company has the following information for 2011: There were no beginning inventories.

-
What is the net income for Eastwood using the variable costing method?

A) $412,000
B) $480,000
C) $1,200,000
D) $600,000

Question 47

Inventory values calculated using variable costing as opposed to absorption costing will generally be

A) equal.
B) less.
C) greater.
D) twice as much.

Question 48

Eastwood Company has the following information for 2011: There were no beginning inventories.
What is the net income for Eastwood using the absorption costing method?

A) $452,000
B) $480,000
C) $1,200,000
D) $600,000

Question 49

Ramon Company reported the following units of production and sales for June and July 2011: Net income under absorption costing for June was $40,000; net income under variable costing for July was $50,000.Fixed manufacturing costs were $600,000 for each month.
How much was net income for June using variable costing?

A) $40,000
B) $20,000
C) $(40,000)
D) $(20,000)

Question 50

The following information pertains to Mayberry Corporation: What is the value of the ending inventory using the variable costing method?

A) $240,000
B) $360,000
C) $350,000
D) $420,000

Question 51

Steele Corporation has the following information for January, February, and March 2011:

-There were no beginning inventories for January 2011, and all units were sold for $50.Costs are stable over the three months.
What is the February contribution margin for Steele Corporation using the variable costing method?

A) $240,000
B) $170,000
C) $119,000
D) $204,000

Question 52

Toshi Company incurred the following costs in manufacturing desk calculators: During the period, the company produced and sold 1,000 units.
What is the inventory cost per unit using variable costing?

A) $52
B) $62
C) $42
D) $70

Question 53

Steele Corporation has the following information for January, February, and March 2011:

-There were no beginning inventories for January 2006, and all units were sold for $50.Costs are stable over the three months.
What is the March ending inventory for Steele Corporation using the variable costing method?

A) $120,000
B) $104,000
C) $260,000
D) $15,000

Question 54

A disadvantage of absorption costing is

A) that it is not a useful format for decision making.
B) that it might encourage inventory build up.
C) both a and b.
D) none of these.

Question 55

Steele Corporation has the following information for January, February, and March 2011: Production costs per unit (based on 10,000 units) are as follows:
There were no beginning inventories for January 2011, and all units were sold for $50.Costs are stable over the three months.
What is the January ending inventory for Steele Corporation using the variable costing method?

A) $260,000
B) $78,000
C) $108,000
D) $90,000

Question 56

When monthly production volume is constant and sales volume is less than production, net income determined with variable costing procedures will

A) always be greater than net income determined using absorption costing.
B) always be less than net income determined using absorption costing.
C) be equal to net income determined using absorption costing.
D) be equal to contribution margin per unit times units sold.

Question 57

Ramon Company reported the following units of production and sales for June and July 2011: Net income under absorption costing for June was $40,000; net income under variable costing for July was $50,000.Fixed manufacturing costs were $600,000 for each month.
How much was net income for July using absorption costing?

A) $50,000
B) $20,000
C) $80,000
D) $40,000

Question 58

Gross margin is to absorption costing as _______________ is to variable costing.

A) gross profit
B) contribution margin
C) net income
D) territory margin

Question 59

Eastwood Company has the following information for 2011: There were no beginning inventories.

-
What is the cost of ending inventory for Eastwood using the variable costing method?

A) $300,000
B) $180,000
C) $120,000
D) $80,000

Question 60

What is the primary difference between variable and absorption costing?

A) inclusion of fixed selling expenses in product costs
B) inclusion of variable factory overhead in period costs
C) inclusion of fixed selling expenses in period costs
D) inclusion of fixed factory overhead in product costs

Question 61

Nauman Company has the following information pertaining to its two divisions for 2011: Common expenses are $24,000 for 2011.

-
What is the net income for Nauman Company?

A) $65,000
B) $325,000
C) $300,000
D) $41,000

Question 62

Grass Valley Mining mines three products.Gold ore sells for $1,000 per ton, variable costs are $600 per ton, and fixed mining costs are $250,000.The segment margin for 2011 was $(100,000).The management of Grass Valley Mining was considering dropping the mining of gold ore.Only one-half of the fixed expenses are direct and would be eliminated if the segment was dropped. What were the sales (in tons) for 2011?

A) 375 tons
B) 1,000 tons
C) 250 tons
D) 200 tons

Question 63

Franklin Company's expected sales were 2,000 units at $100 per unit.During 2011, it had actual sales of 1,800 units at $110 per unit.Budgeted variable costs were $60 per unit. What is Franklin's total sales variance?

A) $8,000 (U)
B) $20,000 (U)
C) $18,000 (F)
D) $2,000 (U)

Question 64

The following information pertains to Stark Corporation: Absorption costing net income would be _______________ the variable costing net income.

A) $50,000 greater than
B) $70,000 greater than
C) $70,000 less than
D) $50,000 less than

Question 65

Common segment costs, when contrasted with direct segment costs, are

A) costs of all segments such as direct labor.
B) costs related to more than one segment and not directly traceable to a particular segment.
C) incurred at one level for the benefit of two or more segments.
D) both b and c.

Question 66

Assume the following information for a product line:

- What is the contribution margin of the product line?

A) $400,000
B) $325,000
C) $350,000
D) $215,000

Question 67

The sales price variance is created by a difference between

A) actual and standard contribution margin.
B) actual and expected sales price.
C) expected and standard net income.
D) actual and expected sales volume.

Question 68

Assume the following information for a product line:

-What is the segment margin of the product line?

A) $400,000
B) $325,000
C) $350,000
D) $215,000

Question 69

Redding Company has two divisions with the following segment margins for the current year: Northern, $200,000; Southern, $400,000.Common expenses of the company are $50,000.What is Redding Company's net income?

A) $150,000
B) $550,000
C) $600,000
D) $650,000

Question 70

Consider the following portion of a segmented income statement for the year just ended.Assume that the fixed expenses of Division X include $30,000 of direct expenses and that the discontinuance of the department will not affect the sales of the other departments nor reduce the common expenses. What is X's divisional segment margin?

A) $(10,000)
B) $40,000
C) $10,000
D) $100,000

Question 71

Consider the following portion of a segmented income statement for the year just ended.Assume that the fixed expenses of Division X include $30,000 of direct expenses and that the discontinuance of the department will not affect the sales of the other departments nor reduce the common expenses. What would be the effect on the firm's operating income if Division X were discontinued?

A) increase $10,000
B) decrease $40,000
C) decrease $100,000
D) decrease $10,000

Question 72

Barmore Company has the following information pertaining to its two divisions for 2011: Common expenses are $12,000 for 2011.

-
What is the segment margin for Division B?

A) $155,000
B) $105,000
C) $55,000
D) $20,000

Question 73

Taylor Company's budgeted sales were 10,000 units at $200 per unit.Actual sales were 9,200 units at $210 per unit. Taylor's price volume variance is

A) $68,000 (U).
B) $160,000 (U).
C) $8,000 (U).
D) $168,000 (U).

Question 74

Barmore Company has the following information pertaining to its two divisions for 2011: Common expenses are $12,000 for 2011.

-
What is the net income for Barmore Company?

A) $300,000
B) $20,500
C) $150,000
D) $32,500

Question 75

Division B earns a contribution margin of $200,000 and has a divisional margin of $70,000.If Division B is closed, all of the direct divisional expenses and $110,000 of common expenses can be eliminated.These facts indicate that closing the division will cause the firm's operating income to

A) increase by $90,000.
B) decrease by $90,000.
C) increase by $40,000.
D) decrease by $40,000.

Question 76

Which of the following could be considered a segment?

A) division
B) product-line
C) sales territory
D) all of these

Question 77

The market share variance is calculated by

A) [(Actual industry sales in units - Budgeted industry sales in units) ´ (Budgeted market share percentage)] ´ (Budgeted average unit contribution margin).
B) [(Actual market share percentage - Budgeted market share percentage) ´ (Actual industry sales in units)] ´ (Budgeted average unit contribution margin).
C) (Actual quantity sold - Budgeted quantity sold) ´ Budgeted average unit contribution margin.
D) (Actual quantity sold - Budgeted quantity sold) ´ Actual average unit contribution margin.

Question 78

The following information pertains to Stark Corporation: What is the value of ending inventory using the absorption costing method?

A) $310,000
B) $250,000
C) $200,000
D) $390,000

Question 79

Nauman Company has the following information pertaining to its two divisions for 2011: Common expenses are $24,000 for 2011.

-
What is the segment margin for Division Y?

A) $310,000
B) $210,000
C) $240,000
D) $40,000

Question 80

Taylor Company's budgeted sales were 10,000 units at $200 per unit.Actual sales were 9,200 units at $210 per unit. Taylor's sales price variance is

A) $68,000 (U).
B) $100,000 (U).
C) $8,000 (U).
D) $92,000 (F).