Deck 18: Pricing and Profitability Analysis

Question 1

Profit-related variances focus on the difference between budgeted and actual prices, volumes, and contribution margin.

Answer 1

True

Question 2

Target costing sets costs based on the price that customers are willing to pay.

Answer 2

True

Question 3

The legal system supports business competition by allowing an open policy on pricing.

Answer 3

False

Question 4

Predatory pricing and dumping are outlawed practices that set prices below cost intending to injure competitors.

Question 5

Goods that are price elastic have few substitutes while those that are inelastic have many substitutes.

Question 6

Market structure affects price as well as the costs necessary to support that price.

Question 7

Cost-based pricing involves the calculated product cost plus the desired profit.

Question 8

The sales volume variance communicates the impact the difference between actual and expected units sold has on revenues.

Question 9

The overall sales variance is the sum of the contribution margin and the sales price variance.

Question 10

Absorption costing is used to calculate two measures of profit: gross profit and operating income.

Question 11

The relationship between supply and demand helps set pricing.

Question 12

Price elasticity of demand is the percent change in price demanded for a given percent change in quantity.

Question 13

The perfectly competitive market has many buyers and sellers, none of which are large enough to influence the market.

Question 14

Unlike absorption costing, variable costing only assigns unit-level manufacturing costs to a product.

Question 15

There are three types of market structure: monopoly, oligopoly, and perfect competition.

Question 16

Many companies base prices on cost while other companies use target-costing strategies.

Question 17

Profits are measured to determine the viability of a firm and its adherence to government regulations, to measure managerial performance, and to signal the market to encourage stockholders.

Question 18

The sales volume variance is the difference between actual and expected volume sold multiplied by the expected price.

Question 19

Price discrimination is the charging of different prices to different customers to promote fairer competition.

Question 20

The markup is pure profit, it does not include all costs not included in the base cost.

Question 21

Another term for predatory pricing in the international market is .

Question 22

Product-level costs are highest in the maturity phase and fall through the decline phase.

Question 23

The variance that compares actual volume with expected volume multiplied by expected price is the __________ variance.

Question 24

The profit history of a product according to four stages is called the product .

Question 25

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

Question 26

The stage where revenues always decrease is the stage.

Question 27

Firms enjoy greater success when they include the impact of profits on their employees and the community.

Question 28

Profits are lower in the introductory phase because revenues are low and investment and learning may be high.

Question 29

The income measurement required for external financial reporting is called costing.

Question 30

One limitation to profitability analysis is its focus on performance.

Question 31

The biggest limitation to profitability analysis is its focus on past, not future performance.

Question 32

Too much emphasis on short-run optimization can lead to problems.

Question 33

The percent change in quantity demanded for a given percent change in price is called price __________ .

Question 34

The variance is the difference between actual and budgeted contribution margin.

Question 35

Using variable costing procedures, net income will be less than when production is less than sales volume.

Question 36

The product life cycle describes the profit history of a product according to its introduction, growth, maturity, and decline stages.

Question 37

When a company charges different prices for the same product to different customers it is referred to as price
__________ .

Question 38

The two factors that influence the ability of companies to adjust price are price elasticity and __________ structure.

Question 39

The variances used to analyze changes in profit from one period to another are called variances.

Question 40

When companies with market power price products too high it's called price .

Question 41

Figure 18-1
The Lancashire 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 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.
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
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) $5.00 per case
B) $2.20 per case
C) $2.68 per case
D) $2.32 per case

Question 42

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 43

Figure 18-1
The Lancashire 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 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.
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
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) drugstore chains
B) gas station chains
C) supermarket chains
D) local pharmacies

Question 44

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2016 when 30,000 were projected. Sales for 2017 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) ($100,000)
B) $600,000
C) $100,000
D) $40,000

Question 45

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

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

Question 46

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2016 when 30,000 were projected. Sales for 2017 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) $110,000
C) $950,000
D) $210,000

Question 47

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 48

Figure 18-1
The Lancashire 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 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.
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
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) $2.12 per case
B) $2.32 per case
C) $2.20 per case
D) $2.45 per case

Question 49

The following information pertains to three different products being sold by Modular Company: Which products have an inelastic demand curve?

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

Question 50

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 51

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 52

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2016 when 30,000 were projected. Sales for 2017 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) $110,000
B) $1,200,000
C) $215,000
D) ($60,000)

Question 53

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.

Question 54

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 55

Johanson Company had the following information: Revenues $400,000
Cost of goods sold:
Direct materials $100,000 Direct labor 50,000
Overhead 50,000 200,000
Gross profit $200,000
Selling and administrative expenses
75,000
Operating income $125,000
What is the markup based on prime costs?

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

Question 56

Figure 18-1
The Lancashire 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 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.
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
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 57

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 the above.

Question 58

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

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

Question 59

The following information pertains to three different products being sold by Modular Company: Which products have an elastic demand curve?

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

Question 60

Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2016 when 30,000 were projected. Sales for 2017 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) Options One and Three are equally preferred.
B) Option Three
C) Option Two
D) Option One

Question 61

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 62

Girasol 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 Girasol utilizes a mark-up on direct materials?

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

Question 63

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

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

Question 64

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 65

When a higher price is charged at the beginning of a product's life cycle it is called:

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

Question 66

Lorillard Corporation has the following information for April, May, and June 2016: Production costs per unit (based on 12,500 units) are as follows:
Direct materials $15
Direct labor 10
Variable factory overhead 7.50
Fixed factory overhead 5
Variable selling and admin. expenses 12.50
Fixed selling and admin. expenses 5
There were no beginning inventories for April 2016, and all units were sold for $50. Costs are stable over the three months.
What is the May ending inventory cost for Lorillard Corporation using the absorption costing method?

A) $44,375.00
B) $35,625.00
C) $70,000.00
D) $210,937.50

Question 67

The charging of different prices to different customers for essentially the same product is called:

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

Question 68

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

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

Question 69

The pricing of a new product at a low initial price to build market share quickly is called:

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

Question 70

Consolidated 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)$65
B) $708
C) $834
D) $2,000

Question 71

The following information pertains to Guillotine Corporation: How much greater or less than variable costing net income is the absorption costing net income?

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

Question 72

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 73

Dumping in the international market is a form of:

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

Question 74

New England businesses were trying to sell lumber for 50 percent above their regular prices right after 2011 hurricane Irene hit. This is an example of:

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

Question 75

Lorillard Corporation has the following information for April, May, and June 2016: Production costs per unit (based on 12,500 units) are as follows:
There were no beginning inventories for April 2016, and all units were sold for $50. Costs are stable over the three
Months.
What is the May ending inventory cost for Lorillard Corporation using the variable costing method?

A) $182,812.50
B) $187,500
C) $312,500
D) $162,500

Question 76

Consolidated Corporation had the following information:

Question 77

Lorillard Corporation has the following information for April, May, and June 2016: Production costs per unit (based on 12,500 units) are as follows:
There were no beginning inventories for April 2016, and all units were sold for $50. Costs are stable over the three
Months.
What is the April ending inventory for Lorillard Corporation using the variable costing method?

A) $312,500
B) $187,500
C) $121,875
D) $140,000

Question 78

When firms with market power price products "too high", companies are:

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

Question 79

Soloist Company had the following information:

A) .1833
B) .3611
C) .6667
D) none of the above

Question 80

Lorillard Corporation has the following information for April, May, and June 2016: Production costs per unit (based on 12,500 units) are as follows:
There were no beginning inventories for April 2016, and all units were sold for $50. Costs are stable over the three
Months.
What is the June ending inventory cost for Lorillard Corporation using the variable costing method?

A) $75,000
B) $125,000
C) $162,500
D) $187,500