Deck 11: Pricing Decisions, Incl Target Costing and Transfer Pricing

Question 1

Profit maximization has been tempered by other more socially focused concerns in recent years.

Answer 1

True

Question 2

Legal constraints and ethical considerations should be considered when developing a company's pricing policy.

Answer 2

True

Question 3

Companies should be concerned about the effect of their prices on their public image.

Answer 3

True

Question 4

Focusing pricing objectives on sales growth can provide a measure of increasing market share as well as an incentive and target for managers for a period of time.

Question 5

Organizations will not invest in making a product or providing a service unless it will provide a minimum return.

Question 6

Both internal and external factors can influence the pricing decision.

Question 7

A company's pricing policy objectives may include maintaining a minimum return on investment.

Question 8

A company that produces standard items for a competitive market should have the same pricing strategies as a company that makes unique items custom-designed for its customers.

Question 9

The target market for a product or service should be given strong consideration before the final price is chosen.

Question 10

Setting appropriate prices is one of the simplest decisions that managers make on a day-to-day basis.

Question 11

In a competitive market, prices can be reduced to gain market share by displacing the sales of competing companies.

Question 12

The primary internal factor to be considered in product pricing is the cost of the product or service.

Question 13

Underlying every pricing decision is the fact that all costs incurred must be recovered in the long run or the company will no longer be in business.

Question 14

A company should never attempt to increase its market share by reducing prices below cost.

Question 15

A company producing custom-designed products for its customers can be more conservative in its pricing strategy than a company producing standardized items.

Question 16

Factors that influence the pricing decision are only external in nature.

Question 17

The long-term objectives of a company need not include statements concerning pricing policy.

Question 18

A manager may deviate from the four pricing rules if a specific short-term objective is being targeted.

Question 19

Each product or service has a target market that determines its demand.

Question 20

Maximizing profits has been and continues to be a dominant factor in price setting.

Question 21

The markup percentage includes the gross margin in the computation of the selling price.

Question 22

Under microeconomic theory, total revenue will continue to increase, but the rate of increase will diminish as more and more units are sold.

Question 23

Marginal revenue is the change in total revenue resulting from a one-unit change in output.

Question 24

The ability to set the one perfect price will never be achieved because there will always be changes in circumstances that will justify a different price.

Question 25

A good starting point for any pricing method is to develop a price based on the cost of producing the good or service.

Question 26

It is realistic to assume that a total revenue line will curve rather than be straight.

Question 27

The numerator in the markup percentage for the gross margin-based pricing method comprises selling expenses, general and administrative expenses, and a desired profit.

Question 28

Beyond the sales level that achieves maximum profits, total costs rise at a slower rate than total revenue.

Question 29

Economic theory indicates that as you market a product, price reductions will have to be made to sell additional units.

Question 30

Auction-based pricing is a pricing method used primarily on the Internet where price is determined by willing buyers and sellers.

Question 31

Marginal cost is the change in total cost resulting from a one-unit change in output.

Question 32

Gross margin is the difference between sales and the variable production costs of those sales.

Question 33

The gross margin pricing method computes unit selling price based on production costs rather than total costs.

Question 34

The denominator of the gross margin markup percentage is total production costs.

Question 35

Within the relevant range, fixed and variable costs are fairly predictable.

Question 36

The gross margin-based price is computed by adding total production costs per unit to the total production costs per unit times the gross margin markup percentage.

Question 37

Return on assets pricing is based on the estimated number of units to be sold.

Question 38

The economic approach to pricing is based on microeconomic theory.

Question 39

A company should not deviate from the traditional approaches to price determination.

Question 40

Gross margin pricing establishes selling prices at an amount that is a stipulated rate above variable production costs.

Question 41

Target costing identifies a competitive price and then subtracts the desired profit to determine a target cost.

Question 42

Target costing is a variation of cost-based pricing models that reverses the normal procedure for a cost-based pricing model.

Question 43

Target costing identifies a competitive price and then adds the desired profit to determine a target cost.

Question 44

Service-oriented businesses take the same approach to pricing their "product" as product-oriented businesses.

Question 45

Return on assets pricing has the same objective as gross margin pricing for the price determination process.

Question 46

Computing the target cost for a product is the first step in target costing.

Question 47

For the return on assets pricing method, the desired rate of return on assets per unit is added to the total costs and expenses per unit to determine the selling price.

Question 48

A company will choose a cost-based pricing method based on the degree of trust it has in the cost base.

Question 49

When using a cost-based approach, once the cost of a good or service has been determined, additional factors need not be considered in establishing a selling price.

Question 50

For the return on assets pricing method, desired earnings are computed by dividing asset costs by projected units to be produced and then multiplying by the desired rate of return on assets.

Question 51

For service-oriented businesses, pricing is determined using cost-based approaches that add the cost of overhead to materials, parts, and labor via markup percentages.

Question 52

Because a business should have as its primary objective the earning of a minimum rate of return on assets, the return on assets pricing method has a great deal of appeal and support.

Question 53

A target price is an estimate of a price for a product or service that potential customers will be willing to pay.

Question 54

A target cost is an anticipated cost that should be achieved at a midpoint in the product's life cycle.

Question 55

Anticipated market price is taken as a given in target costing.

Question 56

Committed costs are engineered into a product or service at the design stage of product development.

Question 57

If engineers determine that a product can be produced for less than its target cost, then production of the product should not be undertaken.

Question 58

Management accountants are directly involved in designing products that meet target costs.

Question 59

When using traditional, cost-based pricing, the pricing decision is made before products have been put into production.

Question 60

In gross margin pricing, the markup percentage is based on total production costs.

Question 61

The concept of transfer pricing is widely accepted because of its ability to assist in performance evaluation of managers in a company with decentralized divisions.

Question 62

Profit measurement and return on investment for decentralized divisions are important gauges for performance evaluation.

Question 63

A negotiated transfer price is one that is bargained for between the managers of the buying and selling divisions of a company.

Question 64

Transfer prices affect the revenues and costs of the divisions involved but do not affect the revenues and costs of the company as a whole.

Question 65

A negotiated transfer price is often used for internal pricing.

Question 66

Transfer prices force segments of a business to compete for the company's resources.

Question 67

The cost-plus transfer price is the sum of the costs incurred by the producing division plus an agreed-upon profit percentage.

Question 68

The pricing of intracompany transactions should not have an effect on the determination of the product cost and the selling price to external customers.

Question 69

A transfer price can be based on a market price for products that has been reduced in the process of bargaining by division managers.

Question 70

A negotiated transfer price will be between the negotiation floor and the negotiation ceiling.

Question 71

A set of rules similar to those used to set external prices governs the establishment of transfer prices.

Question 72

One approach to the development of a transfer price is to use the market value if the item has an existing market at the time of transfer.

Question 73

Target costing is a useful pricing tool because it allows the company to critically analyze the potential for success of a product before committing resources to its production.

Question 74

Transfer pricing can create problems if a company division can purchase inputs outside of the company at a price lower than the internal transfer price from another division.

Question 75

A transfer price should not contain any profit since the profit for a product should be determined when the product is completed.

Question 76

The weakness of a negotiated transfer price is that cost recovery is guaranteed to the selling division, which may lead to failure to detect inefficient operating conditions and excessive cost incurrence.

Question 77

Transfer pricing can influence operating efficiency and profitability.

Question 78

Transfer pricing can create problems if a company division can sell its output outside the company rather than transfer its output to another division within the company.

Question 79

A transfer price is the price at which goods are exchanged among company divisions.

Question 80

Transfer prices are used for internal decisions and performance evaluation purposes and are not made known to the outside world.