Chapter 12   
 
Pricing Decisions and Cost Management
 
1) 
 
Companies must always examine pricing decisions through the eyes of their customers..   
2) 
 
Companies that produce high quality products do not have to pay attention to the actions of their competitors.  
3) 
 
Relevant costs for pricing decisions include manufacturing costs, but not costs from other value-chain functions.   
4) 
 
Cost information only helps the company decide how many units to produce..   
5) 
 
In markets with little or no competition, the key factor affecting price is costs, not customers' willingness to pay or competitors.   
6) 
 
When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions.   
7) 
 
The only competition a firm must be concerned about when setting prices are those in the local market.   
8) 
 
Short-run pricing decisions include adjusting product mix in a competitive environment..   
9) 
 
Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions, but not long-term pricing decisions.   
10) 
 
In a one-time-only special order, existing fixed manufacturing costs are irrelevant..   
11) 
 
Relevant costs of a bidding decision should exclude revenues lost on lower-priced sales to existing customers.   
12) 
 
Customers prefer stable and predictable prices over a long time horizon..   
13) 
 
Product cost analysis is important even if market forces set prices..   
14) 
 
Companies that operate in very competitive environments use a market-based approach when making their long-run pricing decisions..   
15) 
 
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.   
16) 
 
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.   
17) 
 
Target pricing is a form of cost-based pricing.   
18) 
 
The first step in target pricing is to determine the target cost of the product.   
19) 
 
Value engineering has the objective of reducing costs while still satisfying customer needs..   
20) 
 
Reverse engineering has the objective of reducing costs while still satisfying customer needs.   
21) 
 
Rework is an example of a value-added cost.   
22) 
 
It is always clear which activities add value and which do not add value to a product.   
23) 
 
Value engineering seeks to reduce value-added costs as well as nonvalue-added costs..   
24) 
 
Suppliers play a key role in the success of target costing..   
25) 
 
Target costing begins with the price the customer is willing to pay and the "backs-into" what the product should cost..   
26) 
 
Cost-plus pricing starts with what customers are willing to pay, and then adds a desired profit.   
27) 
 
Value engineering can be used to make cost improvements to meet a target cost..   
28) 
 
Whether the firm uses the market-based approach or the cost-based approach for pricing decisions, the market forces must be considered..   
29) 
 
Costs may be locked in before they are incurred..   
30) 
 
Locked-in costs have already been incurred.   
31) 
 
For manufacturing firms, product costs are generally locked in during the manufacturing stage.   
32) 
 
One goal of target costing is to design costs out of products..   
33) 
 
Spending more on the design phase of a new product usually reduces subsequent product-related costs..   
34) 
 
Customers are sometimes willing to pay for nonvalue-added costs.  
35) 
 
Kaizen costing focuses on improving productivity and eliminating waste through continuous improvements..   
36) 
 
In cost-plus pricing, the markup is a rigid number that determines the actual selling price.   
37) 
 
The target rate of return on investment is another way of referring to the markup percentage.   
38) 
 
Cost bases that include fewer costs also have lower markups.   
39) 
 
Markups tend to be lower in more competitive markets..   
40) 
 
The full-cost formula for pricing is relatively simple to use because it does not require a detailed analysis of cost behavior..   
41) 
 
A full-cost base rather than a variable-cost base is a better guide for discounting decisions that may affect long-term customers..   
42) 
 
One market-based pricing method is called the time and materials method.  
43) 
 
To be profitable, a company must generate revenues to cover costs incurred in all six business functions..   
44) 
 
Life-cycle budgeting is particularly important when nonproduction costs are significant..   
45) 
 
Many companies use life-cycle budgeting to determine target prices..   
46) 
 
Customer life-cycle costs focus on total costs incurred by the customer from purchase to disposal..   
47) 
 
Life-cycle budgeting estimates the costs and revenues attributed to a product from its initial R&D through production of a prototype product.   
48) 
 
A firm using product life-cycle reporting will have a calendar-based focus for this report.   
49) 
 
When price discrimination is effective, cost is not a major factor in setting prices..   
50) 
 
When demand is elastic, an increase in price will lead to an increase in profits.   
51) 
 
Peak-load pricing is the practice of charging a lower price for the same product or service when the demand for it approaches the physical limit of the capacity to produce that product or service.  
52) 
 
Price discrimination is the illegal practice of charging some customers a higher price than is charged to other customers.   
53) 
 
When demand is strong, firms usually increase markups..   
54) 
 
Price discrimination laws apply only to manufacturers..   
55) 
 
Price discrimination is only illegal if the intent is to destroy competition..   
56) 
 
A business that engages in predatory pricing violates various U.S. antitrust laws..   
57) 
 
Price dumping occurs when a domestic company is trying to get rid of out-of-style products at a substantially reduced price.   
58) 
 
Collusive pricing occurs when companies in an industry conspire in their pricing and output decisions to achieve a price above the competitive price..   
59) 
 
Peak-load pricing is a form of price discrimination and is illegal.   
60) 
 
To comply with antitrust laws, a company must not engage in predatory pricing, dumping, or collusive pricing which lessen competition, put another company at a competitive disadvantage, or harm consumers..   
61) 
 
Companies should ONLY produce and sell units as long as:   
C) 
 
the revenue from an additional unit exceeds the cost of producing it   
62) 
 
Too high a price may:   
A) 
 
deter a customer from purchasing a product   
63) 
 
Companies must ALWAYS examine their pricing:   
C) 
 
through the eyes of their customers   
64) 
 
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   
65) 
 
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   
66) 
 
The cost of producing a product:   
B) 
 
affects the willingness of a company to supply a product   
67) 
 
In a noncompetitive environment, the key factor affecting pricing decisions is the:   
A) 
 
customer's willingness to pay   
68) 
 
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   
69) 
 
Three major influences on pricing decisions are:   
A) 
 
competition, costs, and customers   
70) 
 
Long-run pricing decisions:   
D) 
 
use prices that include a reasonable return on investment   
71) 
 
Short-term pricing decisions:   
B) 
 
are more opportunistic   
72) 
 
Relevant costs for pricing a special order include:   
C) 
 
additional setup costs for the special order   
73) 
 
Which of the following factors should NOT be considered when pricing a special order?   
D) 
 
stable pricing to earn the desired long-run return   
74) 
 
Long-run pricing:   
C) 
 
is a strategic decision   
75) 
 
For long-run pricing decisions, using stable prices has the advantage of:   
D) 
 
helping to build buyer-seller relationships   
76) 
 
A price-bidding decision for a one-time-only special order includes an analysis of all:   
C) 
 
direct and indirect variable costs of each function in the value chain   
77) 
 
For pricing decisions, full product costs:   
C) 
 
include all direct costs plus an appropriate allocation of the indirect costs of all business functions   
Answer the following questions using the information below:

Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $120 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Northwoods' policy to add a 50% markup to full costs.
  
78) 
 
Northwoods is invited to bid on a one-time-only special order to supply 200 rustic tables. What is the lowest price Northwoods should bid on this special order?   
D) 
 
$14,400   
79) 
 
A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Northwoods is invited to submit a bid to the hotel chain. What per unit price will Northwoods MOST likely bid on this long-term order?   
C) 
 
$180 per unit   
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 $95 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.
  
80) 
 
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?  
B) 
 
$3,562.50  
81) 
 
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?   
C) 
 
$123.50 per unit   
Answer the following questions using the information below:

Rogers' Heaters is approached by Ms. Yukki, 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:

  Direct materials  $200
  Direct manufacturing labor  60
  Variable manufacturing support  30
  Fixed manufacturing support  100
  Total manufacturing costs  390
  Markup (30%)  117
  Estimated selling price  $507
  
82) 
 
For Rogers' Heaters, what is the minimum acceptable price of this one-time-only special order?   
A) 
 
$290   
83) 
 
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   
84) 
 
If Ms. Yukki wanted a long-term commitment for supplying this product, what price would MOST likely be quoted to her?   
D) 
 
$507   
Answer the following questions using the information below:

Gerry's Generator Supply is approached by Mr. Gladstone, 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:

  Direct materials  $850
  Direct manufacturing labor  50
  Variable manufacturing support  100
  Fixed manufacturing support  75
  Total manufacturing costs  1,075
  Markup (20%)  215
  Estimated selling price  $1,290
  
85) 
 
For Gerry's Generators, what is the minimum acceptable price of this one-time-only special order?   
B) 
 
$1,000  
86) 
 
Before accepting this one-time-only special order, Gerry's Generators wants to know how much profit would be made on the order:  
C) 
 
$0  
87) 
 
If Mr. Gladstone wanted a long-term commitment for supplying this product, what price would MOST likely be quoted to him?   
C) 
 
$1,290  
Answer the following questions using the information below:

Welch 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. Welch Manufacturing has a policy of adding a 10% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers:

  Variable costs:
  Direct materials  $30
  Direct labor  10
  Manufacturing overhead  15
  Marketing costs  5
  Fixed costs:
  Manufacturing overhead  100
  Marketing costs  20
  Total costs  180
  Markup (10%)  18
  Estimated selling price  $198
 
88) 
 
For Welch Manufacturing, what is the minimum acceptable price of this one-time-only special order?   
C) 
 
$60   
89) 
 
What is the full cost of the product per unit?   
B) 
 
$180   
90) 
 
If the European customer wanted a long-term commitment for supplying this product, what price would MOST likely be quoted?   
C) 
 
$198.00   
Answer the following questions using the information below:

Berryman Products manufactures coffee tables. Berryman 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:

  Output units  30,000  tables
  Machine-hours  8,000  hours
  Direct manufacturing labor-hours  10,000  hours

  Direct materials per unit  $50
  Direct manufacturing labor per hour  $6
  Variable manufacturing overhead costs  $161,250
  Fixed manufacturing overhead costs  $600,000
  Product and process design costs  $450,000
  Marketing and distribution costs  $562,500
  
91) 
 
Berryman Products is approached by an overseas customer to fulfill a one-time-only special order for 2,000 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) 
 
$67.38   
92) 
 
For long-run pricing of the coffee tables, what price will MOST likely be used by Berryman?   
D) 
 
$133.35   
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:

  Output units  10,000  phones
  Machine-hours  8,000  hours
  Direct manufacturing labor-hours  5,000  hours

  Direct materials per unit  $25
  Direct manufacturing labor per hour  $15
  Variable manufacturing overhead costs  $175,000
  Fixed manufacturing overhead costs  $425,000
  Product and process design costs  $400,000
  Marketing and distribution costs  $475,000
  
93) 
 
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?   
C) 
 
$65.00  
94) 
 
For long-run pricing of the cell phones, what price will MOST likely be used by Delgreco?   
D) 
 
$234.00  
95) 
 
Target pricing:   
C) 
 
estimates are based on customers' perceived value of the product   
96) 
 
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   
97) 
 
The department usually in the best position to identify customers' needs is the:   
B) 
 
sales and marketing department   
98) 
 
Relevant costs for target pricing are:   
D) 
 
all future costs, both variable and fixed   
99) 
 
Place the following steps for the implementation of target costing in order:
  A = Derive a target cost
  B = Develop a target price
  C = Perform value engineering
  D = Determine target operating income   
A) 
 
B D A C   
100) 
 
Value engineering may result in all of the following EXCEPT:   
C) 
 
increases in the quantity of nonvalue-added cost drivers   
101) 
 
Value-added costs:   
C) 
 
are reduced through improved efficiencies   
102) 
 
To design costs out of products is a goal of:   
B) 
 
target costing   
103) 
 
All of the following are true regarding target costing EXCEPT:   
A) 
 
improvements are implemented in small incremental amounts   
104) 
 
All of the following are associated with target costing EXCEPT:   
B) 
 
the markup component   
105) 
 
When target costing and target pricing are used together:   
B) 
 
the target cost is the estimated long-run cost that enables a product or service to achieve a desired profit   
106) 
 
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:   
B) 
 
target costing   
Answer the following questions using the information below:

After conducting a market research study, Schultz 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 $60. The annual target sales volume for interior doors is 20,000. Schultz has target operating income of 20% of sales.
  
107) 
 
What are target sales revenues?   
C) 
 
$1,200,000   
108) 
 
What is the target operating income?   
A) 
 
$240,000   
109) 
 
What is the target cost?   
B) 
 
$960,000   
110) 
 
What is the target cost for each interior door?   
A) 
 
$48   
Answer the following questions using the information below:

After conducting a market research study, Potter 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 $46. The annual target sales volume for the coffee pot is 300,000. Potter has target operating income of 18% of sales.
  
111) 
 
What are the target sales revenues?   
B) 
 
$13,800,000  
112) 
 
What is the target operating income?   
D) 
 
$2,484,000   
113) 
 
What is the total target cost?   
B) 
 
$11,316,000  
114) 
 
What is the target cost for each coffee pot?   
B) 
 
$37.72  
Answer the following questions using the information below:

Sheltar's TV currently sells small televisions for $180. It has costs of $140. A competitor is bringing a new small television to market that will sell for $150. Management believes it must lower the price to $150 to compete in the market for small televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Sheltar's sales are currently 100,000 televisions per year.
  
115) 
 
What is the target cost if target operating income is 25% of sales?   
C) 
 
$112.50   
116) 
 
What is the change in operating income if marketing is correct and only the sales price is changed?   
D) 
 
$(2,900,000)   
117) 
 
What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)?   
B) 
 
$113.64   
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.
  
118) 
 
What is the target cost if operating income is 25% of sales?   
C) 
 
$168.75   
119) 
 
What is the change in operating income if marketing is correct and only the sales price is changed?   
D) 
 
$(435,000)   
120) 
 
What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)?   
B) 
 
$170.46   
121) 
 
Concerns about target costing include all the following EXCEPT:   
C) 
 
development time may decrease   
122) 
 
Direct material costs are locked in when they are:   
A) 
 
designed   
123) 
 
Cost accounting systems focus on when costs are:   
A) 
 
incurred   
124) 
 
Most of a product's life-cycle costs are locked in by decisions made during the ________ business function of the value chain.   
A) 
 
design   
125) 
 
For most products, the majority of costs are incurred during the ________ business function of the value chain.   
B) 
 
manufacturing   
126) 
 
________ focuses on reducing costs during the manufacturing stage.   
B) 
 
Kaizen costing   
127) 
 
Cross-functional engineering teams may include:   
A) 
 
marketing managers   
B) 
 
suppliers   
C) 
 
management accountants   
128) 
 
In some industries, such as legal and consulting, most costs are locked in:   
A) 
 
when they are incurred   
129) 
 
Value engineering can reduce all of the following EXCEPT:   
A) 
 
existing fixed manufacturing costs   
130) 
 
A graph comparing locked-in costs with incurred costs will have:   
C) 
 
locked-in costs rising much faster initially than the incurred cost, but joining the incurred cost line at the completion of the value-chain functions   
131) 
 
Graphic analysis of incurred and locked-in costs provides several insights as to how the different concepts influence decisions. Which of the following statements is FALSE?   
D) 
 
Most costs are locked in during the manufacturing process.   
132) 
 
Value engineering can reduce costs by all of the following EXCEPT:   
C) 
 
redesigning alternative options over and over until the wishes of all cross-functional team members are accommodated   
133) 
 
The cost-plus pricing approach is generally in the form:   
A) 
 
Cost base + Markup component = Prospective selling price   
134) 
 
In cost-plus pricing, the markup component:   
B) 
 
is ultimately determined by the market   
135) 
 
A product's markup percentage needs to cover nonmanufacturing variable costs when the cost base is:   
C) 
 
variable manufacturing costs   
136) 
 
A product's markup percentage needs to cover operating profits when the cost base is:   
A) 
 
the full cost of the product   
B) 
 
the variable cost of the product   
C) 
 
variable manufacturing costs   
137) 
 
Erickson Company is considering pricing its 5,000-gallon petroleum tanks using either variable manufacturing or full product costs as the base. The variable cost base provides a prospective price of $3,000 and the full cost base provides a prospective price of $3,050. The difference between the two prices is:   
B) 
 
that the variable cost base estimates fixed costs in the markup percentage while the full cost base includes an amount for fixed costs   
138) 
 
________ starts with estimated product costs and next adds desired operating income.   
A) 
 
Cost-plus pricing   
139) 
 
The amount of markup percentage is usually higher if:   
B) 
 
demand is strong   
140) 
 
The markup percentage is usually higher if the cost base used is:   
C) 
 
variable manufacturing costs   
141) 
 
Which of the following statements is FALSE regarding cost-plus pricing?   
D) 
 
The cost-plus price chosen has already been studied for customer reaction to the price.   
142) 
 
Advantages of using the full cost of the product as the cost base include all of the following EXCEPT that:   
C) 
 
fixed cost allocations can be arbitrary   
Answer the following questions using the information below:

Timothy Company has invested $2,000,000 in a plant to make vending machines. The target operating income desired from the plant is $300,000 annually. The company plans annual sales of 1,500 vending machines at a selling price of $2,000 each.
  
143) 
 
What is the target rate of return on investment for Timothy Company?   
A) 
 
15.0%   
144) 
 
What is the markup percentage as a percentage of cost for Timothy Company?   
D) 
 
11.1%   
145) 
 
What is the cost base of each vending machine for Timothy Company?   
B) 
 
$1,802   
Answer the following questions using the information below:

Grant Company has invested $1,000,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $180,000 annually. The company plans annual sales of 7,000 juicer machines at a selling price of $200 each.
  
146) 
 
What is the target rate of return on investment for Grant Company?   
B) 
 
18.0%   
147) 
 
What is the markup percentage as a percentage of cost for Grant Company?   
C) 
 
14.8%   
148) 
 
What is the cost base of each juicer machine for Grant Company?   
A) 
 
$174   
Answer the following questions using the information below:

Meyer Corporation budgeted the following costs for the production of its one and only product for the next fiscal year:

  Direct materials  $ 562,500
  Direct labor  390,000
  Manufacturing overhead
  Variable  420,000
  Fixed  322,500
  Selling and administrative
  Variable  180,000
  Fixed  240,000
  Total costs  $2,115,000

Meyer has an annual target operating income of $450,000.
  
149) 
 
The markup percentage for setting prices as a percentage of total manufacturing costs is:   
A) 
 
51%   
150) 
 
The markup percentage for setting prices as a percentage of variable manufacturing costs is:   
C) 
 
169%   
151) 
 
The markup percentage for setting prices as a percentage of the variable cost of the product is:   
D) 
 
65%   
152) 
 
The markup percentage for setting prices as a percentage of the full cost of the product is:   
D) 
 
21%   
153) 
 
Life-cycle costing is the name given to:   
C) 
 
the process of managing all costs along the value chain   
154) 
 
An understanding of life-cycle costs can lead to:   
C) 
 
cost effective product designs that are easier to service   
155) 
 
Life-cycle budgeting is particularly important when:   
B) 
 
there are significant nonproduction costs   
156) 
 
Life-cycle budgeting and life-cycle costing help highlight:   
D) 
 
an increase in annual operating income resulting from the new product   
157) 
 
Life-cycle budgeting:   
C) 
 
helps companies estimate revenues over a multiyear horizon   
158) 
 
Customer life-cycle costs are the:   
B) 
 
costs to the customer for buying and using a product   
Answer the following questions using the information below:

Bicker, Inc., is in the process of evaluating a new product using the following information:
∙  A new transformer has two production runs each year, each with $10,000 in setup costs.
∙  The new transformer incurred $30,000 in development costs and is expected to be produced over the next three years.
∙  Direct costs of producing the transformers are $40,000 per run of 5,000 transformers each.
∙  Indirect manufacturing costs charged to each run are $45,000.
∙  Destination charges for each transformer average $1.00.
∙  Customer service expenses average $0.20 per transformer.
∙  The transformers are selling for $25 the first year and will increase by $3 each year thereafter.
∙  Sales units equal production units each year.
  
159) 
 
What are estimated life-cycle revenues?   
D) 
 
$840,000   
160) 
 
What is the estimated life-cycle operating income for the first year?   
A) 
 
$18,000   
161) 
 
What is the estimated life-cycle operating income for the first three years?   
B) 
 
$204,000   
Answer the following questions using the information below:

Neises, White, Granberry and Associates are in the process of evaluating its new client services for the business consulting division.
∙  Estate Planning, a new service, incurred $600,000 in development costs and employee training.
∙  The direct costs of providing this service, which is all labor, averages $100 per hour.
∙  Other costs for this service are estimated at $2,000,000 per year.
∙  The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting.
∙  Customer service expenses average $400 per client, with each job lasting an average of 400 hours. The current staff expects to bill 40,000 hours for each of the two years the program is in effect. Billing averages $140 per hour.
  
162) 
 
What are estimated life-cycle revenues?   
C) 
 
$11,200,000   
163) 
 
What is estimated life-cycle operating income for the first year?   
A) 
 
$(1,040,000)   
164) 
 
What is the estimated life-cycle operating income for the first two years?   
A) 
 
$(1,480,000)   
Answer the following questions using the information below:

Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division.
∙  Server Planning, a new service, incurred $250,000 in development costs.
∙  The direct costs of providing the service, which is all labor, averages $50 per hour.
∙  Other costs for this service are estimated at $300,000 per year.
∙  The current program for server planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non viable.
∙  Customer service expenses average $250 per client, with each job lasting an average of 40 hours. The current staff expects to bill 15,000 hours for each of the two years the program is in effect. Billing averages $90 per hour.
  
165) 
 
What are the estimated life-cycle revenues?   
A) 
 
$2,700,000  
166) 
 
What is the estimated life-cycle operating income for the first year?   
C) 
 
$(43,750)   
167) 
 
What is the estimated life-cycle operating income for both years combined?   
B) 
 
$162,500  
168) 
 
Price discrimination is the practice of:   
D) 
 
charging different prices to different customers or clients for the same products or services   
169) 
 
Iowa Utility Company charges its high-usage commercial customers a lower rate per kilowatt-hour than other customers. This is an example of:   
D) 
 
price discrimination   
170) 
 
When demand for a product is inelastic and prices are increased, usually demand will:   
B) 
 
remain the same, and operating profits will increase   
171) 
 
When demand for a product is very elastic and prices are increased, demand will:   
D) 
 
decrease, and operating profits may either increase or decrease   
172) 
 
Costs are a major factor:   
B) 
 
when demand is price-elastic   
Answer the following questions using the information below:

LeBlanc Lighting manufactures table lamps and is considering raising the price by $10 a unit for the coming year. With a $10 price increase, demand is expected to fall by 2,000 units.

  Currently  Projected
  Demand  20,000 units  18,000 units
  Selling price  $150  $160
  Variable costs per unit  $100  $100
  
173) 
 
Would you recommend the $10 price increase?   
D) 
 
Yes, because operating income increases.   
174) 
 
The demand for this product is:   
C) 
 
elastic   
Answer the following questions using the information below:

Stowers Shavers, Inc. manufactures electric shavers and is considering decreasing the price by $2 a unit for the coming year. With a $2 price decrease, the unit demand is expected to increase by 25%, and a high volume materials discount is expected to decrease the variable costs per unit by $1 per unit.

  Currently  Projected
  Demand  10,000 units  12,500 units
  Selling price  $51  $49
  Variable costs per unit  $45  $44
  
175) 
 
Would you recommend the $2 price decrease?   
C) 
 
Yes, because operating income increases.  
176) 
 
The demand for this product is:   
A) 
 
elastic  
177) 
 
The Maize Eagles are evaluating ticket prices for its basketball games. Studies show that Friday and Saturday night games average more than twice the fans of games on other days. The following information pertains to the stadium's normal operations per season:

  Average fans per game (all games)  2,500  fans
  Average fans per Friday and Saturday night games  3,500  fans
  Number of home games per season  30  games
  Stadium capacity  3,500  seats
  Variable operating costs per operating hour  $2,000
  Marketing costs per season for basketball  $138,750
  Customer-service costs per season for basketball  $25,000

The stadium is open for 5 operating hours on each day a game is played. All employees work by the hour except for the administrators. A maximum of one game is played per day and each fan has only one ticket per game. 

The stadium authority wants to charge more for games on Friday and Saturday. What is the minimum price that should be charged for peak attendance nights?   
C) 
 
$6.19   
178) 
 
Hitz Video Rental is evaluating rental prices. Historical data show that Friday and Saturday have twice the rentals of other days of the week. The following information pertains to the store's normal operations per week: 

  Average rentals per day on Friday and Saturday  1,150
  Average rentals per day on Sunday through Thursday  500
  Store hours per day  12
  Total units available for rent  10,000

  Variable operating costs per hour  $ 40
  Marketing costs per week  $1,500
  Customer service costs per week  $ 250

The store manager wants to charge more for rentals on Friday and Saturday. What is the minimum price that should be charged during peak rental days?   
D) 
 
$1.07   
179) 
 
All of the following are true regarding price discrimination EXCEPT that:   
D) 
 
it is most likely to occur when the cost base is the full cost of the product   
180) 
 
Predatory pricing is a type of price discrimination that:   
D) 
 
deliberately sets prices very low, sometimes even below costs, to minimize competition   
181) 
 
To minimize the chances of violating pricing laws, a company should:   
A) 
 
keep detailed records of variable costs for all value-chain business functions   
182) 
 
Collusive pricing occurs when:   
C) 
 
two or more companies agree to sell a product at a price higher than should be expected   
183) 
 
A short-run pricing decision typically has a time horizon of less than:   
A) 
 
one year   
184) 
 
Which one of the following activities would most likely be considered a long-run pricing decision?   
C) 
 
setting prices to generate a reasonable rate of return on investment   
185) 
 
When the firm uses the target-costing approach to pricing, the target cost per unit is the difference between the per unit target price and the per unit target:   
B) 
 
operating income   
186) 
 
Action Toys has a new video game cassette for the upcoming holiday season. It is trying to determine the target cost for the game if the selling price per unit will be set at $60, the going price for video games, and the firm wants to earn a target operating income of 12% of sales. What will be the target cost per unit for the new game?   
B) 
 
$52.80   
187) 
 
A locked-in cost is a(n):   
C) 
 
cost that has not yet been incurred, but based on decisions that have already been made, will be incurred in the future   
188) 
 
Under the cost-plus approach to pricing products, all of the following are prospective cost bases except for:   
B) 
 
target cost  

Chapter 13   
 
Strategy, Balanced Scorecard, and Strategic Profitability Analysis
 
1) 
 
Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives..   
2) 
 
One of the five forces of industry analysis is understanding the bargaining power of your customers..  
3) 
 
One of the two basic strategies is achieving market leadership.  
4) 
 
A product differentiation strategy includes offering unique and superior products for increased prices..   
5) 
 
The cost leadership strategy is for products and services that are similar to competitor's products and services..   
6) 
 
The product differentiation strategy is probably best for a company if the engineering staff is more skilled at making process improvements than at creatively designing new products.   
7) 
 
In general, profit potential increases with greater competition, stronger potential entrants, products that are similar, and tougher customers and suppliers.   
8) 
 
Reengineering is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction..   
9) 
 
Reengineering benefits are most significant when they focus on one business function rather than crossing functional lines of the business process.   
10) 
 
Successful reengineering efforts generally involve changing the roles and responsibilities of employees..   
11) 
 
The balanced scorecard translates an organization's mission and strategy into a set of performance measures that provides the framework for implementing its strategy..  
12) 
 
The balanced scorecard uses only financial performance measures to evaluate short-run and long-run performance.  
13) 
 
The primary purpose of the balanced scorecard is to obtain increased operating profits for the current year.   
14) 
 
To achieve success, it is important to set nonfinancial objectives as well as financial objectives..   
15) 
 
One valuable measure of the customer perspective of the balanced scorecard is market share..   
16) 
 
The learning and growth perspective of the balanced scorecard evaluates the profitability of the strategy.   
17) 
 
Employee satisfaction is a measure of the internal business perspective of the balanced scorecard.   
18) 
 
The customer perspective of the balanced scorecard identifies targeted customers and market segments and measures the company's success in these segments..  
19) 
 
The customer perspective under the balanced scorecard approach would include measures on cost reduction.   
20) 
 
When implementing a balanced scorecard, the cause-and-effect linkages are always precise.   
21) 
 
When evaluating managers and employees under the balanced scorecard approach, only financial measures should be considered.   
22) 
 
An increase of operating income from one year to the next indicates a company's strategy was successful.   
23) 
 
To evaluate the success of its strategy, a company can subdivide the change in operating income into growth, price-recovery, and productivity components..   
24) 
 
The productivity component of operating income focuses exclusively on revenues.   
25) 
 
The price-recovery component measures the increase in operating income from selling more units of a product.   
26) 
 
Companies that have been successful at cost leadership will show large favorable price-recovery and growth components when analyzing profitability.   
27) 
 
The price-recovery component of a change in operating income from one year to the next measures the increase in operating income from selling more units of the product.   
28) 
 
The price-recovery component of a change in operating income measures the effect of price changes on revenues and costs..  
29) 
 
Unused capacity is the amount of productive capacity available over and above the productive capacity employed to meet customer demand in the current period..  
30) 
 
Engineered costs have no measurable cause-and-effect relationship between output and resources used.   
31) 
 
Discretionary costs arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred..   
32) 
 
Engineered costs contain a higher level of uncertainty than discretionary costs.   
33) 
 
Engineered costs may be variable or fixed in the short run..   
34) 
 
Research and development cost is an example of an engineered cost.   
35) 
 
It is relatively easy to identify unused capacity for discretionary costs.   
36) 
 
One way to eliminate unused capacity is to downsize..   
37) 
 
Downsizing discretionary costs is easier than downsizing engineered costs.   
38) 
 
Downsizing often means eliminating jobs, which can have an adverse effect on employee morale..   
39) 
 
Productivity measures the relationship between actual inputs used (both quantities and costs) and standard outputs produced.   
40) 
 
Partial productivity equals quantity of output produced divided by quantity of individual input used..   
41) 
 
Total factor productivity (TFP) is the ratio of the quantity of output produced to the costs of all inputs used, where the inputs are combined on the basis of current period prices..   
42) 
 
Although total factor productivity (TFP) measures are comprehensive, operations personnel find financial TFP measures more difficult to understand and less useful than physical partial productivity measures in performing their tasks..   
43) 
 
________ describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives.   
A) 
 
Strategy   
44) 
 
In general, profit potential ________ with greater competition, stronger potential entrants, products that are similar, and more-demanding customers and suppliers.  
C) 
 
decreases  
45) 
 
Which of the following is NOT a force that shapes an organization's profit potential?   
A) 
 
Competitors   
B) 
 
Equivalent products   
C) 
 
Bargaining power of input suppliers   
46) 
 
Which of the following is a force that shapes an organization's profit potential?  
B) 
 
Potential entrants into the market  
47) 
 
________ is an organization's ability to offer products or services that are perceived by its customers as being superior and unique relative to those of its competitors.   
B) 
 
Product differentiation   
48) 
 
________ is an organization's ability to achieve low costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control.   
C) 
 
Cost leadership   
49) 
 
An organization that is using the product differentiation approach would:   
B) 
 
carefully cultivate their brands   
50) 
 
An organization that is using the cost leadership approach would:   
C) 
 
focus on productivity through efficiency improvements   
51) 
 
________ is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed, and customer satisfaction.   
D) 
 
Reengineering   
52) 
 
Successful reengineering involves:   
A) 
 
cutting across functional lines to focus on the entire business process   
B) 
 
redefining the roles and responsibilities of employees   
C) 
 
using information technology   
53) 
 
The balanced scorecard measures an organization's performance from all of the following perspectives EXCEPT:  
B) 
 
government  
54) 
 
________ translates an organization's mission and strategy into a comprehensive set of performance measures that provide the framework for implementing its strategy.   
D) 
 
The balanced scorecard   
55) 
 
The purpose of the balanced scorecard is BEST described as helping an organization:   
D) 
 
translate an organization's mission and strategy into a set of performance measures that help to implement the strategy   
56) 
 
The FIRST step to successful balanced scorecard implementation is clarifying the:   
A) 
 
organization's vision and strategy   
57) 
 
The balanced scorecard is said to be "balanced" because it measures:   
A) 
 
short-term and long-term objectives   
B) 
 
financial and nonfinancial objectives   
C) 
 
internal and external objectives   
58) 
 
Balanced scorecard objectives are in balance when:   
B) 
 
financial performance measurements are less than the majority of measurements   
59) 
 
The internal business processes perspective of the balanced scorecard comprises three subprocesses that address all of the following EXCEPT:   
B) 
 
motivating current employees   
60) 
 
Identify the BEST description of the balanced scorecard's financial perspective. To achieve our firm's vision and strategy:  
B) 
 
how can we increase shareholder value?   
61) 
 
Identify the BEST description of the balanced scorecard's internal business processes perspective. To achieve our firm's vision and strategy:  
D) 
 
what processes will increase value to customers?   
62) 
 
All of the following relate to the balanced scorecard's learning and growth perspective EXCEPT:   
B) 
 
What new products do we create?   
63) 
 
Measures of the balanced scorecard's financial perspective include:  
C) 
 
revenue growth  
64) 
 
Measures of the balanced scorecard's financial perspective include all of the following EXCEPT:  
B) 
 
customer satisfaction  
65) 
 
Measures of the balanced scorecard's customer perspective include:   
A) 
 
market share   
66) 
 
Measures of the balanced scorecard's customer perspective include all of the following EXCEPT:  
D) 
 
customer training on new products  
67) 
 
Measures of the balanced scorecard's internal-business-process perspective include:  
B) 
 
new product development time  
68) 
 
Measures of the balanced scorecard's internal-business-process perspective include all of the following EXCEPT:  
C) 
 
employee turnover rates  
69) 
 
Measures of the balanced scorecard's learning-and-growth perspective include:  
A) 
 
employee satisfaction ratings  
70) 
 
Measures of the balanced scorecard's learning-and-growth perspective include all of the following EXCEPT:  
D) 
 
time taken to replace defective products  
71) 
 
Which of the following is NOT true of a good balanced scorecard?   
C) 
 
It identifies all measures, whether significant or small, that help to implement strategy.   
72) 
 
Which of the following is NOT true of the balanced scorecard?   
C) 
 
Only objective measures should be used and subjective measures should be avoided.   
73) 
 
The return-on-investment ratio is an example of a balanced-scorecard measure of the:   
D) 
 
financial perspective   
74) 
 
The number of complaints about a product is an example of a balanced-scorecard measure of the:   
B) 
 
customer perspective   
75) 
 
Manufacturing cycle efficiency is an example of a balanced-scorecard measure of the:   
A) 
 
internal business process perspective   
76) 
 
Surveys of employee satisfaction is an example of a balanced-scorecard measure of the:   
C) 
 
learning and growth perspective   
Answer the following questions using the information below:

Stewart Corporation plans to grow by offering a sound system, the SS3000, that is superior and unique from the competition. Stewart believes that putting additional resources into R&D and staying ahead of the competition with technological innovations is critical to implementing its strategy.
  
77) 
 
Stewart's strategy is:   
A) 
 
product differentiation   
78) 
 
To further company strategy, measures on the balanced scorecard would MOST likely include:   
B) 
 
manufacturing quality   
Answer the following questions using the information below:

Riter Corporation manufactures water toys. It plans to grow by producing high-quality water toys at a low cost that are delivered in a timely manner. There are a number of other manufacturers who produce similar water toys. Riter believes that continuously improving its manufacturing processes and having satisfied employees are critical to implementing its strategy.
  
79) 
 
Riter's strategy is:   
D) 
 
cost leadership   
80) 
 
To further company strategy, measures on the balanced scorecard would MOST likely include:   
A) 
 
number of process improvements   
81) 
 
Managers need to evaluate the success of a strategy by:  
C) 
 
linking the sources of operating-income increases to the strategy  
82) 
 
Which component of strategy measures the changes in operating income attributed solely to an increase in the quantity of output between Year 1 and Year 2?   
A) 
 
the growth component   
83) 
 
Which component of strategy measures the change in operating income attributable solely to changes in a company's profit margins between Year 1 and Year 2?   
B) 
 
the price-recovery component   
84) 
 
Which component of strategy measures the reduction in costs attributable to a reduction in the quantity of inputs used in Year 2 relative to the quantity of inputs that would have been used in Year 1 to produce the Year 2 output?   
C) 
 
the productivity component   
85) 
 
When analyzing the change in operating income, the strategy component of growth:   
D) 
 
isolates the change attributed solely to an increase in the quantity of units sold   
86) 
 
When analyzing the change in operating income, the strategy component of price-recovery:   
B) 
 
compares the change in output price with the changes in input prices   
87) 
 
When analyzing the change in operating income, the strategy component of productivity:   
C) 
 
will report a large positive amount when a company has successfully pursued the cost leadership strategy   
88) 
 
When analyzing the change in operating income, the strategy component of growth will increase when:   
D) 
 
more units are sold   
89) 
 
When analyzing the change in operating income, the strategy component of price-recovery will increase when:   
C) 
 
selling prices are increased   
90) 
 
When analyzing the change in operating income, the strategy component of productivity will increase when:   
A) 
 
capacity is reduced   
91) 
 
Successful implementation of a cost leadership strategy will result in:   
C) 
 
large favorable productivity and growth components   
92) 
 
Successful implementation of a product differentiation strategy will result in:  
A) 
 
a large favorable growth and price-recovery components  
93) 
 
The revenue effect of growth is calculated by multiplying the difference in units sold (current year minus the previous year) by ________.  
B) 
 
selling price in the previous year  
94) 
 
The revenue effect of price recovery is calculated by multiplying the difference in selling price (current year minus the previous year) by ________.  
A) 
 
actual units sold in the current year  
95) 
 
An operating income analysis of Sara McCullough Incorporated revealed the following: 

  Operating income for 2005  $500,000
  Add growth component  25,000
  Deduct price-recovery component  (15,000)
  Add productivity component  60,000
  Operating income for 2006  $570,000

McCullough's operating income gain is consistent with the:   
D) 
 
cost leadership strategy   
96) 
 
An operating income analysis of Deb Schmidt Incorporated revealed the following: 

  Operating income for 2005  $500,000
  Add growth component  15,000
  Add price-recovery component  100,000
  Deduct productivity component  (8,000)
  Operating income for 2006  $607,000

Schmidt's operating income gain is consistent with the:   
A) 
 
product differentiation strategy   
Answer the following questions using the information below:

Bugos Company makes a household appliance with model number XX300. The goal for 20X4 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of XX300 units that can be produced. The industry market size for appliances increased 5% from 20X3 to 20X4. The following additional data are available for 20X3 and 20X4:

  20X3  20X4
  Units of XX300 produced and sold  10,000  10,500
  Selling price  $100  $95
  Direct materials (square feet)  30,000  29,000
  Direct material costs per square foot  $10  $11
  Manufacturing capacity for XX300 (units)  12,500  12,000
  Total conversion costs  $250,000  $240,000
  Conversion costs per unit of capacity  $20  $20
  
97) 
 
What is operating income for 20X3?   
A) 
 
$450,000   
98) 
 
What is operating income for 20X4?   
C) 
 
$438,500   
99) 
 
Which strategy is Bugos Corporation pursuing?   
D) 
 
Cost leadership, because the selling price decreased.   
100) 
 
Overall, was Bugos' strategy successful in 20X4?   
B) 
 
No, because operating income decreased.   
Answer the following questions using the information below:

Bugos Company makes a household appliance with model number XX300. The goal for 20X4 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of XX300 units that can be produced. The industry market size for appliances increased 5% from 20X3 to 20X4. The following additional data are available for 20X3 and 20X4:

  20X3  20X4
  Units of XX300 produced and sold  10,000  10,500
  Selling price  $100  $95
  Direct materials (square feet)  30,000  29,000
  Direct material costs per square foot  $10  $11
  Manufacturing capacity for XX300 (units)  12,500  12,000
  Total conversion costs  $250,000  $240,000
  Conversion costs per unit of capacity  $20  $20
  
101) 
 
What is the revenue effect of the growth component?   
D) 
 
$50,000 F   
102) 
 
What is the cost effect of the growth component for direct materials?   
A) 
 
$15,000 U   
103) 
 
What is the cost effect of the growth component for conversion costs?   
B) 
 
Zero   
104) 
 
What is the net effect on operating income as a result of the growth component?   
C) 
 
Operating income increased due to industry growth.   
Answer the following questions using the information below:

Bugos Company makes a household appliance with model number XX300. The goal for 20X4 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of XX300 units that can be produced. The industry market size for appliances increased 5% from 20X3 to 20X4. The following additional data are available for 20X3 and 20X4:

  20X3  20X4
  Units of XX300 produced and sold  10,000  10,500
  Selling price  $100  $95
  Direct materials (square feet)  30,000  29,000
  Direct material costs per square foot  $10  $11
  Manufacturing capacity for XX300 (units)  12,500  12,000
  Total manufacturing conversion costs  $250,000  $240,000
  Manufacturing conversion costs per unit of capacity  $20  $20
  
105) 
 
What is the revenue effect of the price-recovery component?   
B) 
 
$52,500 U   
106) 
 
What is the cost effect of the price-recovery component?   
D) 
 
$31,500 U   
107) 
 
What is the net effect on operating income as a result of the price-recovery component?   
A) 
 
decreased operating income due to decreased selling price and inability to recover increased costs   
108) 
 
What is the net effect on operating income as a result of the productivity component?   
C) 
 
increased operating income due to direct material efficiencies and capacity reduction   
Answer the following questions using the information below:

Following a strategy of product differentiation, Lucas Company makes a high-end Appliance, AP15. Lucas Company presents the following data for the years 20X3 and 20X4:

  20X3  20X4
  Units of AP15 produced and sold  20,000  21,000
  Selling price  $200  $220
  Direct materials (square feet)  60,000  61,500
  Direct materials costs per square foot  $20  $22
  Manufacturing capacity in units of AP15  25,000  25,000
  Total conversion costs  $1,000,000  $1,110,000
  Conversion costs per unit of capacity  $40  $44
  Selling and customer-service capacity (customers)  60  58
  Total selling and customer-service costs  $360,000  $362,500
  Selling and customer-service capacity cost per customer  $6,000  $6,250

Lucas Company produces no defective units but it wants to reduce direct materials usage per unit of AP15 in 20X4. Manufacturing conversion costs in each year depend on production capacity defined in terms of AP15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Lucas Company has 46 customers in 20X3 and 50 customers in 20X4. The industry market size for high-end appliances increased 5% from 20X3 to 20X4.
  
109) 
 
What is operating income for 20X3?   
C) 
 
$1,440,000   
110) 
 
What is operating income in 20X4?   
B) 
 
$1,804,500   
111) 
 
What is the change in operating income from 20X3 to 20X4?   
C) 
 
$364,500 F   
112) 
 
What is the revenue effect of the growth component?   
D) 
 
$200,000 F   
113) 
 
What is the cost effect of the growth component?   
A) 
 
$60,000 U   
114) 
 
What is the net effect on operating income as a result of the growth component?   
B) 
 
$140,000 F   
115) 
 
What is the revenue effect of the price-recovery component?   
B) 
 
$420,000 F   
116) 
 
What is the cost effect of the price-recovery component?   
C) 
 
$241,000 U   
117) 
 
What is the net effect on operating income as a result of the price-recovery component?   
A) 
 
$179,000 F   
118) 
 
What is the net effect on operating income as a result of the productivity component?   
B) 
 
$45,500 F   
119) 
 
An analysis of Ragan, Inc.'s operating income for the last two years showed the following:

Operating income for 2005  $600,000
Add growth component  15,000
Add price-recovery component  100,000
Deduct productivity component  (8,000)
Operating income for 2006  $707,000

This gain in operating income is consistent with a:   
C) 
 
product differentiation strategy   
120) 
 
Engineered costs:   
D) 
 
include a high level of certainty   
121) 
 
Discretionary costs:   
B) 
 
include advertising and executive training costs   
122) 
 
A high level of uncertainty is represented in:   
B) 
 
discretionary costs   
123) 
 
A high level of precision between resources used and output produced exists with:   
A) 
 
engineered costs   
124) 
 
Discretionary costs:   
D) 
 
are usually large total amounts   
125) 
 
Engineered costs:   
C) 
 
are from physically observable activities   
126) 
 
Conversion costs are an example of ________.  
B) 
 
indirect engineered costs  
127) 
 
Managers can reduce capacity-based fixed costs  by measuring and managing ________.  
A) 
 
unused capacity  
128) 
 
Unused capacity is difficult to determine for:   
B) 
 
discretionary costs   
129) 
 
To effectively deal with unused capacity a company:   
D) 
 
Both A and B are correct.   
130) 
 
Downsizing:   
D) 
 
All of these answers are correct.   
131) 
 
Rightsizing is another term for:  
B) 
 
downsizing  
132) 
 
What actions can management take when unused capacity is identified?  
A) 
 
eliminate the unused capacity  
B) 
 
attempt to grow to utilize the unused capacity  
133) 
 
The lower the inputs for a given set of outputs or the higher the outputs for a given set of inputs, the higher the level of:   
C) 
 
productivity   
134) 
 
Yield variances:   
B) 
 
address the productivity of a single component of one factor of production   
135) 
 
Partial productivity multiplied by the quantity of input used results in:   
C) 
 
actual output   
136) 
 
________ measures the relationship between actual inputs used and actual outputs achieved.   
C) 
 
Productivity   
137) 
 
________ compares the quantity of output produced with the quantity of a single input used.   
B) 
 
Partial productivity   
138) 
 
Frazier Company provided the following information:
  Budgeted input  19,500  gallons
  Actual input  17,900  gallons
  Budgeted production  20,000  units
  Actual production  19,000  units 

What is the partial productivity ratio?   
C) 
 
1.06 units per gallon   
139) 
 
Germaine Company provided the following information:
  Budgeted input  9,750  gallons
  Actual input  8,950  gallons
  Budgeted production  10,000  units
  Actual production  9,500  units 

What is the partial productivity ratio?   
C) 
 
1.06 units per gallon   
140) 
 
Melik Company provided the following information:
  Budgeted input  12,000  gallons
  Actual input  15,000  gallons
  Budgeted production  5,000  units
  Actual production  4,750  units 

What is the partial productivity ratio?   
A) 
 
0.32 units per pound   
141) 
 
Which of the following statements is TRUE?   
B) 
 
Productivity has increased when the partial productivity is high.   
142) 
 
What is the direct manufacturing labor partial productivity, assuming 20,000 widgets were produced during 20X1 and 80,000 direct manufacturing labor-hours were used?   
A) 
 
0.25 unit per direct manufacturing labor-hour   
143) 
 
What is the direct manufacturing labor partial productivity, assuming 10,000 units were produced during 20X1 and 40,000 direct manufacturing labor-hours were used?   
A) 
 
0.25 unit per direct manufacturing labor-hour   
144) 
 
What terms describe the relationship between different quantities of inputs consumed and the quantities of output produced?   
B) 
 
production technology or production function   
145) 
 
Total factor productivity will increase if:   
A) 
 
technical productivity occurs   
146) 
 
One problem with total factor productivity revolves around which of the following?   
A) 
 
the measurement of combined productivity of all inputs   
147) 
 
________ is the ratio of the quantity of output produced to the costs of all inputs used, where the inputs are combined on the basis of current period prices.   
A) 
 
Total factor productivity   
148) 
 
The partial productivity of overhead resources can be measured by considering the cost driver as:   
D) 
 
the numerator   
149) 
 
Which of the following statements about productivity measures is FALSE?   
C) 
 
The productivity measure may not be made for companies with multiple products.   
150) 
 
The average number of student credit hours taught per faculty member is an example of a(n):   
D) 



 
partial productivity measure 





 
Chapter 14   
 
Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis
 
1) 
 
Indirect costs are costs that cannot be traced to cost objects in an economically feasible way..   
2) 
 
To motivate engineers to design simpler products, costs for production, distribution, and customer service may be included in product-cost estimates..   
3) 
 
One of the purposes of allocating indirect costs is to justify costs or compute reimbursement amounts..  
4) 
 
For external reporting, inventoriable costs under GAAP sometimes include R&D costs.   
5) 
 
To allocate a cost, it must satisfy all four purposes for which costs are allocated.   
6) 
 
Today, companies are simplifying their cost systems and moving toward less-detailed and less-complex cost allocation bases.   
7) 
 
Using the benefits received criterion, the costs are allocated among the beneficiaries in proportion to the benefits each receives..  
8) 
 
Under the fairness criterion, cost allocation is not viewed as a reasonable means of establishing a selling price.  
9) 
 
When using the cause-and-effect criterion, cost drivers are selected as the cost allocation bases..   
10) 
 
The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation.   
11) 
 
The benefits of implementing a more-complex cost allocation system are relatively easy to quantify for application of the cost-benefit approach.   
12) 
 
Each company must decide which corporate cost categories should be included in the indirect costs of the divisions  all, only a subset, or none..   
13) 
 
Full allocation of corporate costs to divisions is justified when the notion of controllability is applied.   
14) 
 
Companies that want to calculate the full cost of products must allocate all corporate costs to indirect-cost pools of divisions..  
15) 
 
When there is a lesser degree of homogeneity, fewer cost pools are required to accurately explain the use of company resources.   
16) 
 
If a cost pool is homogeneous, the cost allocations using that pool will be the same as they would be if costs of each individual activity in that pool were allocated separately..   
17) 
 
Facility-sustaining costs do not have a cause-and-effect relationship with individual products..   
18) 
 
An individual cost item can be simultaneously a direct cost of one cost object and an indirect cost of another cost object..   
19) 
 
A homogenous cost pool has costs that have similar cause-and-effect relationships with the cost-allocation base..   
20) 
 
Once a cost pool has been established, it should not need to be revisited or revised.   
21) 
 
All customers are equally important to a company and should receive equal levels of attention.   
22) 
 
The purpose of price discounting is to encourage increases in customer purchases..   
23) 
 
Price discounts must be uniform among all customers.  
24) 
 
There are two elements that influence customer profitability  revenues and costs..   
25) 
 
Companies that only record the invoice price can usually track the magnitude of price discounting.   
26) 
 
A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of using only one cost driver.   
27) 
 
An activity-based costing system may focus on customers rather than products..   
28) 
 
A customer cost hierarchy may include customer-sustaining costs..  
29) 
 
A customer cost hierarchy may include distribution-channel costs..   
30) 
 
The cost of visiting customers is an example of a customer output unit-level cost.   
31) 
 
In general, distribution-channel costs are more easily influenced by customer actions than customer batch-level costs.   
32) 
 
If one of four distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most likely be reduced by 25%.   
33) 
 
To more accurately assess customer profitability, corporate-sustaining costs should be allocated.   
34) 
 
The higher the likely growth of the customer's industry and the customer's sales, the more valuable the customer..  
35) 
 
It is common to find that a small number of customers generate a high percentage of operating income..   
36) 
 
Managers who utilize customer profitability charts should drop customers that generate a negative customer operating income, since dropping an unprofitable customer will automatically cause overall income to increase.   
37) 
 
It is possible that the largest customer in terms of revenue is not the most profitable customer..   
38) 
 
The static-budget variance is the difference between an actual result and a budgeted amount in the static budget..   
39) 
 
The flexible-budget variance is the difference between an actual result and the flexible-budget amount based on the level of output actually achieved in the budget period..   
40) 
 
Managers can gain more insight about the static-budget variance by subdividing it into the flexible-budget variance and the sales-volume variance..  
41) 
 
Additional insight can be gained by dividing the sales-mix variance into the flexible-budget variance and the sales-volume variance.   
42) 
 
A favorable sales-mix variance arises when the actual sales-mix percentage is less than the budgeted sales-mix percentage.   
43) 
 
A composite unit is a hypothetical unit with weights based on the mix of individual units..   
44) 
 
The sales-mix variance can be explained in terms of the budgeted contribution margin per composite unit of the sales mix..   
45) 
 
The sales-quantity variance is favorable when budgeted unit sales exceed actual unit sales.   
46) 
 
The sales mix variance is the difference between budgeted contribution margin for the actual sales mix and the budgeted contribution margin for the budgeted sales mix..   
47) 
 
The sales quantity variance is the difference between budgeted contribution margin based on actual units sold of all products at the budgeted mix, and contribution margin in the flexible budget.   
48) 
 
The market-share variance is caused solely by the actual market share being different than the budgeted market share..   
49) 
 
A favorable market-size variance results with a decrease in market size.   
50) 
 
The flexible-budget variance can be further divided into the sales-mix variance and the sales-quantity variance.   
51) 
 
The market share variance is the difference in budgeted contribution margin for actual market size in units caused solely by the actual market share being different from the budgeted market share..   
52) 
 
The market size variance is the difference in budgeted contribution margin at budgeted market share caused solely by actual market size in units being different from budgeted market size in units..   
53) 
 
A difficulty with the market share and market size variances is that accurate measures of market share and market size often do not exist..   
54) 
 
The direct materials mix variance is the sum of the direct materials mix variances for each input..   
55) 
 
An unfavorable direct materials mix variance results when cheaper direct materials are substituted for more expensive direct materials.   
56) 
 
A favorable direct materials yield variance results when less direct materials are used than planned..   
57) 
 
Costs which are not economically feasible to trace but which are related to a cost object are known as:   
A) 
 
fixed costs   
B) 
 
direct costs   
C) 
 
indirect costs   
 
58) 
 
Any item for which a separate measurement of cost is desired is known as:   
B) 
 
a cost object   
59) 
 
Indirect costs:   
A) 
 
often comprise a large percentage of overall costs assigned to a cost object   
60) 
 
All of the following illustrate purposes for allocating costs to cost objects EXCEPT to:   
C) 
 
determine a selling price the market will bear   
61) 
 
Which of the following illustrates a purpose for allocating costs to cost objects?  
A) 
 
to motivate managers and employees  
62) 
 
The costs of all six value-chain functions should be included when determining:   
A) 
 
whether to add a new product line   
B) 
 
the selling price of a service   
C) 
 
whether to make or buy a component part from another manufacturer   
63) 
 
R&D costs are used for which purpose of cost allocation?   
A) 
 
to provide information for economic decisions   
64) 
 
Which purpose of cost allocation is used to encourage sales representatives to push high-margin products or services?   
B) 
 
to motivate managers and other employees   
65) 
 
Which purpose of cost allocation is used to decide on the selling price for a customized product or service?   
A) 
 
to provide information for economic decisions   
66) 
 
Which purpose of cost allocation is used to cost products at a "fair" price?  
C) 
 
to justify costs or compute reimbursement  
67) 
 
Which purpose of cost allocation is used to cost inventories for reporting to tax authorities?  
D) 
 
to measure income and assets for reporting to external parties  
68) 
 
When the purpose of cost allocation is to provide information for economic decisions or to motivate managers and employees, the best criteria are:  
B) 
 
the cause-and-effect and the benefits-received criteria  
69) 
 
ABC systems use the concept of a ________ to identify the cost drivers that best demonstrate the cause-and-effect relationship between each activity and the costs in the related cost pool.  
A) 
 
cost hierarchy  
70) 
 
To guide cost allocation decisions, the cause-and-effect criterion:   
B) 
 
is the primary criterion used in activity-based costing   
71) 
 
To guide cost allocation decisions, the benefits-received criterion:  
D) 
 
may use an allocation base of division revenues to allocate advertising costs   
72) 
 
To guide cost allocation decisions, the fairness or equity criterion is:   
A) 
 
the criterion often cited in government contracts   
73) 
 
To guide cost allocation decisions, the ability to bear criterion:   
C) 
 
results in subsidizing products that are not profitable   
74) 
 
Which cost-allocation criterion is appropriate when making an economic decision?   
A) 
 
the fairness or equity criterion   
B) 
 
the ability to bear criterion   
C) 
 
the cause-and-effect criterion   
75) 
 
Which cost-allocation criterion is MOST likely to subsidize poor performers at the expense of the best performers?   
C) 
 
the ability to bear criterion   
76) 
 
A challenge to using cost-benefit criteria for allocating costs is that:   
B) 
 
the benefits of making better-informed pricing decisions are difficult to measure   
77) 
 
Corporate overhead costs can be allocated:   
A) 
 
using a single cost pool   
B) 
 
to divisions using one cost pool and then reallocating costs to products using multiple cost pools   
C) 
 
using numerous individual corporate cost pools   
78) 
 
The MOST likely reason for allocating all corporate costs to divisions include that:   
B) 
 
divisions receive benefits from all corporate costs   
79) 
 
The MOST likely reason for NOT allocating corporate costs to divisions include that:   
A) 
 
these costs are not controllable by division managers   
80) 
 
Some companies only allocate corporate costs to divisions that are:   
C) 
 
perceived as causally related to division activities   
81) 
 
Which is the preferred allocation method for performance evaluation?  
C) 
 
allocating controllable costs  
82) 
 
Not allocating some corporate costs to divisions and products results in:   
C) 
 
the sum of individual product profitability being greater than overall company profitability   
83) 
 
The greater the degree of homogeneity, the:  
B) 
 
fewer the number of needed cost pools   
84) 
 
When individual activities within a cost pool have a similar relationship with the cost driver, those costs:   
C) 
 
are considered a homogeneous cost pool   
85) 
 
Homogeneous cost pools lead to:   
A) 
 
more accurate costs of a given cost object   
86) 
 
Identifying homogeneous cost pools:   
A) 
 
requires judgment and should be reevaluated on a regular basis   
B) 
 
should include the input of management   
C) 
 
should include a cost-benefit analysis   
87) 
 
To allocate corporate costs to divisions, the allocation base used should:   
B) 
 
have the best cause-and-effect relationship with the costs   
88) 
 
Corporate administrative costs allocated to a division cost pool are MOST likely to be:   
B) 
 
facility-sustaining costs   
89) 
 
To manage setup costs, a corporation might focus on the:  
A) 
 
number of setup-hours   
C) 
 
batch-level costs incurred per setup-hour   
Answer the following questions using the information below:

The Hassan Corporation has an Electric Mixer Division and an Electric Lamp Division. Of a $20,000,000 bond issuance, the Electric Mixer Division used $14,000,000 and the Electric Lamp Division used $6,000,000 for expansion. Interest costs on the bond totaled $1,500,000 for the year.
  
90) 
 
What amount of interest costs should be allocated to the Electric Mixer Division?   
B) 
 
$1,050,000   
91) 
 
What amount of interest costs should be allocated to the Electric Lamp Division?   
A) 
 
$450,000   
B) 
 
$1,050,000   
C) 
 
$4,200,000   
D) 
 
$6,000,000   
Answer:  
 
A  
Explanation:  
 
A) 
 
$6,000,000 / $20,000,000 × $1,500,000 = $450,000   
Diff: 2  
Terms:  
 
cost allocation  
Objective:  
 
3  
AACSB:  
 
Analytical skills
 
92) 
 
The above interest costs would be considered a(n):   
C) 
 
product-sustaining cost   
93) 
 
Which corporate costs should be allocated to divisions?  
D) 
 
both fixed and variable costs  
94) 
 
Customers making large contributions to the profitability of the company should:   
B) 
 
receive a higher level of attention from the company than less profitable customers   
95) 
 
Price discounts are influenced by:   
A) 
 
the volume of product purchased   
B) 
 
a desire to sell to a customer in an area with high-growth potential   
C) 
 
negotiating skills of the sales person   
96) 
 
Price discounts should never be viewed as:  
A) 
 
price discrimination  
B) 
 
predatory pricing  
C) 
 
collusive pricing  
D) 
 
unethical  
97) 
 
Customer revenues and ________ are the determinants of customer profitability  
B) 
 
customer costs  
98) 
 
To improve customer profitability, companies should track:   
B) 
 
the volume of the products purchased by each customer   
C) 
 
discounts taken by each customer   
99) 
 
To improve customer profitability, companies should:   
B) 
 
track discounts by customer   
C) 
 
track discounts by sales person   
100) 
 
A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different:   
A) 
 
types of cost drivers   
B) 
 
benefits-received relationships   
C) 
 
levels of cause-and-effect relationships   
101) 
 
Costs incurred to process orders would MOST likely be classified as a:   
B) 
 
customer batch-level cost   
102) 
 
Top management and general administration costs would MOST likely be classified as a:   
D) 
 
corporate-sustaining cost   
103) 
 
The cost of visiting customers would MOST likely be classified as a:   
C) 
 
customer-sustaining cost   
104) 
 
Costs incurred to handle each unit sold would MOST likely be classified as a:   
A) 
 
customer output unit-level cost   
105) 
 
The cost of the manager of a retail distribution channel would MOST likely be classified as a:  
B) 
 
distribution-channel cost  
106) 
 
Which item is NOT a category in the customer cost hierarchy?  
A) 
 
customer output unit-level costs  
B) 
 
customer batch-level costs  
C) 
 
distribution-channel costs  
D) 
 
corporate-sustaining costs  
107) 
 
________ categorizes costs related to customers into different cost pools on the basis of either different classes of cost drivers or different degrees of difficulty in determining the cause-and-effect (or benefits-received) relationships.   
C) 
 
Customer cost hierarchy   
108) 
 
In analyzing customer-level indirect costs, which category of the customer-cost hierarchy would you NOT consider?  
A) 
 
distribution-channel costs  
109) 
 
An advantage of using a bar chart to visualize customer profitability is that:   
B) 
 
loss customers stand out   
110) 
 
Customer actions will LEAST affect:   
D) 
 
distribution-channel costs   
111) 
 
To reduce distribution-channel costs, a company could:   
C) 
 
eliminate distribution to retailers and only service wholesalers   
112) 
 
Corporate-sustaining costs:   
A) 
 
are common to all individual customers   
113) 
 
The allocation of corporate-sustaining costs is useful for:   
A) 
 
evaluating the performance of salespersons with individual customer accounts   
B) 
 
motivating distribution-channel management   
C) 
 
focusing on the cause-and-effect relationships with the cost-allocation bases   
D) 
 
None of these answers is correct.   
114) 
 
If deciding whether to eliminate a distribution channel, allocating corporate-sustaining costs to distribution channels:  
B) 
 
gives the misleading impression of potential cost savings   
115) 
 
When corporate-sustaining costs are fully allocated to distribution channels, then the sum of the distribution-channel operating incomes is:   
B) 
 
equal to company-wide operating income   
116) 
 
Corporate-sustaining costs should be allocated to:   
C) 
 
determine the selling price that will cover all costs   
117) 
 
A common finding in many studies is that a high percentage of operating income is:   
A) 
 
contributed by a small number of customers   
118) 
 
Loss-causing customers:   
B) 
 
should be evaluated for ways to become profitable customers   
119) 
 
Customers are more valuable when they are all of the following EXCEPT:   
D) 
 
require special attention on a regular basis   
120) 
 
Dropping an unprofitable customer will:   
B) 
 
eliminate most short-run costs assigned to that customer   
121) 
 
Other factors that managers should consider in deciding how to allocate resources among customers include:  
A) 
 
likelihood of customer retention  
B) 
 
long-run customer profitability  
C) 
 
potential for sales growth  
D) 
 
ability to learn from customers  
122) 
 
The static budget variance is:  
A) 
 
the difference between an actual result and the budget amount in the static budget  
123) 
 
More insight into the static-budget variance can be gained by subdividing it into:   
C) 
 
the flexible-budget variance and the sales-volume variance   
124) 
 
The static-budget variance will be favorable when:   
B) 
 
the actual contribution margin is greater than the static-budget contribution margin   
125) 
 
More insight into the sales-volume variance can be gained by subdividing it into:   
A) 
 
the sales-mix variance and the sales-quantity variance   
126) 
 
The budgeted contribution margin per composite unit for the budgeted mix can be computed by dividing the:   
B) 
 
total budgeted contribution margin by the total budgeted units   
127) 
 
The sales-mix variance results from a difference between the:   
C) 
 
budgeted contribution margin per composite unit for the actual mix and the budgeted contribution margin per composite unit for the budgeted mix   
128) 
 
The sales-mix variance will be unfavorable when:   
A) 
 
the actual sales mix shifts toward the less profitable units   
129) 
 
The sales-mix variance will be favorable when:   
D) 
 
the composite unit for the actual mix is greater than for the budgeted mix   
130) 
 
An unfavorable sales-mix variance would MOST likely be caused by:   
A) 
 
a new competitor providing better service in the high-margin product sector   
131) 
 
A shift towards a mix of products with a lower contribution margin per unit will MOST likely result in a(n):   
A) 
 
unfavorable sales-mix variance   
132) 
 
The sales-quantity variance will be favorable when:  
B) 
 
actual units of all products sold exceed budgeted units of all products sold  
133) 
 
The sales-quantity variance will be unfavorable when:   
B) 
 
actual unit sales are less than budgeted unit sales   
134) 
 
A favorable sales-quantity variance would MOST likely be caused by:   
B) 
 
a competitor having distribution problems with high-margin products   
135) 
 
The formula, (Actual sales quantity in units - Static budget sales quantity in units) x Budgeted contribution margin per unit, is equal to the:   
A) 
 
sales-volume variance   
136) 
 
The sales-quantity variance results from a difference between:   
B) 
 
the actual quantity of units sold and the budgeted quantity of unit sales in the static budget   
Answer the following questions using the information below:

Ceylon Tea Products has an exclusive contract with British Distributors. Calamine and Ceylon are two brands of teas that are imported and sold to retail outlets. The following information is provided for the month of March:

  Actual  Budget
  Calamine  Ceylon  Calamine  Ceylon
  Sales in pounds  1,700 lbs.  1,800 lbs.  2,000 lbs.  1,500 lbs
  Price per pound  $2.50  $2.50  $2.00  $3.00
  Variable cost per pound  1.00  2.00  1.00  1.50
  Contribution margin  $1.50  $0.50  $1.00  $1.50

Budgeted and actual fixed corporate-sustaining costs are $1,750 and $2,000, respectively.
  
137) 
 
What is the actual contribution margin for the month?   
D) 
 
$3,450   
138) 
 
What is the contribution margin for the flexible budget?   
B) 
 
$4,400   
139) 
 
For the contribution margin, what is the total static-budget variance?   
D) 
 
$800 unfavorable   
140) 
 
For the contribution margin, what is the total flexible-budget variance?   
B) 
 
$950 unfavorable   
Answer the following questions using the information below:

Edna's Flowering Plants provides the following information for the month of May:

  Actual  Budget
  Tulips  Geraniums  Tulips  Geraniums
  Sales in units  1,950  1,800  2,250  1,500
  Contribution margin per unit  $11  $18  $10  $20
  
141) 
 
What is the budgeted contribution margin per composite unit for the actual mix?   
D) 
 
$14.80   
142) 
 
What is the budgeted contribution margin per composite unit for the budgeted mix?   
B) 
 
$14.00   
143) 
 
For May, Edna will report a(n):   
A) 
 
favorable sales-mix variance   
Answer the following questions using the information below:

Edna's Flowering Plants provides the following information for the month of May:

  Actual  Budget
  Fuchsia  Dogwood  Fuchsia  Dogwood
  Sales in units  10,000  2,500  8,000  2,000
  Contribution margin per unit  $9  $7  $10  $8
  
144) 
 
What is the budgeted contribution margin per composite unit for the actual mix?   
D) 
 
$9.60   
145) 
 
What is the budgeted contribution margin per composite unit for the budgeted mix?   
D) 
 
$9.60   
146) 
 
For May, Edna will report a(n):   
C) 
 
favorable sales-volume variance   
Answer the following questions using the information below:

The XTRA Appliance Manufacturing Corporation manufactures two vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:

  Standard  Super
  Budgeted sales in units  3,200  800
  Budgeted selling price  $300  $850
  Budgeted contribution margin per unit  $210  $550
  Actual sales in units  3,500  1,500
  Actual selling price  $325  $840
  
147) 
 
What is the budgeted sales-mix percentage for the Standard and the Super vacuum cleaners, respectively?   
A) 
 
0.80 and 0.20   
148) 
 
What is the total sales-volume variance in terms of the contribution margin?   
D) 
 
$448,000 favorable   
149) 
 
What is the total sales-quantity variance in terms of the contribution margin?   
C) 
 
$278,000 favorable   
150) 
 
What is the total sales-mix variance in terms of the contribution margin?   
B) 
 
$170,000 favorable   
151) 
 
More insight into the sales-quantity variance can be gained by subdividing it into:   
B) 
 
the market-share variance and the market-size variance   
152) 
 
The market-share variance results from a difference between the:   
A) 
 
actual market share and the budgeted market share   
153) 
 
Which item is NOT used in the calculation of the market-share variance?  
D) 
 
actual sales mix percentage  
154) 
 
The market-share variance will be favorable when:   
B) 
 
the actual market share is greater than the budgeted market share   
155) 
 
The market-share variance is MOST influenced by:   
B) 
 
how well managers perform relative to their peers   
156) 
 
An unfavorable market-share variance would MOST likely be caused by:   
A) 
 
a competitor providing better service   
157) 
 
The market-size variance results from a difference between the:   
D) 
 
actual market size in units and the budgeted market size in units   
158) 
 
Which item is NOT used in the calculation of the market-size variance?  
A) 
 
actual market share  
159) 
 
The market-size variance will be unfavorable when:   
C) 
 
actual market size in units is less than budgeted market size in units   
160) 
 
A favorable market-size variance would MOST likely be caused by:   
B) 
 
an increase in overall market size   
161) 
 
Reliable information about market size and market share is available for:   
C) 
 
the automobile and television industries   
Answer the following questions using the information below:

Zorro Company manufactures remote control devices for garage doors. The following information was collected during June:

  Actual market size (units)  10,000
  Actual market share  32%
  Actual average selling price  $10.00
  Budgeted market size (units)  11,000
  Budgeted market share  30%
  Budgeted average selling price  $11.00
  Budgeted contribution margin per
  composite unit for budgeted mix  $ 5.00
  
162) 
 
What is the market-size variance?   
B) 
 
$1,500 U   
163) 
 
What is the market-share variance?   
A) 
 
$1,000 F   
164) 
 
What is the sales-quantity variance?   
C) 
 
$500 U   
Answer the following questions using the information below:

The Sasita Corporation manufactures two types of vacuum cleaners, the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 20X5 were as follows:

  Static Budget  ZENITH  House-Helper  Total
  Number sold  5,000  20,000  25,000
  Contribution margin  $1,500,000  $3,000,000  $4,500,000

  Actual Results  ZENITH  House-Helper  Total
  Number sold  4,000  28,000  32,000
  Contribution margin  $1,280,000  $3,920,000  $5,200,000

Prior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the ZENITH and House-Helper category to be 250,000 units, but actual industry volume was 256,000 units.
  
165) 
 
What is the contribution margin for the flexible budget?   
D) 
 
$5,400,000   
166) 
 
What is the total static-budget variance in terms of the contribution margin?   
B) 
 
$700,000 favorable   
167) 
 
What is the total flexible-budget variance in terms of the contribution margin?   
C) 
 
$200,000 unfavorable   
168) 
 
What is the total sales-volume variance in terms of the contribution margin?   
A) 
 
$900,000 favorable   
169) 
 
What is the total sales-quantity variance in terms of the contribution margin?   
D) 
 
$1,260,000 favorable   
170) 
 
What is the total sales-mix variance in terms of the contribution margin?   
B) 
 
$360,000 unfavorable   
171) 
 
What is the budgeted contribution margin per composite unit of the budgeted mix?   
B) 
 
$180.000   
172) 
 
What is the market-size variance?   
B) 
 
$108,000 F   
173) 
 
What is the market-share variance?   
C) 
 
$1,152,000 F  

 
174) 
 
More insight into the flexible-budget variance for direct materials can be gained by subdividing it into the direct materials:   
D) 
 
price and efficiency variances   
175) 
 
More insight into the efficiency variance for direct materials can be gained by subdividing it into the direct materials:   
C) 
 
mix and yield variances.   
176) 
 
The direct materials mix variance will be favorable when:   
B) 
 
the actual direct materials input mix is less expensive than the budgeted direct materials input mix   
177) 
 
The materials yield variance will be unfavorable when:   
C) 
 
the actual quantity of total inputs used is greater than the flexible budget for total inputs   
178) 
 
The direct materials mix variance is the:   
B) 
 
sum of the direct materials mix variances for each input