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Cost Accounting, 13e (Horngren et al.) 
Chapter 12   

Pricing Decisions and Cost Management


61) 

Companies should ONLY produce and sell units as long as:  
A) 

there is customer demand for the product  
B) 

the competition allows it  
C) 

the revenue from an additional unit exceeds the cost of producing it  
D) 

there is a generous supply of low-cost direct materials  
Answer:  

C 
Diff: 2 
Terms:  

target price 
Objective:  

1 
AACSB:  

Ethical reasoning


62) 

Too high a price may:  
A) 

deter a customer from purchasing a product  
B) 

increase demand for the product  
C) 

indicate supply is too plentiful  
D) 

decrease a competitor's market share  
Answer:  

A 
Diff: 1 
Terms:  

target price 
Objective:  

1 
AACSB:  

Reflective thinking

63) 

Companies must ALWAYS examine their pricing:  
A) 

based on the supply of the product 
B) 

based on the cost of producing the product  
C) 

through the eyes of their customers  
D) 

through the eyes of their competitors  
Answer:  

C 
Diff: 3 
Terms:  

target price 
Objective:  

1 
AACSB:  

Ethical reasoning

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  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

target price 
Objective:  

1 
AACSB:  

Reflective thinking 
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  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

target price 
Objective:  

1 
AACSB:  

Multiculturalism and diversity

66) 

The cost of producing a product:  
A) 

is an important influence on pricing  
B) 

affects the willingness of a company to supply a product  
C) 

for pricing decisions includes manufacturing costs, but not product design costs  
D) 

in highly competitive markets controls pricing  
Answer:  

B 
Diff: 3 
Terms:  

cost incurrence 
Objective:  

1 
AACSB:  

Reflective thinking

67) 

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

customer's willingness to pay  
B) 

price charged for alternative products  
C) 

cost of producing and delivering the product  
D) 

All of these answers are correct.  
Answer:  

A 
Diff: 3 
Terms:  

target price 
Objective:  

1 
AACSB:  

Reflective thinking

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  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

target price 
Objective:  

1 
AACSB:  

Reflective thinking

69) 

Three major influences on pricing decisions are:  
A) 

competition, costs, and customers  
B) 

competition, demand, and production efficiency  
C) 

continuous improvement, customer satisfaction, and supply  
D) 

variable costs, fixed costs, and mixed costs  
Answer:  

A 
Diff: 1 
Terms:  

target price 
Objective:  

1 
AACSB:  

Reflective thinking 
70) 

Long-run pricing decisions:  
A) 

have a time horizon of less than one year  
B) 

include adjusting product mix in a competitive environment  
C) 

and short-run pricing decisions generally have the same relevant costs  
D) 

use prices that include a reasonable return on investment  
Answer:  

D 
Diff: 3 
Terms:  

target rate of return on investment 
Objective:  

2 
AACSB:  

Reflective thinking


71) 

Short-term pricing decisions:  
A) 

use costs that may be irrelevant for long-term pricing decisions  
B) 

are more opportunistic  
C) 

tend to decrease prices when demand is strong  
D) 

have a time horizon of more than one year  
Answer:  

B 
Diff: 3 
Terms:  

target price 
Objective:  

2 
AACSB:  

Reflective thinking

72) 

Relevant costs for pricing a special order include:  
A) 

existing fixed manufacturing overhead  
B) 

nonmanufacturing costs that will not change even if the special order is accepted  
C) 

additional setup costs for the special order  
D) 

All of these answers are correct.  
Answer:  

C 
Diff: 2 
Terms:  

cost incurrence 
Objective:  

2 
AACSB:  

Reflective thinking

73) 

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

the likely bids of competitors  
B) 

the incremental cost of one unit of product  
C) 

revenues that will be lost on existing sales if prices are lowered  
D) 

stable pricing to earn the desired long-run return  
Answer:  

D 
Diff: 3 
Terms:  

target price 
Objective:  

2 
AACSB:  

Reflective thinking

74) 

Long-run pricing:  
A) 

needs to cover only incremental costs  
B) 

only utilizes the market-based approach to pricing and not the cost-based approach  
C) 

is a strategic decision  
D) 

strives for flexible pricing that can respond to temporary changes in demand  
Answer:  

C 
Diff: 2 
Terms:  

target price 
Objective:  

2 
AACSB:  

Reflective thinking 
75) 

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

minimizing the need to monitor competitors' prices frequently  
B) 

reducing the need to change cost structures frequently  
C) 

reducing competition  
D) 

helping to build buyer-seller relationships  
Answer:  

D 
Diff: 2 
Terms:  

target price 
Objective:  

2 
AACSB:  

Reflective thinking

76) 

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

manufacturing costs  
B) 

cost drivers related to the product  
C) 

direct and indirect variable costs of each function in the value chain  
D) 

fixed manufacturing costs  
Answer:  

C 
Diff: 2 
Terms:  

cost incurrence 
Objective:  

2 
AACSB:  

Reflective thinking

77) 

For pricing decisions, full product costs:  
A) 

include all costs that are traceable to the product  
B) 

include all manufacturing and selling costs  
C) 

include all direct costs plus an appropriate allocation of the indirect costs of all business functions  
D) 

allow for the highest possible product prices  
Answer:  

C 
Diff: 2 
Terms:  

cost incurrence 
Objective:  

2 
AACSB:  

Reflective thinking

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?  
A) 

$21,600  
B) 

$7,200  
C) 

$12,000  
D) 

$14,400  
Answer:  

D 
Explanation:  

D) 

$120 × 60% × 200 tables = $14,400 

Diff: 2 
Terms:  

cost incurrence 
Objective:  

2 
AACSB:  

Analytical skills 

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?  
A) 

$72 per unit  
B) 

$108 per unit  
C) 

$180 per unit  
D) 

$120 per unit  
Answer:  

C 
Explanation:  

C) 

$120 + ($120 × 50%) = $180 

Diff: 2 
Terms:  

cost incurrence 
Objective:  

2, 5 
AACSB:  

Analytical skills

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? 
A) 

$4,750.00 
B) 

$3,562.50 
C) 

$6,250.00  
D) 

$6,175.00  
Answer:  

B 
Explanation:  

B) 

$95 × 75% × 50 air conditioners = $3,562.50

Diff: 2 
Terms:  

cost incurrence 
Objective:  

2 
AACSB:  

Analytical skills

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?  
A) 

$95.00 per unit  
B) 

$71.25 per unit  
C) 

$123.50 per unit  
D) 

$125.00 per unit  
Answer:  

C 
Explanation:  

C) 

$95+ ($95 × 30%) = $123.50

Diff: 2 
Terms:  

cost incurrence 
Objective:  

2, 5 
AACSB:  

Analytical skills 

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  
B) 

$390  
C) 

$260  
D) 

$507  
Answer:  

A 
Explanation:  

A) 

$200 + $60 + $30 = $290  
Diff: 2 
Terms:  

target price 
Objective:  

2 
AACSB:  

Analytical skills

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  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

target price 
Objective:  

2 
AACSB:  

Analytical skills

84) 

If Ms. Yukki wanted a long-term commitment for supplying this product, what price would MOST likely be quoted to her?  
A) 

$290  
B) 

$390  
C) 

$260  
D) 

$507  
Answer:  

D 
Explanation:  

D) 

The estimated selling price of $507. 

Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

2, 5 
AACSB:  

Analytical skills 

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?  
A) 

$900 
B) 

$1,000 
C) 

$1,075 
D) 

$1,290 
Answer:  

B 
Explanation:  

A) 

  
B) 

$850 + $50 + $100 = $1,000 
Diff: 2 
Terms:  

target price 
Objective:  

2 
AACSB:  

Analytical skills

86) 

Before accepting this one-time-only special order, Gerry's Generators wants to know how much profit would be made on the order: 
A) 

$1,000   
B) 

Loss of $75 
C) 

$0 
D) 

$215  
Answer:  

C 
Diff: 2 
Terms:  

target price 
Objective:  

2 
AACSB:  

Analytical skills

87) 

If Mr. Gladstone wanted a long-term commitment for supplying this product, what price would MOST likely be quoted to him?  
A) 

$1,000 
B) 

$1,075  
C) 

$1,290 
D) 

$1,400 
Answer:  

C 
Explanation:  

C) 

The estimated selling price of $1,290. 

Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

2, 5 
AACSB:  

Analytical skills 

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?  
A) 

$40  
B) 

$55  
C) 

$60  
D) 

$66  
Answer:  

C 
Explanation:  

C) 

$30 + $10 + $15 + $5 = $60 

Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

2 
AACSB:  

Multiculturalism and diversity

89) 

What is the full cost of the product per unit?  
A) 

$60  
B) 

$180  
C) 

$198  
D) 

$66  
Answer:  

B 
Explanation:  

B) 

$30 + $10 + $15 + $5 + $100 + $20 = $180 

Diff: 1 
Terms:  

cost-plus pricing 
Objective:  

2 
AACSB:  

Analytical skills 

90) 

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

$66.00  
B) 

$180.00  
C) 

$198.00  
D) 

$217.80  
Answer:  

C 
Explanation:  

C) 

The estimated selling price of $198. 

Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

2, 5 
AACSB:  

Multiculturalism and diversity

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  
B) 

$77.38  
C) 

$111.13  
D) 

$80.85  
Answer:  

A 
Explanation:  

A) 

Direct materials  $50.000
Direct manufacturing labor ($6 × 10,000) / 30,000  2.000
Variable manufacturing ($161,250 / 30,000)  5.375
Setup ($20,000 / 2,000)  10.000 
  Minimum acceptable bid  $67.375  
Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

2 
AACSB:  

Analytical skills 

92) 

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

$67.38  
B) 

$80.85  
C) 

$111.13  
D) 

$133.35  
Answer:  

D 
Explanation:  

D) 

Direct materials  $ 50.000
Direct manufacturing labor ($6 × 10,000)/30,000  2.000
Variable manufacturing ($161,250/30,000)  5.375
Fixed manufacturing ($600,000/30,000)  20.000
Product and process design costs ($450,000/30,000)  15.000
Marketing and distribution ($562,500/30,000)  18.750
Full cost per unit  111.125
Markup (20%)  22.225
Estimated selling price  $133.350 

Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

2, 5 
AACSB:  

Analytical skills 

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?  
A) 

$180.00 
B) 

$92.50 
C) 

$65.00 
D) 

$234.00 
Answer:  

C 
Explanation:  

C) 

Direct materials                                                                            $25.00
Direct manufacturing labor (5,000/10,000) × $15                              7.50   
Variable manufacturing ($175,000 / 10,000)                            17.50
Setup     ($15,000/1000)                                                                          15.00          
Minimum  acceptable bid                                                                    $65.00 

Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

2 
AACSB:  

Analytical skills 

94) 

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

$180.00 
B) 

$92.50 
C) 

$65.00 
D) 

$234.00 
Answer:  

D 
Explanation:  

D) 

Direct materials  $ 25.00
Direct manufacturing labor ($15 × 5,000)/10,000  7.50
Variable manufacturing ($175,000/10,000)  17.50
Fixed manufacturing ($425,000/10,000)  42.50
Product and process design costs ($400,000/10,000)  40.00
Marketing and distribution ($475,000/10,000)                                   47.50
Full cost per unit  180.00
Markup (30%)                                                                                           54.00
Estimated selling price  $234.00

Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

2, 5 
AACSB:  

Analytical skills

95) 

Target pricing:  
A) 

is used for short-term pricing decisions  
B) 

is one form of cost-based pricing  
C) 

estimates are based on customers' perceived value of the product  
D) 

relevant costs are all variable costs  
Answer:  

C 
Diff: 3 
Terms:  

target price 
Objective:  

3 
AACSB:  

Reflective thinking

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  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

target price 
Objective:  

3 
AACSB:  

Reflective thinking

97) 

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

production department  
B) 

sales and marketing department  
C) 

design department  
D) 

distribution department  
Answer:  

B 
Diff: 1 
Terms:  

target price 
Objective:  

3 
AACSB:  

Reflective thinking 
98) 

Relevant costs for target pricing are:  
A) 

variable manufacturing costs  
B) 

variable manufacturing and variable nonmanufacturing costs  
C) 

all fixed costs  
D) 

all future costs, both variable and fixed  
Answer:  

D 
Diff: 2 
Terms:  

target price, target cost per unit 
Objective:  

3 
AACSB:  

Reflective thinking

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  
B) 

B A D C  
C) 

A D B C  
D) 

A B C D  
Answer:  

A 
Diff: 2 
Terms:  

target cost per unit, target price, target operating income per unit 
Objective:  

3 
AACSB:  

Reflective thinking

100) 

Value engineering may result in all of the following EXCEPT:  
A) 

improved product design  
B) 

changes in materials specifications  
C) 

increases in the quantity of nonvalue-added cost drivers  
D) 

the evaluation of all business functions within the value chain  
Answer:  

C 
Diff: 3 
Terms:  

value engineering 
Objective:  

3 
AACSB:  

Reflective thinking

101) 

Value-added costs:  
A) 

are costs that a customer is unwilling to pay for  
B) 

include maintenance and repairs of the manufacturing equipment  
C) 

are reduced through improved efficiencies  
D) 

if eliminated, increase profitability  
Answer:  

C 
Diff: 2 
Terms:  

value-added cost 
Objective:  

3 
AACSB:  

Reflective thinking 

102) 

To design costs out of products is a goal of:  
A) 

cost-plus pricing  
B) 

target costing  
C) 

kaizen costing  
D) 

peak-load costing  
Answer:  

B 
Diff: 1 
Terms:  

designed-in costs 
Objective:  

3 
AACSB:  

Reflective thinking

103) 

All of the following are true regarding target costing EXCEPT:  
A) 

improvements are implemented in small incremental amounts  
B) 

customer input is essential to the target costing process  
C) 

input is requested from suppliers and distributors  
D) 

a key goal is to minimize costs over the product's useful life  
Answer:  

A 
Diff: 3 
Terms:  

target cost per unit 
Objective:  

3 
AACSB:  

Reflective thinking

104) 

All of the following are associated with target costing EXCEPT:  
A) 

value engineering  
B) 

the markup component  
C) 

all value-chain business functions  
D) 

cross-functional teams  
Answer:  

B 
Diff: 2 
Terms:  

target cost per unit, target price, target operating income per unit 
Objective:  

3 
AACSB:  

Reflective thinking

105) 

When target costing and target pricing are used together:  
A) 

the target cost is established first, then the target price  
B) 

the target cost is the estimated long-run cost that enables a product or service to achieve a desired profit  
C) 

the focus of target pricing is to undercut the competition  
D) 

target costs are generally higher than current costs  
Answer:  

B 
Diff: 3 
Terms:  

target cost per unit, target price 
Objective:  

3 
AACSB:  

Reflective thinking


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:  
A) 

cost-plus pricing  
B) 

target costing  
C) 

kaizen costing  
D) 

full costing  
Answer:  

B 
Diff: 1 
Terms:  

target price, target cost per unit 
Objective:  

3 
AACSB:  

Reflective thinking 
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?  
A) 

$960,000  
B) 

$2,000,000  
C) 

$1,200,000  
D) 

None of these answers is correct.  
Answer:  

C 
Explanation:  

C) 

$60 × 20,000 = $1,200,000 

Diff: 1 
Terms:  

target price 
Objective:  

3 
AACSB:  

Analytical skills

108) 

What is the target operating income?  
A) 

$240,000  
B) 

$300,000  
C) 

$192,000  
D) 

$180,000  
Answer:  

A 
Explanation:  

A) 

$1,200,000 × 20% = $240,000  
Diff: 2 
Terms:  

target operating income per unit 
Objective:  

3 
AACSB:  

Analytical skills


109) 

What is the target cost?  
A) 

$900,000  
B) 

$960,000  
C) 

$1,260,000  
D) 

$1,008,000  
Answer:  

B 
Explanation:  

B) 

$1,200,000 - ($1,200,000 × 20%) = $960,000 

Diff: 2 
Terms:  

target cost per unit 
Objective:  

3 
AACSB:  

Analytical skills

110) 

What is the target cost for each interior door?  
A) 

$48  
B) 

$58  
C) 

$60  
D) 

$45  
Answer:  

A 
Explanation:  

A) 

[$1,200,000 - ($1,200,000 × 20%)] / 20,000 = $48  
Diff: 2 
Terms:  

target cost per unit 
Objective:  

3 
AACSB:  

Analytical skills 
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?  
A) 

$1,380,000 
B) 

$13,800,000 
C) 

$1,200,000  
D) 

$12,000,000 
Answer:  

B 
Explanation:  

B) 

$46 × 300,000 = $13,800,000

Diff: 1 
Terms:  

target price 
Objective:  

3 
AACSB:  

Analytical skills


112) 

What is the target operating income?  
A) 

$2,400,000 
B) 

$1,200,000 
C) 

$1,242,000 
D) 

$2,484,000  
Answer:  

D 
Explanation:  

D) 

$46 × 300,000 x 18% = $2,484,000 

Diff: 2 
Terms:  

target operating income per unit 
Objective:  

3 
AACSB:  

Analytical skills

113) 

What is the total target cost?  
A) 

$2,484,000 
B) 

$11,316,000 
C) 

$13,800,000 
D) 

$1,000,000 
Answer:  

B 
Explanation:  

B) 

$46 x 300,000 x (1 - .18) =  $11,316,000

Diff: 2 
Terms:  

target cost per unit 
Objective:  

3 
AACSB:  

Analytical skills 
114) 

What is the target cost for each coffee pot?  
A) 

$35.50 
B) 

$37.72 
C) 

$42.15 
D) 

$46.00  
Answer:  

B 
Explanation:  

B) 

$46 x (1 - .18) = $37.72

Diff: 2 
Terms:  

target cost per unit 
Objective:  

3 
AACSB:  

Analytical skills


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?  
A) 

$37.50  
B) 

$45.00  
C) 

$112.50  
D) 

$135.00  
Answer:  

C 
Explanation:  

C) 

$150 - ($150 × 0.25) = $112.50 

Diff: 2 
Terms:  

target cost per unit, target operating income per unit, target price 
Objective:  

3 
AACSB:  

Analytical skills

116) 

What is the change in operating income if marketing is correct and only the sales price is changed?  
A) 

$1,100,000  
B) 

$300,000  
C) 

$(1,100,000)  
D) 

$(2,900,000)  
Answer:  

D 
Explanation:  

D) 

[100,000 × ($180 - $140)] - [110,000 × ($150 - $140)] = $(2,900,000) 

Diff: 3 
Terms:  

target price, target operating income per unit 
Objective:  

3 
AACSB:  

Analytical skills 
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)?  
A) 

$112.50  
B) 

$113.64  
C) 

$123.34  
D) 

$140.00  
Answer:  

B 
Explanation:  

B) 

Current income = 100,000 × ($180 - $140) = $4,000,000
Target cost y: $4,000,000 = (110,000 × $150) - 110,000y
y = $12,500,000/110,000 = $113.6363 

Diff: 3 
Terms:  

target price, target cost per unit, target operating income per unit 
Objective:  

3 
AACSB:  

Analytical skills


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?  
A) 

$56.25  
B) 

$67.50  
C) 

$168.75  
D) 

$202.50  
Answer:  

C 
Explanation:  

C) 

$225 - ($225 × 0.25) = $168.75 

Diff: 2 
Terms:  

target price, target cost per unit, target operating income per unit 
Objective:  

3 
AACSB:  

Analytical skills

119) 

What is the change in operating income if marketing is correct and only the sales price is changed?  
A) 

$165,000  
B) 

$45,000  
C) 

$(165,000)  
D) 

$(435,000)  
Answer:  

D 
Explanation:  

D) 

[10,000 × ($270 - $210)] - [11,000 × ($225 - $210)] = ($435,000) 

Diff: 3 
Terms:  

target price, target cost per unit, target operating income per unit 
Objective:  

3 
AACSB:  

Analytical skills 
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)?  
A) 

$168.75  
B) 

$170.46  
C) 

$185.00  
D) 

$210.00  
Answer:  

B 
Explanation:  

B) 

Current income = 10,000 × ($270 - $210) = $600,000
Target cost y: $600,000 = (11,000 × $225) - 11,000y
y = $1,875,000/11,000 = $170.4545 

Diff: 3 
Terms:  

target price, target cost per unit, target operating income per unit 
Objective:  

3 
AACSB:  

Analytical skills


121) 

Concerns about target costing include all the following EXCEPT:  
A) 

cross-functional teams may add too many features  
B) 

excessive pressure is put on suppliers  
C) 

development time may decrease  
D) 

burnout of design engineers  
Answer:  

C 
Diff: 2 
Terms:  

target cost per unit 
Objective:  

4 
AACSB:  

Reflective thinking

122) 

Direct material costs are locked in when they are:  
A) 

designed  
B) 

assembled  
C) 

sold  
D) 

delivered  
Answer:  

A 
Diff: 2 
Terms:  

locked-in costs 
Objective:  

4 
AACSB:  

Reflective thinking

123) 

Cost accounting systems focus on when costs are:  
A) 

incurred  
B) 

locked in  
C) 

paid for  
D) 

used for setting prices for products and services  
Answer:  

A 
Diff: 1 
Terms:  

cost incurrence 
Objective:  

4 
AACSB:  

Reflective thinking 
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  
B) 

manufacturing  
C) 

customer-service  
D) 

marketing  
Answer:  

A 
Diff: 1 
Terms:  

product life-cycle, life-cycle costing 
Objective:  

4 
AACSB:  

Reflective thinking


125) 

For most products, the majority of costs are incurred during the ________ business function of the value chain.  
A) 

design  
B) 

manufacturing  
C) 

customer-service  
D) 

marketing  
Answer:  

B 
Diff: 1 
Terms:  

cost incurrence 
Objective:  

4 
AACSB:  

Reflective thinking

126) 

________ focuses on reducing costs during the manufacturing stage.  
A) 

Target costing  
B) 

Kaizen costing  
C) 

Cost-plus pricing  
D) 

Life-cycle costing  
Answer:  

B 
Diff: 1 
Terms:  

Kaizen costing 
Objective:  

4 
AACSB:  

Reflective thinking

127) 

Cross-functional engineering teams may include:  
A) 

marketing managers  
B) 

suppliers  
C) 

management accountants  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 1 
Terms:  

cost incurrence 
Objective:  

4 
AACSB:  

Reflective thinking

128) 

In some industries, such as legal and consulting, most costs are locked in:  
A) 

when they are incurred  
B) 

during the design stage  
C) 

during the customer-service stage  
D) 

during the marketing stage  
Answer:  

A 
Diff: 2 
Terms:  

cost incurrence, locked-in costs 
Objective:  

4 
AACSB:  

Reflective thinking 

129) 

Value engineering can reduce all of the following EXCEPT:  
A) 

existing fixed manufacturing costs  
B) 

value-added costs  
C) 

nonvalue-added costs  
D) 

rework-hours  
Answer:  

A 
Diff: 2 
Terms:  

value engineering 
Objective:  

4 
AACSB:  

Reflective thinking

130) 

A graph comparing locked-in costs with incurred costs will have:  
A) 

locked-in costs rising much faster initially, but dropping to zero after the product is manufactured  
B) 

the two cost lines running parallel until the end of the process, when they join  
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  
D) 

no differences unless the product is manufactured inefficiently  
Answer:  

C 
Diff: 2 
Terms:  

locked-in costs, cost incurrence 
Objective:  

4 
AACSB:  

Reflective thinking

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?  
A) 

Costs are generally locked in before they are incurred.  
B) 

After a product's design has been approved, costs are difficult to influence.  
C) 

When and how costs are locked in are more important than when and how costs are incurred.  
D) 

Most costs are locked in during the manufacturing process.  
Answer:  

D 
Diff: 2 
Terms:  

locked-in costs, cost incurrence 
Objective:  

4 
AACSB:  

Reflective thinking

132) 

Value engineering can reduce costs by all of the following EXCEPT:  
A) 

simplifying the design and thereby decreasing the number of component parts  
B) 

reducing the number of features offered  
C) 

redesigning alternative options over and over until the wishes of all cross-functional team members are accommodated  
D) 

building efficiencies into value-added costs  
Answer:  

C 
Diff: 3 
Terms:  

value engineering 
Objective:  

4 
AACSB:  

Reflective thinking 

133) 

The cost-plus pricing approach is generally in the form:  
A) 

Cost base + Markup component = Prospective selling price  
B) 

Prospective selling price - Cost base = Markup component  
C) 

Cost base + Gross margin = Prospective selling price  
D) 

Variable cost + Fixed cost + Contribution margin = Prospective selling price  
Answer:  

A 
Diff: 1 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking

134) 

In cost-plus pricing, the markup component:  
A) 

is a rigid number  
B) 

is ultimately determined by the market  
C) 

provides a means to calculate the actual selling price  
D) 

is the end rather than the start of pricing decisions  
Answer:  

B 
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking

135) 

A product's markup percentage needs to cover nonmanufacturing variable costs when the cost base is:  
A) 

the full cost of the product  
B) 

the variable cost of the product  
C) 

variable manufacturing costs  
D) 

All of these answers are correct.  
Answer:  

C 
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking

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  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking 

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:  
A) 

the estimated amount of profit  
B) 

that the variable cost base estimates fixed costs in the markup percentage while the full cost base includes an amount for fixed costs  
C) 

known as price discrimination  
D) 

caused by the inability of most companies to estimate fixed cost per unit with any degree of reliability  
Answer:  

B 
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking

138) 

________ starts with estimated product costs and next adds desired operating income.  
A) 

Cost-plus pricing  
B) 

Target costing  
C) 

Kaizen costing  
D) 

Life-cycle budgeting  
Answer:  

A 
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking

139) 

The amount of markup percentage is usually higher if:  
A) 

there is idle capacity  
B) 

demand is strong  
C) 

competition is intense  
D) 

demand is elastic  
Answer:  

B 
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking

140) 

The markup percentage is usually higher if the cost base used is:  
A) 

the full cost of the product  
B) 

the variable cost of the product  
C) 

variable manufacturing costs  
D) 

total manufacturing costs  
Answer:  

C 
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking 

141) 

Which of the following statements is FALSE regarding cost-plus pricing?  
A) 

A company selects a cost base that it regards as reliable.  
B) 

A company uses a markup percentage that estimates a product price that covers full product costs and earns the required return on investment.  
C) 

The selling price computed is only a prospective price.  
D) 

The cost-plus price chosen has already been studied for customer reaction to the price.  
Answer:  

D 
Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking

142) 

Advantages of using the full cost of the product as the cost base include all of the following EXCEPT that:  
A) 

managers are informed regarding the minimum long-run cost they need to recover to stay in business  
B) 

it limits the ability of a salesperson to cut prices  
C) 

fixed cost allocations can be arbitrary  
D) 

it does not require a detailed analysis of cost behavior for computations  
Answer:  

C 
Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking

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%  
B) 

17.6%  
C) 

10.0%  
D) 

11.1%  
Answer:  

A 
Explanation:  

A) 

$300,000 / $2,000,000 = 15%  
Diff: 2 
Terms:  

target rate of return on investment 
Objective:  

5 
AACSB:  

Analytical skills

144) 

What is the markup percentage as a percentage of cost for Timothy Company?  
A) 

15.0%  
B) 

17.6%  
C) 

10.0%  
D) 

11.1%  
Answer:  

D 
Explanation:  

D) 

$300,000 / [(1,500 × $2,000) - $300,000] = 11.1% 

Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills 
145) 

What is the cost base of each vending machine for Timothy Company?  
A) 

$1,739  
B) 

$1,802  
C) 

$1,700  
D) 

$1,780  
Answer:  

B 
Explanation:  

B) 

$2,000 / $300,000 / [(1,500 × $2,000) - $300,000] = $1,802 

Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills

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?  
A) 

22.0%  
B) 

18.0%  
C) 

14.8%  
D) 

12.9%  
Answer:  

B 
Explanation:  

B) 

$180,000 / $1,000,000 = 18% 

Diff: 2 
Terms:  

target rate of return on investment 
Objective:  

5 
AACSB:  

Analytical skills

147) 

What is the markup percentage as a percentage of cost for Grant Company?  
A) 

22.0%  
B) 

18.0%  
C) 

14.8%  
D) 

12.9%  
Answer:  

C 
Explanation:  

C) 

$180,000 / [(7,000 × $200) - $180,000] = 14.8% 

Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills


148) 

What is the cost base of each juicer machine for Grant Company?  
A) 

$174  
B) 

$162  
C) 

$169  
D) 

$152  
Answer:  

A 
Explanation:  

A) 

$200 / 1 + ($180,000) / [(7,000 × $200) - $180,000] = $174  
Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills 
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%  
B) 

125%  
C) 

185%  
D) 

245%  
Answer:  

A 
Explanation:  

A) 

($450,000 + $180,000 + $240,000) / 
($562,500 + $390,000 + $420,000 + $322,500) = 51.3%  
Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills

150) 

The markup percentage for setting prices as a percentage of variable manufacturing costs is:  
A) 

54%  
B) 

87%  
C) 

169%  
D) 

122%  
Answer:  

C 
Explanation:  

C) 

($450,000 + $420,000 + $322,500 + $180,000 + $240,000) /
($562,500 + $390,000) = 169.3% 

Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills 
151) 

The markup percentage for setting prices as a percentage of the variable cost of the product is:  
A) 

328%  
B) 

36%  
C) 

228%  
D) 

65%  
Answer:  

D 
Explanation:  

D) 

($450,000 + $322,500 + $240,000) /
($562,500 + $390,000 + $420,000 + $180,000) = 65.2% 

Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills

152) 

The markup percentage for setting prices as a percentage of the full cost of the product is:  
A) 

328%  
B) 

36%  
C) 

228%  
D) 

21%  
Answer:  

D 
Explanation:  

D) 

$450,000 / $2,115,000 = 21.3% 

Diff: 3 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills

153) 

Life-cycle costing is the name given to:  
A) 

a method of cost planning to reduce manufacturing costs to targeted levels  
B) 

the process of examining each component of a product to determine whether its cost can be reduced  
C) 

the process of managing all costs along the value chain  
D) 

a system that focuses on reducing costs during the manufacturing cycle  
Answer:  

C 
Diff: 2 
Terms:  

life-cycle costing 
Objective:  

6 
AACSB:  

Reflective thinking

154) 

An understanding of life-cycle costs can lead to:  
A) 

additional costs during the manufacturing cycle  
B) 

less need for evaluation of the competition  
C) 

cost effective product designs that are easier to service  
D) 

mutually beneficial relationships between buyers and sellers  
Answer:  

C 
Diff: 2 
Terms:  

life-cycle costing 
Objective:  

6 
AACSB:  

Reflective thinking 

155) 

Life-cycle budgeting is particularly important when:  
A) 

the development period for R&D is short and inexpensive  
B) 

there are significant nonproduction costs  
C) 

most costs are locked in during production  
D) 

a low percentage of costs are incurred before any revenues are received  
Answer:  

B 
Diff: 3 
Terms:  

life-cycle budgeting 
Objective:  

6 
AACSB:  

Reflective thinking

156) 

Life-cycle budgeting and life-cycle costing help highlight:  
A) 

an increase in customer-service costs due to using inferior materials  
B) 

high production costs caused by a complex design  
C) 

large ordering costs due to the great number of component parts used  
D) 

an increase in annual operating income resulting from the new product  
Answer:  

D 
Diff: 3 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Reflective thinking

157) 

Life-cycle budgeting:  
A) 

has little in common with target pricing  
B) 

is most useful to companies that manufacture small items such as household plastics  
C) 

helps companies estimate revenues over a multiyear horizon  
D) 

gives companies more insight into total costs when manufacturing costs consume the majority of the resources  
Answer:  

C 
Diff: 2 
Terms:  

life-cycle budgeting 
Objective:  

6 
AACSB:  

Reflective thinking

158) 

Customer life-cycle costs are the:  
A) 

costs incurred by the selling company to satisfy the customer  
B) 

costs to the customer for buying and using a product  
C) 

same as the selling life-cycle prices  
D) 

replacement costs of using a product or service  
Answer:  

B 
Diff: 1 
Terms:  

customer life-cycle costs 
Objective:  

6 
AACSB:  

Reflective thinking 

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?  
A) 

$250,000  
B) 

$280,000  
C) 

$310,000  
D) 

$840,000  
Answer:  

D 
Explanation:  

D) 

First year (5,000 × 2 runs × $25)  $250,000
Second year (5,000 × 2 × $28)  280,000
Third year (5,000 × 2 × $31)  310,000
  Total  $840,000

Diff: 2 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills

160) 

What is the estimated life-cycle operating income for the first year?  
A) 

$18,000  
B) 

$20,000  
C) 

$48,000  
D) 

$119,000  
Answer:  

A 
Explanation:  

A) 

Sales (5,000 units × 2 runs × $25)  $250,000
Development costs  $30,000
Setup costs (2 × $10,000)  20,000
Direct manufacturing costs (2 × $40,000)  80,000
Indirect manufacturing costs (2 × $45,000)  90,000
Destination charges ($1.00 × 10,000)  10,000
Customer service ($0.20 × 10,000)  2,000  232,000

Estimated life-cycle operating income for the first year  $ 18,000 
Diff: 3 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills 

161) 

What is the estimated life-cycle operating income for the first three years?  
A) 

$174,000  
B) 

$204,000  
C) 

$636,000  
D) 

$840,000  
Answer:  

B 
Explanation:  

B) 

  Year 1  Year 2  Year 3  Totals
Life-cycle revenue  $250,000  $280,000  $310,000  $840,000

Life-cycle costs:
Development  30,000  30,000
Setup  20,000  20,000  20,000  60,000
Direct manufacturing costs  80,000  80,000  80,000  240,000
Indirect manufacturing  90,000  90,000  90,000  270,000
Destination charges  10,000  10,000  10,000  30,000
Customer service  2,000  2,000  2,000  6,000

Total costs  $232,000  $202,000  $202,000  636,000

Life-cycle operating income  $204,000

Diff: 3 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills

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?  
A) 

$6,400,000  
B) 

$8,000,000  
C) 

$11,200,000  
D) 

$22,400,000  
Answer:  

C 
Explanation:  

C) 

First year (40,000 × $140)  $ 5,600,000
Second year (40,000 × $140)  5,600,000
  Total  $11,200,000

Diff: 1 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills 

163) 

What is estimated life-cycle operating income for the first year?  
A) 

$(1,040,000)  
B) 

$(1,400,000)  
C) 

$5,600,000  
D) 

$6,640,000  
Answer:  

A 
Explanation:  

A) 

Revenue (40,000 hours × $140)  $5,600,000
Development costs  $ 600,000
Direct costs (40,000 × $100)  4,000,000
Indirect costs  2,000,000
Customer service ($400 × 100 clients)  40,000  6,640,000
Operating income (loss)  $(1,040,000) 
Diff: 3 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills

164) 

What is the estimated life-cycle operating income for the first two years?  
A) 

$(1,480,000)  
B) 

$(1,400,000)  
C) 

$3,200,000  
D) 

$11,200,000  
Answer:  

A 
Explanation:  

A) 

  Year 1  Year 2  Totals
Life-cycle revenue  $5,600,000  $5,600,000  $11,200,000
Life-cycle costs:
  Development  600,000  600,000
  Direct costs  4,000,000  4,000,000  8,000,000
  Indirect costs  2,000,000  2,000,000  4,000,000
  Customer service  40,000  40,000  80,000

  Total costs  $6,640,000  $6,040,000  $12,680,000

Life-cycle operating income  $(1,480,000) 
Diff: 3 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

7 
AACSB:  

Analytical skills 

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 
B) 

$3,000,000 
C) 

$3,400,000  
D) 

$1,350,000 
Answer:  

A 
Explanation:  

A) 

First year (15,000 × $90)  $ 1,350,000
Second year (15,000 × $90)                          1,350,000
  Total  $2,700,000 
Diff: 1 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills

166) 

What is the estimated life-cycle operating income for the first year?  
A) 

$206,250  
B) 

$162,500 
C) 

$(43,750)  
D) 

$43,750 
Answer:  

C 
Explanation:  

C) 

Revenue (15,000 hours × $90)  $1,350,000
Development costs  $ 250,000
Direct costs (15,000 × 50)  750,000
Indirect costs  300,000
Customer service ($250 × 375 clients)                    93,750  1,393,750
Operating income (loss)  $(43,750)

Diff: 3 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills 

167) 

What is the estimated life-cycle operating income for both years combined?  
A) 

$206,250 
B) 

$162,500 
C) 

$(43,750)  
D) 

$(87,500) 
Answer:  

B 
Explanation:  

B) 

  Year 1  Year 2  Totals
Life-cycle revenue  $1,350,000  $1,350,000  $2,700,000
Life-cycle costs:
  Development  250,000  250,000
  Direct costs  750,000  750,000  1,500,000
  Indirect costs  300,000  300,000  600,000
  Customer service  93,750  93,750  187,500

  Total costs  $1,393,750  $1,143,750  $2,537,500

Life-cycle operating income  $162,500

Diff: 3 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

7 
AACSB:  

Analytical skills

168) 

Price discrimination is the practice of:  
A) 

setting different prices for different products  
B) 

charging different prices for quantity amounts  
C) 

using variable costing for some products and full costing for other products when setting prices  
D) 

charging different prices to different customers or clients for the same products or services  
Answer:  

D 
Diff: 2 
Terms:  

price discrimination 
Objective:  

7 
AACSB:  

Ethical reasoning

169) 

Iowa Utility Company charges its high-usage commercial customers a lower rate per kilowatt-hour than other customers. This is an example of:  
A) 

customer-preference pricing  
B) 

high-load pricing  
C) 

peak-load pricing  
D) 

price discrimination  
Answer:  

D 
Diff: 1 
Terms:  

peak-load pricing 
Objective:  

7 
AACSB:  

Ethical reasoning


170) 

When demand for a product is inelastic and prices are increased, usually demand will:  
A) 

increase, and operating profits will increase  
B) 

remain the same, and operating profits will increase  
C) 

decrease, and operating profits will decrease  
D) 

remain the same, and operating profits will decrease  
Answer:  

B 
Diff: 2 
Terms:  

price elasticity 
Objective:  

7 
AACSB:  

Reflective thinking 
171) 

When demand for a product is very elastic and prices are increased, demand will:  
A) 

remain the same, and operating profits will increase  
B) 

remain the same, and operating profits may either increase or decrease  
C) 

decrease, and operating profits will decrease  
D) 

decrease, and operating profits may either increase or decrease  
Answer:  

D 
Diff: 3 
Terms:  

price elasticity 
Objective:  

7 
AACSB:  

Reflective thinking

172) 

Costs are a major factor:  
A) 

when demand is price-inelastic  
B) 

when demand is price-elastic  
C) 

when the opportunity for price discrimination exists  
D) 

for peak-load pricing  
Answer:  

B 
Diff: 2 
Terms:  

price elasticity 
Objective:  

7 
AACSB:  

Reflective thinking


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?  
A) 

No, because demand decreased.  
B) 

No, because the selling price increases.  
C) 

Yes, because contribution margin per unit increases.  
D) 

Yes, because operating income increases.  
Answer:  

D 
Explanation:  

D) 

[18,000 × ($160 - $100)] - [20,000 × ($150 - $100)] = $80,000 operating income increase 

Diff: 2 
Terms:  

price elasticity 
Objective:  

7 
AACSB:  

Analytical skills

174) 

The demand for this product is:  
A) 

greatly inelastic  
B) 

slightly inelastic  
C) 

elastic  
D) 

indeterminable  
Answer:  

C 
Diff: 2 
Terms:  

price elasticity 
Objective:  

7 
AACSB:  

Analytical skills 

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?  
A) 

Yes, because demand increases.  
B) 

No, because the selling price decreases.  
C) 

Yes, because operating income increases. 
D) 

No, because contribution margin per unit decreases.   
Answer:  

C 
Explanation:  

C) 

[12,500 × ($49 - $44)] - [10,000 × ($51 - $45)] = $2,500 operating income increase 

Diff: 2 
Terms:  

price elasticity 
Objective:  

7 
AACSB:  

Analytical skills

176) 

The demand for this product is:  
A) 

elastic 
B) 

slightly inelastic  
C) 

greatly inelastic  
D) 

indeterminable  
Answer:  

A 
Diff: 2 
Terms:  

price elasticity 
Objective:  

7 
AACSB:  

Analytical skills 

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?  
A) 

$4.40  
B) 

$8.60  
C) 

$6.19  
D) 

$171.45  
Answer:  

C 
Explanation:  

C) 

Variable operating costs (30 × 5 × $2,000)  $300,000
Marketing  138,750
Customer service  25,000
  Total  $463,750
Attendance = 30 × 2,500 = 75,000 fans
Minimum price is $463,750 / 75,000 = $6.1833 

Diff: 3 
Terms:  

price elasticity 
Objective:  

7 
AACSB:  

Analytical skills 

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?  
A) 

$0.60  
B) 

$0.83  
C) 

$0.90  
D) 

$1.07  
Answer:  

D 
Explanation:  

D) 

Variable costs ($40 × 12 × 7)  $3,360
Marketing  1,500
Customer service  250
  Total costs per week  $5,110
Average rental cost per customer $5,110 / [(2 × 1,150) + (5 × 500)] = $1.0645 

Diff: 3 
Terms:  

peak-load pricing 
Objective:  

7 
AACSB:  

Analytical skills

179) 

All of the following are true regarding price discrimination EXCEPT that:  
A) 

the laws apply to service providers, but not manufacturers  
B) 

it is permissible if price differences can be explained  
C) 

it is illegal only if the intent is to destroy competition  
D) 

it is most likely to occur when the cost base is the full cost of the product  
Answer:  

D 
Diff: 3 
Terms:  

price discrimination 
Objective:  

8 
AACSB:  

Ethical reasoning

180) 

Predatory pricing is a type of price discrimination that:  
A) 

allows prices to be cut to the level of variable costs  
B) 

is required when a company declares bankruptcy so that it can sell its remaining goods quickly  
C) 

is used in the food industry for perishable goods  
D) 

deliberately sets prices very low, sometimes even below costs, to minimize competition  
Answer:  

D 
Diff: 1 
Terms:  

price discrimination, predatory pricing 
Objective:  

8 
AACSB:  

Ethical reasoning 

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  
B) 

use a variable cost-plus markup method of pricing  
C) 

underprice products on a consistent basis, rather than sporadically  
D) 

use dumping only when a product is at the end of its life cycle  
Answer:  

A 
Diff: 3 
Terms:  

price discrimination, predatory pricing 
Objective:  

8 
AACSB:  

Ethical reasoning

182) 

Collusive pricing occurs when:  
A) 

a company wants two products to sell for the same, or almost the same, amount  
B) 

a company wants a product to sell for the same as a competitor's product  
C) 

two or more companies agree to sell a product at a price higher than should be expected  
D) 

competitors are part of the same large parent organization  
Answer:  

C 
Diff: 1 
Terms:  

collusive pricing 
Objective:  

8 
AACSB:  

Ethical reasoning

183) 

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

one year  
B) 

two years  
C) 

five years  
D) 

None of these answers is correct.  
Answer:  

A 
Diff: 1 
Terms:  

target price 
Objective:  

2 
AACSB:  

Reflective thinking

184) 

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

one-time-only special order pricing  
B) 

product mix adjustments in a competitive market  
C) 

setting prices to generate a reasonable rate of return on investment  
D) 

changing prices in response to weak demand  
Answer:  

C 
Diff: 2 
Terms:  

target price 
Objective:  

2 
AACSB:  

Analytical skills


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:  
A) 

contribution margin  
B) 

operating income  
C) 

production costs  
D) 

gross margin  
Answer:  

B 
Diff: 2 
Terms:  

target price 
Objective:  

3 
AACSB:  

Reflective thinking 
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?  
A) 

$48.00  
B) 

$52.80  
C) 

$53.57  
D) 

$67.20  
Answer:  

B 
Explanation:  

B) 

target operating income $60 × .12 = $7.20; target cost = $60 - $7.20 = $52.80 

Diff: 2 
Terms:  

target cost per unit 
Objective:  

3 
AACSB:  

Analytical skills

187) 

A locked-in cost is a(n):  
A) 

opportunity cost that is fixed in the short run  
B) 

cost that can be changed in the short run  
C) 

cost that has not yet been incurred, but based on decisions that have already been made, will be incurred in the future  
D) 

cost that has been incurred, but based on decisions that have already been made, will be not incurred in the future  
Answer:  

C 
Diff: 2 
Terms:  

locked-in costs 
Objective:  

4 
AACSB:  

Reflective thinking

188) 

Under the cost-plus approach to pricing products, all of the following are prospective cost bases except for:  
A) 

full product cost  
B) 

target cost  
C) 

variable manufacturing cost  
D) 

variable product cost  
Answer:  

B 
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Reflective thinking 

189) 

Backwoods Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $80 per table, consisting of 70% variable costs and 30% fixed costs. The company has surplus capacity available. It is Backwoods' policy to add a 50% markup to full costs. 

a.  Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Backwoods should bid on this one-time-only special order? 

b.  A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Backwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Backwoods should bid on this long-term order?  
Answer:  

a.  The lowest price Backwoods should bid on the 100 table one-time special order is $5,600 = Variable costs ($80 × .70 × 100 tables), the short-term incremental costs. 

b.  The lowest price Backwoods should bid on the long-term hotel chain order is $120 per table = Full costs $80 + 50% markup, the long-term targeted price.  
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

2, 3 
AACSB:  

Analytical skills 

190) 

Schlickau Company manufactures basketball backboards. The following information pertains to the company's normal operations per month: 

  Output units  15,000 boards
  Machine-hours  4,000 hours
  Direct manufacturing labor-hours  5,000 hours

  Direct manufacturing labor per hour  $12
  Direct materials per unit  $100
  Variable manufacturing overhead costs  $150,000
  Fixed manufacturing overhead costs  $300,000
  Product and process design costs  $200,000
  Marketing and distribution costs  $250,000

Required: 

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

a.  Direct materials  $100.00
  Direct manufacturing labor ($12 × 5,000)/15,000  4.00
  Variable manufacturing ($150,000/15,000)  10.00
  Fixed manufacturing ($300,000/15,000)  2.00
  Marketing and distribution ($250,000/15,000)  16.67
  Research and development ($200,000/15,000)  13.33

  Total  $146.00

b.  Direct materials  $100.00
  Direct manufacturing labor  4.00
  Variable manufacturing  10.00
  Setup ($40,000 / 1,000)  40.00

  Total  $154.00 
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

2 
AACSB:  

Analytical skills 

191) 

Steven Corporation manufactures fishing poles that have a price of $21.00. It has costs of $16.32. A competitor is introducing a new fishing pole that will sell for $18.00. Management believes it must lower the price to $18.00 to compete in the highly cost-conscious fishing pole market. Marketing believes that the new price will maintain the current sales level. Steven Corporation's sales are currently 200,000 poles per year. 

Required: 

a.  What is the target cost for the new price if target operating income is 20% of sales?
b.  What is the change in operating income for the year if $18.00 is the new price and costs remain the same?
c.  What is the target cost per unit if the selling price is reduced to $18.00 and the company wants to maintain its same income level?  
Answer:  

a.  $18.00 - ($18.00 × 0.20) = $14.40 

b.  Change  = 200,000 × ($21.00 - $16.32) - [200,000 × ($18.00 - $16.32)]
  = $936,000 - $336,000
  = $600,000 reduction in income 

c.  Current income = 200,000 × ($21.00 - $16.32) = $936,000

  Target cost per unit: 

  $936,000  = (200,000 × $18.00) - 200,000y
  200,000y  = $2,664,000
  y  = $13.32  
Diff: 2 
Terms:  

target cost per unit, target price, target operating income per unit 
Objective:  

3 
AACSB:  

Analytical skills 

192) 

Robert's Medical Equipment Company manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,800 and fixed costs of $1,000 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds.

A competitor is introducing a new hospital bed similar to Deluxe that will sell for $4,000. Management believes it must lower the price to compete. Marketing believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Deluxe beds it can produce.

Required: 

a.  What is the annual operating income from Deluxe at the current price of $5,000?
b.  What is the annual operating income from Deluxe if the price is reduced to $4,000 and sales in units increase by 25%?
c.  What is the target cost per unit for the new price if target operating income is 20% of sales?  
Answer:  

a.  Sales (20,000 × $5,000)  $100,000,000
  Costs:
  Variable costs (20,000 × $2,800)  $56,000,000
  Fixed costs ($1,000 × 5,000 × 4)  20,000,000
  Setup costs ($400,000 × 4)  1,600,000  77,600,000

  Operating income  $ 22,400,000

b.  Sales (25,000 × $4,000)  $100,000,000
  Costs:
  Variable costs (25,000 × $2,800)  $70,000,000
  Fixed costs, same  20,000,000
  Setup costs ($400,000 × 5)  2,000,000  92,000,000

  Operating income  $ 8,000,000

c.  $4,000 - ($4,000 × 0.20) = $3,200  
Diff: 2 
Terms:  

price elasticity, target cost per unit 
Objective:  

3 
AACSB:  

Analytical skills 

193) 

Reuter Avionics currently sells radios for $1,800. It has costs of $1,400. A competitor is bringing a new radio to market that will sell for $1,600. Management believes it must lower the price to $1,600 to compete in the market for radios. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Reuter's sales are currently 1,000 radios per year. 

Required: 

a.  What is the target cost if target operating income is 25% of sales?
b.  What is the change in operating income if marketing is correct and only the sales price is changed?
c.  What is the target cost if the company wants to maintain its same income level, and marketing is correct?  
Answer:  

a.  $1,600 - ($1,600 × 0.25) = $1,200 

b.  (1,000 × ($1,800 - $1,400)) - (1,100 × ($1,600 - $1,400)) = $180,000 

c.  Current income = 1,000 × ($1,800 - $1,400) = $400,000
  Target cost y: $400,000 = (1,100 × $1,600) - 1,100y
  y = $1,360,000/1,100
  y = $1,236.3636  
Diff: 3 
Terms:  

target cost per unit, target pricing 
Objective:  

3 
AACSB:  

Analytical skills

194) 

Kezer Crafts currently sells motor boats for $6,000. It has costs of $4,650. A competitor is bringing a new motor boat to the market that will sell for $5,500. Management believes it must lower the price to $5,500 to compete in the market for motor boats. Marketing believes that the new price will cause sales to increase by 12.5%, even with a new competitor in the market. Kezer Crafts' sales are currently 2,000 motor boats per year. 

Required: 

a.  What is the target cost if target operating income is 25% of sales?
b.  What is the change in operating income if marketing is correct and only the sales price is changed?
c.  What is the target cost if the company wants to maintain its same income level, and marketing is correct?  
Answer:  

a.  $5,500 - ($5,500 × 0.25) = $4,125 

b.  (2,000 × ($6,000 - $4,650)) - (2,250 × (5,500 - $4,650)) = $787,500 less operating income 

c.  Current income = 2,000 × ($6,000 - $4,650) = $2,700,000
  Target cost y: $2,700,000 = (2,250 × $5,500) -2,250y
  y = $9,675,000/2,250
  y = $4,300 
Diff: 3 
Terms:  

target cost per unit, target pricing 
Objective:  

3 
AACSB:  

Analytical skills 

195) 

Nancy Company has budgeted sales of $300,000 with the following budgeted costs: 

  Direct materials  $60,000
  Direct manufacturing labor  40,000
  Factory overhead
  Variable  30,000
  Fixed  50,000
  Selling and administrative expenses
  Variable  20,000
  Fixed  30,000

Compute the average markup percentage for setting prices as a percentage of: 

a.  The full cost of the product
b.  The variable cost of the product
c.  Variable manufacturing costs
d.  Total manufacturing costs  
Answer:  

a.  $60,000 + $40,000 + $30,000 + $50,000 + $20,000 + $30,000 = $230,000
  ($300,000 - $230,000)/$230,000 = 30.4% 

b.  $60,000 + $40,000 + $30,000 + $20,000 = $150,000
  ($300,000 - $150,000)/$150,000 = 100% 

c.  $60,000 + $40,000 + $30,000 = $130,000
  ($300,000 - $130,000)/$130,000 = 130.8% 

d.  $60,000 + $40,000 + $30,000 + $50,000 = $180,000
  ($300,000 - $180,000)/$180,000 = 66.7%  
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills 

196) 

Timothy Company has budgeted sales of $780,000 with the following budgeted costs: 

  Direct materials  $168,000
  Direct manufacturing labor  132,000
  Factory overhead
  Variable  96,000
  Fixed  108,000
  Selling and administrative expenses
  Variable  72,000
  Fixed  100,000

Compute the average markup percentage for setting prices as a percentage of: 

a.  Total manufacturing costs
b.  The variable cost of the product
c.  The full cost of the product
d.  Variable manufacturing costs  
Answer:  

a.  $168,000 + $132,000 + $96,000 + $108,000 = $504,000
  ($780,000 - $504,000)/$504,000 = 54.8% 

b.  $168,000 + $132,000 + $96,000 + $72,000 = $468,000
  ($780,000 - $468,000)/$468,000 = 66.7% 

c.  $168,000 + $132,000 + $96,000 + $108,000 + $72,000 + $100,000 = $676,000
  ($780,000 - $676,000)/$676,000 = 15.4% 

d.  $168,000 + $132,000 + $96,000 = $396,000
  ($780,000 - $396,000)/$396,000 = 97%  
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5 
AACSB:  

Analytical skills 

197) 

Henderson Company is in the process of evaluating a new part using the following information.
?  Part SLC2002 has one production run each month, each with $16,000 in setup costs.
?  Part SLC2002 incurred $40,000 in development costs and is expected to be produced over the next three years.
?  Direct costs of producing Part SLC2002 are $56,000 per run of 24,000 parts each.
?  Indirect manufacturing costs charged to each run are $88,000.
?  Destination charges for each run average $18,000.
?  Part SLC2002 is selling for $12.50 in the United States and $25 in all other countries. Sales are one-third domestic and two-thirds exported.
?  Sales units equal production units each year. 

Required: 

a.  What are the estimated life-cycle revenues?
b.  What is the estimated life-cycle operating income for the first year?  
Answer:  

a.  Domestic ($12.50 × 12 months × 24,000 × 3 yrs. × 1/3)  $ 3,600,000
  Export ($25 × 12 months × 24,000 × 3 yrs. × 2/3)  14,400,000

  Estimated life-cycle revenues  $18,000,000

b.  Sales
  Domestic ($12.50 × 12 months × 24,000 × 1/3)  $1,200,000
  Export ($25 × 12 months × 24,000 × 2/3)  4,800,000

  Total Sales  6,000,000

  Costs:
  Development costs  $ 40,000
  Setup costs (12 × $16,000)  192,000
  Direct manufacturing costs (12 × $56,000)  672,000
  Indirect manufacturing costs (12 × $88,000)  1,056,000
  Destination costs (12 × $18,000)  216,000  2,176,000

  Estimated life-cycle operating income, first year  $3,824,000 
Diff: 3 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills 

198) 

Stone and Bicker are starting a new business venture and are in the process of evaluating their product lines. Information for one new product, hand-made lamps, is as follows:
?  Every six months a new lamp pattern will be put into production. Each new pattern will require $11,200 in setup costs.
?  The lamp product line incurred $48,000 in development costs and is expected to be produced over the next six years.
?  Direct costs of producing the lamps average $144 each. Each lamp requires 12 labor-hours and 2 machine-hours.
?  Indirect manufacturing costs are estimated at $160,000 per year.
?  Customer service expenses average $16 per lamp.
?  Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for $224.
?  Sales units equal production units each year. 

Required: 

a.  What are the estimated life-cycle revenues?
b.  What is the estimated life-cycle operating income for the first year?  
Answer:  

a.  Estimated life-cycle revenues:
  (2,000 × 2 patterns per year × $224 per lamp)  $ 896,000
  x 6 years
  $5,376,000

b.  Annual revenues (2,000 × $224 × 2)  $896,000

  Setup costs ($11,200 × 2)  $ 22,400
  Development costs  48,000
  Direct manufacturing costs (2,000 × $144 × 2)  576,000
  Indirect manufacturing costs  160,000
  Customer service costs ($16 × 2,000 lamps × 2)  64,000  870,400 

  Estimated life-cycle operating income for the first year  $ 25,600  
Diff: 2 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills 

199) 

Grace Greeting Cards Incorporated is starting a new business venture and are in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows:
?  Sixteen times each year, a new card design will be put into production. Each new design will require   $600 in setup costs.
?  The parchment grade card product line incurred $75,000 in development costs and is expected to be   produced over the next four years.
?  Direct costs of producing the designs average $0.50 each.
?  Indirect manufacturing costs are estimated at $50,000 per year.
?  Customer service expenses average $0.10 per card.
?  Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50.
?  Sales units equal production units each year. 

Required: 

a.  What are the estimated life-cycle revenues?
b.  What is the estimated life-cycle operating income for the first year?
c.  What is the estimated life-cycle operating income per year for the years after the first year?
d.  What is the total estimated life-cycle operating income? 
Answer:  

a.  Estimated life-cycle revenues:
  (2,500 × 16 designs per year × $3.50 per card sold)  $140,000
  x 4 years
  $560,000

b.  Annual revenues (2,500 × $3.50 × 16)  $140,000

  Development costs  $ 75,000
  Setup costs ($600× 16)   9,600
  Direct manufacturing costs (2,500 × $0.50 × 16)  20,000
  Indirect manufacturing costs  50,000
  Customer service costs ($0.10 × 2,500 cards × 16)  4,000  158,600 

  Estimated life-cycle operating income (loss) for the first year  $(18,600) 

c.  Annual revenues (2,500 × $3.50 × 16)  $140,000

  Setup costs ($600× 16)  $ 9,600
  Direct manufacturing costs (2,500 × $0.50 × 16)  20,000
  Indirect manufacturing costs  50,000
  Customer service costs ($0.10 × 2,500 cards × 16)  4,000  83,600 

  Estimated life-cycle operating income (loss) for the first year  $56,400 

d.  Estimated life-cycle operating income for all four years  $150,600
  (3 × $56,400 - $18,600)   
Diff: 2 
Terms:  

life-cycle costing, life-cycle budgeting 
Objective:  

6 
AACSB:  

Analytical skills 

200) 

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

The major influences are customers, competitors, and costs. 

Customers: Managers must always examine pricing problems through the eyes of their customers. A price increase may cause customers to reject a company's product and choose a competing or substitute product. 

Competitors: Competitors' reactions influence pricing decisions. At one extreme, a rival's prices and products may force a business to lower its prices to be competitive. At the other extreme, a business without a rival in a given situation can set higher prices. A business with knowledge of its rivals' technology, plant capacity, and operating policies is able to estimate its rivals' costs, which is valuable information in setting competitive prices. 

Costs: Companies price products to exceed the costs of making them. The study of cost-behavior patterns gives insight into the income that results from different combinations of price and output quantities sold for a particular product.  
Diff: 2 
Terms:  

target price 
Objective:  

1 
AACSB:  

Reflective thinking

201) 

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

Short-run pricing decisions typically have a time horizon of less than a year and include such decisions such as (a) pricing a one-time-only special order with no long-run implications and (b) adjusting product mix and output volume in a competitive market place. Two key differences affect pricing for the long-run versus the short-run.
1. Fixed costs are often irrelevant for the short-run and are generally relevant in the long-run because they can be altered in the long-run.
2. Profit Margins in the long-run pricing decisions are often set to earn a reasonable return on investment. Short-run pricing decisions is more opportunistic. Prices are decreased when demand is weak and increased when demand is strong. 
Diff: 2 
Terms:  

life-cycle budgeting 
Objective:  

2 
AACSB:  

Reflective thinking

202) 

In target costing, what are at least two techniques used to achieve target costing goals?  
Answer:  

In target costing, techniques used to achieve target-costing goals include value engineering, cross-functional teams, and supply-chain management.  
Diff: 2 
Terms:  

target cost per unit, value engineering 
Objective:  

3 
AACSB:  

Reflective thinking

203) 

What is the primary reason a firm would adopt target costing?  
Answer:  

The primary reason a firm would adopt target costing is to reduce costs. Its unique approach is to design costs out of products during the design stage in the product life cycle. Many firms are adopting this approach when they cannot reduce costs further using traditional costing methods, which focus on cost reductions in manufacturing.  
Diff: 2 
Terms:  

target cost per unit 
Objective:  

3 
AACSB:  

Reflective thinking 
204) 

Compare target costing and kaizen costing.  
Answer:  

Target costing focuses on reducing costs for products during the design stage. Kaizen costing focuses on reducing costs for products in the manufacturing stage.  
Diff: 2 
Terms:  

target cost per unit 
Objective:  

3, 4 
AACSB:  

Reflective thinking

205) 

Explain the difference between locked in costs and costs incurred. Which of these types of costs does a traditional accounting system emphasize? At which stage of the value chain are most costs locked-in? At which stage of the value chain are most costs incurred? What implication does this have for good cost management?  
Answer:  

Locked-in costs are costs that have not been incurred yet, but based on decisions that have already been made, will be incurred in the future. Traditional accounting systems focus upon incurred costs, or costs as they happen. Most costs are actually locked-in at the design stage. but they are not incurred until the manufacturing stage. Good cost management depends, therefore, on a great deal of attention given to costs at the design stage since it may not be possible to influence costs at the manufacturing stage because the costs are locked-in at that time.  
Diff: 2 
Terms:  

costs incurred, locked-in costs 
Objective:  

4 
AACSB:  

Reflective thinking


206) 

Ski Valet provides materials that let people teach themselves how to snow ski. It has six different skill-level programs. Each one includes visual and audio learning aids along with a workbook that can be submitted to the company for grading and evaluation purposes, if the person so desires. 

The accounting system of Ski Valet is very traditional in its reporting functions with the calendar year being the company's fiscal year. It includes an abundance of information that can be used for various reporting purposes. 

The company has found that any new idea soon runs its course with an effective life of about three years. Therefore, the company is always in the development stage of some new program. Program development requires experts in the area to provide the know-how of the item being developed and a development team that puts together the video, audio, and workbook materials. The actual costs of reproducing the packages are relatively inexpensive when compared to the development costs. 

Required: 

How might product life-cycle budgeting aid the company in improving its overall operations?  
Answer:  

Because the product life cycle for Ski Valet extends over several traditional accounting periods, it is critical for the company to consider a planning concept that evaluates each one of its products during its entire life cycle. Procedures that highlight an entire life cycle can include items for overall profitability, and which products might be repeated in a few years. With a large portion of their expenses in the development area, life-cycle budgeting can assist in predicting the sales needs for the entire life of a product.
 
It is probably more important to evaluate company performance on a product basis rather than year to year. Life-cycle budgeting would allow the company to compare products to each other rather than just comparing one year to the next.  
Diff: 2 
Terms:  

life-cycle budgeting 
Objective:  

6 
AACSB:  

Reflective thinking 
207) 

What factors may influence the level of markups?  
Answer:  

Factors affecting the level of markups include the strength of demand, the elasticity of demand, and the intensity of competition. In addition, strategic reasons also may influence the level of markups. For instance, a firm may either choose a low markup to penetrate the market and win market share from established products of its competitors, or employ a high markup if it employs a skimming strategy for a market segment in which some customers are willing to pay higher prices for the privilege of owning the product.  
Diff: 2 
Terms:  

cost-plus pricing 
Objective:  

5, 7 
AACSB:  

Reflective thinking

208) 

A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices be adjusted during peak periods? During slow times? Why?  
Answer:  

During peak periods the hotel can justify increased prices because of full capacity conditions, whereas in slower periods when there is excess capacity, the hotel may want to lower prices to fill the excess capacity.  
Diff: 2 
Terms:  

peak-load pricing 
Objective:  

7 
AACSB:  

Reflective thinking

209) 

Clark Manufacturing offers two product lines, IN2 and EL5. The demand of the IN2 product line is inelastic, while the demand of the EL5 product line is very elastic. If Clark initiates a price increase for both product lines,  how will customer demand change? How will the price increase affect operating profits?  
Answer:  

For the inelastic product line, when prices are increased demand will stay approximately the same and profits would be expected to increase. For the elastic product line, the increased price will result in decreased demand (i.e., lower sales volume). Whether a profit or a loss results from this change will depend on the amount of decreased demand and the amount of the increased contribution margin due to the increase in price.  
Diff: 2 
Terms:  

price elasticity 
Objective:  

7 
AACSB:  

Reflective thinking

210) 

What is price discrimination, and when is it illegal?  
Answer:  

Price discrimination is charging some customers a higher price for a given product or service than other customers. It is permissible if differences in prices can be justified by differences in costs and it is illegal only if the intent is to lessen or prevent competition for customers.  
Diff: 2 
Terms:  

price discrimination 
Objective:  

8 
AACSB:  

Reflective thinking

211) 

What advice would you give a company to avoid the appearance of predatory pricing?  
Answer:  

Useful advice for a company to avoid the appearance of predatory pricing would be (1) Collect data and keep detailed records of variable costs for all value chain functions; and (2) Review all proposed prices below variable cost in advance, with a presumption that claims of predatory intent would occur.  
Diff: 2 
Terms:  

predatory pricing 
Objective:  

8 
AACSB:  

Reflective thinking
4