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