Appendix A - Appendix A Pricing Products and Services...

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Appendix A Pricing Products and Services True/False Questions 1. The price elasticity of demand is used to determine the markup over cost when computing the profit-maximizing price. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 2. Assume that the price elasticity of demand is less than -1. If the absolute value of the price elasticity of demand increases, the profit-maximizing price increases. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard 3. If the unit sales for one product are more sensitive to price increases than another product, then its markup over variable cost should be more than for the other product if the company wants to maximize profit. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 4. Demand for a product is said to be elastic if a change in price has little effect on the number of units sold. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 5. The demand for products that are sold in discount stores is generally less elastic than the demand for products sold in upscale boutiques. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 6. The price elasticity of demand can be estimated using the formula ln(1 + percentage change in quantity sold)/ln(1 + percentage change in selling price). Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition A-3
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Appendix A Pricing Products and Services 7. Under the absorption approach to cost-plus pricing described in the text, all fixed costs are included in the cost base in setting a selling price. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 8. The absorption costing approach to cost-plus pricing will result in attaining the company's required rate of return only if forecasted unit sales are realized. Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 9. The markup over cost under the absorption costing approach would decrease if the required rate of return increases, holding everything else constant. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 10. The markup over cost under the absorption costing approach would decrease if the unit product cost increases, holding everything else constant. Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard
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