ch12 - Cost Accounting, 13e (Horngren et al.) Chapter 12 1...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Cost Accounting, 13e (Horngren et al.) Chapter 12 1 Pricing Decisions and Cost Managemen 1) t Companie s must always examine pricing decisions through the eyes of their customers. Answer: TRUE Diff: 2 Terms: target price Objective: 1 AACSB: Ethical reasoning 2) Companie s that produce high quality products do not have to pay attention to the actions of their competitors. Answer: FALSE Explanation: No business operates in a vacuum. Companies must always be aware of the actions of their competitors. Diff: 2 Terms: target price Objective: 1 AACSB: Reflective thinking 3) Relevant costs for pricing decisions include manufacturing costs, but not costs from other value-chain functions. Answer: FALSE Explanation: Relevant costs for pricing decisions include costs from all value-chain functions, from R&D to customer service. Diff: 2 Terms: value-added cost Objective: 1 AACSB: Reflective thinking 4) Cost information only helps the company decide how many units to produce. Answer: TRUE Diff: 3 Terms: value-added cost Objective: 1 AACSB: Reflective thinking 5) In markets with little or no competition, the key factor affecting price is costs, not customers' willingness to pay or competitors. Answer: FALSE Explanation: In markets with little or no competition, the key factor affecting price is the customers' willingness to pay, not costs or competitors. Diff: 2 Terms: value-added cost Objective: 1 AACSB: Reflective thinking 6) When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions. Answer: FALSE Explanation: When prices are set in a competitive marketplace, companies have no control over setting prices and must accept the price determined by the market. Diff: 2 Terms: target price Objective: 1 AACSB: Reflective thinking 7) The only competition a firm must be concerned about when setting prices are those in the local market. Answer: FALSE Explanation: A firm must be concerned with local, national and even international competition when setting a price. Diff: 2 Terms: target price Objective: 1 AACSB: Reflective thinking 8) Short-run pricing decisions include adjusting product mix in a competitive environment. Answer: TRUE Diff: 2 Terms: target price Objective: 2 AACSB: Reflective thinking 9) Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions, but not long-term pricing decisions. Answer: FALSE Explanation: Profit margins are often set to earn a reasonable return on investment for long-term pricing decisions, but not shortterm pricing decision. Diff: 2 Terms: target operating income per unit Objective: 2 AACSB: Reflective thinking 10) In a one- time-only special order, existing fixed manufacturing costs are irrelevant. Answer: TRUE Diff: 2 Terms: value-added cost Objective: 2 AACSB: Reflective thinking 11) Relevant costs of a bidding decision should exclude revenues lost on lower-priced sales to existing customers. Answer: FALSE Explanation: Relevant costs of a bidding decision should include revenues lost on lower-priced sales to existing customers. Diff: 3 Terms: value-added cost Objective: 2 AACSB: Reflective thinking 12) Customer s prefer stable and predictable prices over a long time horizon. Answer: TRUE Diff: 2 Terms: target price Objective: 2 AACSB: Reflective thinking 13) Product cost analysis is important even if market forces set prices. Answer: TRUE Explanation: True, because a company still has to decide how much of that product to supply to market to maximize operating income, and that decision is based on cost factors. Diff: 3 Terms: cost incurrence Objective: 2 AACSB: Reflective thinking 14) Companie operate in very competitive environments use a market-based approach when making their long-run pricing decisions. s that Answer: TRUE Diff: 3 Terms: target price Objective: 2 AACSB: Reflective thinking 15) Companie operate in non competitive environments offering products or services that differ from each other use a market-based s that approach when making their long-run pricing decisions. Answer: FALSE Explanation: Companies that are not competitive favor costbased approaches because they do not need to respond or react to competitor's prices. The margin they add to the costs to determine the price depends on the value the customers place on the product or service. Diff: 3 Terms: target price Objective: 2 AACSB: Reflective thinking 16) Companie operate in non competitive environments offering products or services that differ from each other can charge a very high s that price for their products and services. Answer: FALSE Explanation: Although they do not have to respond to competition of other companies, the price they can set depends on the value the customers place on the product or service. Diff: 3 Terms: target price Objective: 2 AACSB: Reflective thinking 17) Target pricing is a form of cost-based pricing. Answer: FALSE Explanation: Target pricing is a form Diff: 1 Terms: target price Objective: 3 AACSB: Reflective thinking 18) The first step in target pricing is to determine the target cost of the product. Answer: FALSE Explanation: The first step in target pricing is to determine the target price of the product. Diff: 1 Terms: target cost per unit, target price Objective: 3 AACSB: Reflective thinking 19) Value engineering has the objective of reducing costs while still satisfying customer needs. Answer: TRUE Diff: 1 Terms: value engineering Objective: 3 AACSB: Reflective thinking 20) Reverse engineering has the objective of reducing costs while still satisfying customer needs. Answer: FALSE Explanation: Value engineering has the objective of reducing costs while still satisfying customer needs. Reverse engineering is a means of obtaining information about a companies competitors by disassembling and analyzing the competitor products to determine the design, materials, and technology used. Diff: 1 Terms: value engineering Objective: 3 AACSB: Reflective thinking 21) Rework is an example of a value-added cost. Answer: FALSE Explanation: Rework is an example of Diff: 1 Terms: nonvalue-added costs Objective: 3 AACSB: Reflective thinking 22) It is always clear which activities add value and which do not add value to a product. Answer: FALSE Explanation: Activities do not always fall neatly into valueadded or nonvalue-added categories. Diff: 2 Terms: nonvalue-added costs, value-added cost Objective: 3 AACSB: Reflective thinking 23) Value engineering seeks to reduce value-added costs as well as nonvalue-added costs. Answer: TRUE Explanation: True, value-added costs can be reduced through greater efficiencies. Diff: 3 Terms: value engineering Objective: 3 AACSB: Reflective thinking 24) Suppliers play a key role in the success of target costing. Answer: TRUE Diff: 2 Terms: target cost per unit Objective: 3 AACSB: Reflective thinking 25) Target costing begins with the price the customer is willing to pay and the "backs-into" what the product should cost. Answer: TRUE Diff: 2 Terms: target cost per unit Objective: 3 AACSB: Reflective thinking 26) Cost-plus pricing starts with what customers are willing to pay, and then adds a desired profit. Answer: FALSE Explanation: Cost-plus pricing starts with what the product costs, and then adds a desired mark-up on the cost. Diff: 2 Terms: cost-plus pricing Objective: 3 AACSB: Reflective thinking 27) Value engineering can be used to make cost improvements to meet a target cost. Answer: TRUE Diff: 2 Terms: value engineering Objective: 3 AACSB: Reflective thinking 28) Whether uses the market-based approach or the cost-based approach for pricing decisions, the market forces must be considered. the firm Answer: TRUE Diff: 2 Terms: target price Objective: 3 AACSB: Reflective thinking 29) Costs may be locked in before they are incurred. Answer: TRUE Diff: 2 Terms: locked-in costs, cost incurrence Objective: 4 AACSB: Reflective thinking 30) Locked-in costs have already been incurred. Answer: FALSE Explanation: Locked-in costs are those costs that have not yet been incurred, but which, based on decisions that have already been made, will be incurred in the future. Diff: 2 Terms: target price Objective: 4 AACSB: Reflective thinking 31) For manufacturing firms, product costs are generally locked in during the manufacturing stage. Answer: FALSE Explanation: For manufacturing firms, product costs are generally locked in during the design stage. Diff: 2 Terms: locked-in costs Objective: 4 AACSB: Reflective thinking 32) One goal of target costing is to design costs out of products. Answer: TRUE Diff: 2 Terms: designed-in costs, target cost per unit Objective: 4 AACSB: Reflective thinking 33) Spending more on the design phase of a new product usually reduces subsequent product-related costs. Answer: TRUE Diff: 2 Terms: designed-in costs, life-cycle costing Objective: 4 AACSB: Reflective thinking 34) Customer s are sometimes willing to pay for nonvalue-added costs. Answer: FALSE Explanation: A nonvalue-added cost is a cost that, if eliminated, would not reduce the actual or perceived value or utility (usefullness) customers obtain from using the product or service. It is a cost that the customer is unwilling to pay for. Diff: 1 Terms: nonvalue-added costs Objective: 4 AACSB: Analytical skills 35) Kaizen costing focuses on improving productivity and eliminating waste through continuous improvements. Answer: TRUE Diff: 1 Terms: target cost per unit Objective: 4 AACSB: Reflective thinking 36) In cost- plus pricing, the markup is a rigid number that determines the actual selling price. Answer: FALSE Explanation: In cost-plus pricing, the markup is ultimately determined by the market. Diff: 2 Terms: cost incurrence Objective: 5 AACSB: Reflective thinking 37) The target rate of return on investment is another way of referring to the markup percentage. Answer: FALSE Explanation: The target rate of return on investment and the markup percentage are two different things. Diff: 2 Terms: target rate of return on investment Objective: 5 AACSB: Reflective thinking 38) Cost bases that include fewer costs also have lower markups. Answer: FALSE Explanation: Cost bases that include fewer costs have higher markups. Diff: 2 Terms: cost-plus pricing Objective: 5 AACSB: Reflective thinking 39) Markups tend to be lower in more competitive markets. Answer: TRUE Diff: 2 Terms: cost-plus pricing Objective: 5 AACSB: Reflective thinking 40) The full- cost formula for pricing is relatively simple to use because it does not require a detailed analysis of cost behavior. Answer: TRUE Diff: 2 Terms: cost-plus pricing Objective: 5 AACSB: Reflective thinking 41) A full- cost base rather than a variable-cost base is a better guide for discounting decisions that may affect long-term customers. Answer: TRUE Diff: 2 Terms: cost-plus pricing Objective: 5 AACSB: Reflective thinking 42) One market-based pricing method is called the time and materials method. Answer: FALSE Explanation: The time and materials method is a cost-plus pricing method. The price charged for materials equals the materials cost plus a markup and the price charged for labor equals the labor cost plus a markup. The markups are chosen to recover overhead costs and to earn a profit. Diff: 2 Terms: cost-plus pricing Objective: 5 AACSB: Reflective thinking 43) To be profitable, a company must generate revenues to cover costs incurred in all six business functions. Answer: TRUE Diff: 2 Terms: cost incurrence Objective: 6 AACSB: Reflective thinking 44) Life-cycle budgeting is particularly important when nonproduction costs are significant. Answer: TRUE Diff: 2 Terms: life-cycle budgeting Objective: 6 AACSB: Reflective thinking 45) Many companies use life-cycle budgeting to determine target prices. Answer: TRUE Diff: 2 Terms: life-cycle budgeting Objective: 6 AACSB: Reflective thinking 46) Customer life-cycle costs focus on total costs incurred by the customer from purchase to disposal. Answer: TRUE Diff: 1 Terms: customer life-cycle costs Objective: 6 AACSB: Reflective thinking 47) Life-cycle estimates the costs and revenues attributed to a product from its initial R&D through production of a prototype product. budgeting Answer: FALSE Explanation: Life-cycle budgeting estimates the costs and revenues attributed to a product from its initial R&D through its final customer service and support. Diff: 2 Terms: life-cycle budgeting Objective: 6 AACSB: Reflective thinking 48) A firm using product life-cycle reporting will have a calendar-based focus for this report. Answer: FALSE Explanation: A firm using product life-cycle reporting will not necessarily have a calendar-based focus for this report since lifecycle reporting is a multi-year concept. Diff: 2 Terms: product life-cycle Objective: 6 AACSB: Reflective thinking 49) When price discrimination is effective, cost is not a major factor in setting prices. Answer: TRUE Diff: 2 Terms: price discrimination Objective: 7 AACSB: Reflective thinking 50) When demand is elastic, an increase in price will lead to an increase in profits. Answer: FALSE Explanation: When demand is inelastic, an increase in price will usually lead to an increase in profits. Diff: 1 Terms: price elasticity Objective: 7 AACSB: Reflective thinking 51) Peak-load the practice of charging a lower price for the same product or service when the demand for it approaches the physical limit pricing is of the capacity to produce that product or service. Answer: FALSE Explanation: Peak-load pricing is the practice of charging a higher 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. Diff: 1 Terms: peak-load pricing Objective: 7 AACSB: Reflective thinking 52) Price discrimination is the illegal practice of charging some customers a higher price than is charged to other customers. Answer: FALSE Explanation: Price discrimination is a legal practice of charging some customers a higher price than is charged to other customers. Diff: 1 Terms: price discrimination Objective: 7 AACSB: Ethical reasoning 53) When demand is strong, firms usually increase markups. Answer: TRUE Explanation: True, when capacity is limited this is referred to as peak-load pricing. Diff: 2 Terms: cost-plus pricing Objective: 7 AACSB: Reflective thinking 54) Price discrimination laws apply only to manufacturers. Answer: TRUE Diff: 2 Terms: price discrimination Objective: 8 AACSB: Ethical reasoning 55) Price discrimination is only illegal if the intent is to destroy competition. Answer: TRUE Diff: 1 Terms: price discrimination Objective: 8 AACSB: Ethical reasoning 56) A business that engages in predatory pricing violates various U.S. antitrust laws. Answer: TRUE Diff: 1 Terms: predatory pricing Objective: 8 AACSB: Ethical reasoning 57) Price dumping occurs when a domestic company is trying to get rid of out-of-style products at a substantially reduced price. Answer: FALSE Explanation: Price dumping occurs when a non-U.S. company sells a product in the United States at a price below the market value where it is produced and this action threatens to injure an industry in the United States. Diff: 1 Terms: dumping Objective: 8 AACSB: Multiculturalism and diversity 58) Collusive occurs when companies in an industry conspire in their pricing and output decisions to achieve a price above the pricing competitive price. Answer: TRUE Diff: 1 Terms: collusive pricing Objective: 8 AACSB: Ethical reasoning 59) Peak-load pricing is a form of price discrimination and is illegal. Answer: FALSE Explanation: Peak-load pricing is not considered a form of price discrimination and it is legal unless its intent is to destroy competition. Diff: 2 Terms: peak-load pricing Objective: 8 AACSB: Ethical reasoning 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. Answer: TRUE Diff: 2 Terms: predatory pricing, dumping, collusive pricing Objective: 8 AACSB: Ethical reasoning 61) Companie s should ONLY produce and sell units as long as: A) there is B) customer demand for the product the competition allows it C) the revenue D) from an additional unit exceeds the cost of producing it 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 B) customer from purchasing a product increase C) demand for the product 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) Companie s must ALWAYS examine their pricing: A) based on the B) supply of the product based on the C) cost of producing the product through the D) eyes of their customers through the eyes of their competitors Answer: C Diff: 3 Terms: target price Objective: 1 AACSB: Ethical reasoning 64) Competit ors: A) with alternative products can force a company to lower its prices B) can gain a C) competitive pricing advantage with knowledge of your costs and operating policies may span D) international borders All of these answers are correct. Answer: D Diff: 2 Terms: target price Objective: 1 AACSB: Reflective thinking 65) Fluctuatio ns in exchange rates between different currencies can influence the: A) cost of products using foreign suppliers B) pricing of C) alternative products offered by foreign competitors demand for D) products of foreign competitors 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 C) willingness of a company to supply a product for pricing D) decisions includes manufacturing costs, but not product design costs 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 B) willingness to pay price charged for alternative products C) cost of D) producing and delivering the product 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 B) willingness to pay price charged for alternative products C) cost of D) producing and delivering the product 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, B) costs, and customers competition, C) demand, and production efficiency continuous D) improvement, customer satisfaction, and supply 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 B) horizon of less than one year include C) adjusting product mix in a competitive environment 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 B) may be irrelevant for long-term pricing decisions are more C) opportunistic 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) nonmanufacturi ng 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 D) decision 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 C) need to change cost structures frequently reducing D) competition 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 C) related to the product direct and D) indirect variable costs of each function in the value chain 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 C) manufacturing and selling costs include all D) direct costs plus an appropriate allocation of the indirect costs of all business functions 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) Northwoo invited to bid on a one-time-only special order to supply 200 rustic tables. What is the lowest price Northwoods should bid ds is on this special order? A) $21,600 B) $7,200 C) $12,000 D) $14,400 Answer: D Explanation: D) $ Diff: 2 T 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) $ Diff: 2 T 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 bid on a one-time-only special order to supply 50 air conditioners. What is the lowest price Caruso should bid on this invited to special order? A) $4,750.00 B) $3,562.50 C) $6,250.00 D) $6,175.00 Answer: B Explanation: B) $ Diff: 2 T 2 AACSB: Analytical skills 81) A motel chain is currently expanding and has decided to create more rooms and air condition all of its rooms, which are medium currently not air conditioned. Caruso Cool is invited to submit a bid to the motel chain. What per unit price will Caruso sized 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) $ Diff: 2 T 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 Direct manufacturing labor Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (30%) Estimated selling price 82) $200 60 30 100 390 117 $507 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) $ Diff: 2 T 2 AACSB: Analytical skills 83) Before accepting this one-time-only special order, Rogers' Heaters should consider the impact on: A) current plant B) capacity long-term C) customers 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) T Diff: 2 T 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 Direct manufacturing labor Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (20%) Estimated selling price 85) $850 50 100 75 1,075 215 $1,290 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) target price Objective: 2 AACSB: Analytical skills 86) Before this one-time-only special order, Gerry's Generators wants to know how much profit would be made on the order: accepting 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) T Diff: 2 T 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 Direct labor Manufacturing overhead Marketing costs Fixed costs: Manufacturing overhead Marketing costs Total costs Markup (10%) Estimated selling price 88) $30 10 15 5 100 20 180 18 $198 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) $ Diff: 2 T 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) $ Diff: 1 T 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) T Diff: 2 T 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 Machine-hours Direct manufacturing labor-hours Direct materials per unit Direct manufacturing labor per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs 91) 30,000 tables 8,000 hours 10,000 hours $50 $6 $161,250 $600,000 $450,000 $562,500 Berryman approached by an overseas customer to fulfill a one-time-only special order for 2,000 units. All cost relationships remain Products the same except for a one-time setup charge of $20,000. No additional design, marketing, or distribution costs will be is 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) D D V S 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) D D V Diff: 3 T F M E 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 Machine-hours Direct manufacturing labor-hours Direct materials per unit Direct manufacturing labor per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs 93) 10,000 phones 8,000 hours 5,000 hours $25 $15 $175,000 $425,000 $400,000 $475,000 Delgreco approached by an overseas customer to fulfill a one-time-only special order for 1,000 units. All cost relationships remain Products the same except for a one-time setup charge of $15,000. No additional design, marketing, or distribution costs will be is 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) D D V S M 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) D D V Diff: 3 T F M E 2, 5 AACSB: Analytical skills 95) Target pricing: A) is used for B) short-term pricing decisions is one form of cost-based pricing C) estimates are D) based on customers' perceived value of the product 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 B) understand the competitor's technologies and financial conditions may get C) information from suppliers that service the competitor 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 B) department sales and C) marketing department design D) department distribution department Answer: B Diff: 1 Terms: target price Objective: 3 AACSB: Reflective thinking 98) Relevant costs for target pricing are: A) variable B) manufacturing costs variable C) manufacturing and variable nonmanufacturing costs 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 tation of target costing in order: following A = Derive a target cost steps for B = Develop a target price the C = Perform value engineering implemen 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 B) product design changes in C) materials specifications 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 C) maintenance and repairs of the manufacturing equipment are reduced D) through improved efficiencies 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 B) pricing 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 D) requested from suppliers and distributors 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 B) engineering the markup C) component 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 D) target pricing is to undercut the competition 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 B) pricing 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) $ Diff: 1 T 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) $ Diff: 2 T 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) $ Diff: 2 T 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) [ Diff: 2 T 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) $ Diff: 1 T 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) $ Diff: 2 T 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) $ Diff: 2 T 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) $ Diff: 2 T 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) $ Diff: 2 T 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) [ Diff: 3 T 3 AACSB: Analytical skills 117) What is cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)? the target A) $112.50 B) $113.64 C) $123.34 D) $140.00 Answer: B Explanation: B) C Diff: 3 T y 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 priceto $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) $ Diff: 2 T 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) [ Diff: 3 T 3 AACSB: Analytical skills 120) What is cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)? the target A) $168.75 B) $170.46 C) $185.00 D) $210.00 Answer: B Explanation: B) C Diff: 3 T y 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 C) pressure is put on suppliers development D) time may decrease 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) customerD) service 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) customerD) service 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 D) pricing Life-cycle costing Answer: B Diff: 1 Terms: Kaizen costing Objective: 4 AACSB: Reflective thinking 127) Cross- functional engineering teams may include: A) marketing B) managers suppliers C) management D) accountants 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 C) design stage during the D) customer-service stage 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 C) costs 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 C) lines running parallel until the end of the process, when they join locked-in costs faster initially than the incurred cost, but joining the incurred cost line at the completion of the value-chain functions rising much 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 B) generally locked in before they are incurred. After a C) product's design has been approved, costs are difficult to influence. 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 C) number of features offered redesigning D) alternative options over and over until the wishes of all cross-functional team members are accommodated 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 + B) Markup component = Prospective selling price Prospective C) selling price - Cost base = Markup component Cost base + D) Gross margin = Prospective selling price 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 B) number is ultimately C) determined by the market provides a D) means to calculate the actual selling price 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 D) manufacturing costs 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 D) manufacturing costs All of these answers are correct. Answer: D Diff: 2 Terms: cost-plus pricing Objective: 5 AACSB: Reflective thinking 137) Erickson considering pricing its 5,000-gallon petroleum tanks using either variable manufacturing or full product costs as the base. Company The variable cost base provides a prospective price of $3,000 and the full cost base provides a prospective price of $3,050. is The difference between the two prices is: A) the estimated B) amount of profit 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 B) pricing 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 B) capacity demand is C) strong 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 D) manufacturing costs 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 B) selects a cost base that it regards as reliable. A company percentage that estimates a product price that covers full product costs and earns the required return on investment. uses a markup C) The selling D) price computed is only a prospective price. 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) Advantag es of using the full cost of the product as the cost base include all of the following EXCEPT that: A) managers are B) informed regarding the minimum long-run cost they need to recover to stay in business it limits the C) ability of a salesperson to cut prices fixed cost D) allocations can be arbitrary 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) $ Diff: 2 T 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) $ Diff: 2 T 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) $ Diff: 3 T 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) $ Diff: 2 T 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) $ Diff: 2 T 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) $ Diff: 3 T 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 Direct labor Manufacturing overhead Variable Fixed Selling and administrative Variable Fixed Total costs Meyer has an annual target operating income of $450,000. 149) $ 562,500 390,000 420,000 322,500 180,000 240,000 $2,115,000 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) ( Diff: 3 T 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) ( Diff: 3 T 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) ( Diff: 3 T 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) $ Diff: 3 T 5 AACSB: Analytical skills 153) Life-cycle costing is the name given to: A) a method of B) cost planning to reduce manufacturing costs to targeted levels 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 C) evaluation of the competition 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 B) development period for R&D is short and inexpensive there are C) significant nonproduction costs 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 B) common with target pricing is most useful to companies that manufacture small items such as household plastics C) helps D) companies estimate revenues over a multiyear horizon 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 C) customer for buying and using a product same as the D) selling life-cycle prices 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) F S T 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) S D S C E Diff: 3 T 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) L L D S D I D C T L 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) F Diff: 1 T 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) R D Diff: 3 T C O 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) L L L 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) F Diff: 1 T 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) R D Diff: 3 T C O 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) L L L 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 C) different prices for quantity amounts 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) customerB) preference pricing high-load C) pricing peak-load D) pricing 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 B) operating profits will increase remain the C) same, and operating profits will increase 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 B) same, and operating profits will increase remain the C) same, and operating profits may either increase or decrease 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 D) opportunity for price discrimination exists 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 20,000 units $150 $100 Projected 18,000 units $160 $100 Demand Selling price Variable costs per unit 173) Would you recommend the $10 price increase? A) No, because B) demand decreased. No, because the selling price increases. C) Yes, because D) contribution margin per unit increases. Yes, because operating income increases. Answer: D Explanation: D) [ Diff: 2 T 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 10,000 units $51 $45 Projected 12,500 units $49 $44 Demand Selling price Variable costs per unit 175) Would you recommend the $2 price decrease? A) Yes, because B) demand increases. No, because the selling price decreases. C) Yes, because D) operating income increases. No, because contribution margin per unit decreases. Answer: C Explanation: C) [ Diff: 2 T 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 average more than twice the fans of games on other days. The following information pertains to the stadium's normal Maize operations per season: Eagles are evaluating Average fans per game (all games) 2,500 fans ticket Average fans per Friday and Saturday night games 3,500 fans prices for Number of home games per season 30 games its Stadium capacity 3,500 seats basketball Variable operating costs per operating hour $2,000 games. Marketing costs per season for basketball $138,750 Studies Customer-service costs per season for basketball $25,000 show that Friday The stadium is open for 5 operating hours on each day a game is played. All employees work by the hour except for the and administrators. A maximum of one game is played per day and each fan has only one ticket per game. Saturday night The stadium authority wants to charge more for games on Friday and Saturday. What is the minimum price that should be games charged for peak attendance nights? A) $4.40 B) $8.60 C) $6.19 D) $171.45 Answer: C Explanation: C) V M Diff: 3 T A M 7 AACSB: Analytical skills 178) Hitz twice the rentals of other days of the week. The following information pertains to the store's normal operations per week: Video Rental is Average rentals per day on Friday and Saturday 1,150 evaluating Average rentals per day on Sunday through Thursday 500 rental Store hours per day 12 prices. Total units available for rent 10,000 Historical data show Variable operating costs per hour $ 40 that Marketing costs per week $1,500 Friday Customer service costs per week $ 250 and Saturday The store manager wants to charge more for rentals on Friday and Saturday. What is the minimum price that should be have charged during peak rental days? A) $0.60 B) $0.83 C) $0.90 D) $1.07 Answer: D Explanation: D) V M C A 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 C) when a company declares bankruptcy so that it can sell its remaining goods quickly is used in the D) food industry for perishable goods 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 B) records of variable costs for all value-chain business functions use a variable cost-plus markup method of pricing C) underprice D) products on a consistent basis, rather than sporadically 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 B) wants two products to sell for the same, or almost the same, amount a company C) wants a product to sell for the same as a competitor's product two or more D) companies agree to sell a product at a price higher than should be expected 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 C) adjustments in a competitive market 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 the target-costing approach to pricing, the target cost per unit is the difference between the per unit target price and the per firm uses unit target: A) contribution B) margin operating C) income production costs D) gross margin Answer: B Diff: 2 Terms: target price Objective: 3 AACSB: Reflective thinking 186) Action video game cassette for the upcoming holiday season. It is trying to determine the target cost for the game if the selling Toys has 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 a new 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) t Diff: 2 T 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 D) manufacturing cost variable product cost Answer: B Diff: 2 Terms: cost-plus pricing Objective: 5 AACSB: Reflective thinking 189) Backwoo g system estimates manufacturing costs to be $80 per table, consisting of 70% variable costs and 30% fixed costs. The ds company has surplus capacity available. It is Backwoods' policy to add a 50% markup to full costs. Incorporat ed a. Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Backwoods manufact should bid on this one-time-only special order? ures rustic furniture. b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Backwoods The cost Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Backwoods should bid on this accountin 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 longterm targeted price. Diff: 2 Terms: cost-plus pricing Objective: 2, 3 AACSB: Analytical skills 190) Schlickau Output units 15,000 boards Company Machine-hours 4,000 hours manufact Direct manufacturing labor-hours 5,000 hours ures basketball Direct manufacturing labor per hour $12 backboard Direct materials per unit $100 s. The Variable manufacturing overhead costs $150,000 following Fixed manufacturing overhead costs $300,000 informati Product and process design costs $200,000 on Marketing and distribution costs $250,000 pertains to the Required: company' s normal a. For long-run pricing, what is the full-cost base per unit? operations b. Schlickau Company is approached by an overseas city to fulfill a one-time-only special order for 1,000 units. All cost per relationships remain the same except for an additional one-time setup charge of $40,000. No additional design, marketing, month: 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 Corporati on manufact ures 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 Equipmen t Company manufact ures 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 competitor is bringing a new radio to market that will sell for $1,600. Management believes it must lower the price to Avionics $1,600 to compete in the market for radios. Marketing believes that the new price will cause sales to increase by 10%, even currently with a new competitor in the market. Reuter's sales are currently 1,000 radios per year. sells radios for Required: $1,800. It has costs a. What is the target cost if target operating income is 25% of sales? of $1,400. b. What is the change in operating income if marketing is correct and only the sales price is changed? A 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 A competitor is bringing a new motor boat to the market that will sell for $5,500. Management believes it must lower the Crafts price to $5,500 to compete in the market for motor boats. Marketing believes that the new price will cause sales to increase currently by 12.5%, even with a new competitor in the market. Kezer Crafts' sales are currently 2,000 motor boats per year. sells motor Required: boats for $6,000. It a. What is the target cost if target operating income is 25% of sales? has costs b. What is the change in operating income if marketing is correct and only the sales price is changed? of $4,650. 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 $60,000 Company Direct manufacturing labor 40,000 has Factory overhead budgeted Variable 30,000 sales of Fixed 50,000 $300,000 Selling and administrative expenses with the Variable 20,000 following Fixed 30,000 budgeted costs: Compute the average markup percentage for setting prices as a percentage of: a. The full cost of the product Direct b. The variable cost of the product materials 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 $168,000 Company Direct manufacturing labor 132,000 has Factory overhead budgeted Variable 96,000 sales of Fixed 108,000 $780,000 Selling and administrative expenses with the Variable 72,000 following Fixed 100,000 budgeted costs: Compute the average markup percentage for setting prices as a percentage of: a. Total manufacturing costs Direct b. The variable cost of the product materials 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) Henderso has one production run each month, each with $16,000 in setup costs. n ∙ Part SLC2002 incurred $40,000 in development costs and is expected to be produced over the next three years. Company ∙ Direct costs of producing Part SLC2002 are $56,000 per run of 24,000 parts each. is in the ∙ Indirect manufacturing costs charged to each run are $88,000. process of ∙ Destination charges for each run average $18,000. evaluating ∙ Part SLC2002 is selling for $12.50 in the United States and $25 in all other countries. Sales are one-third domestic and a new part two-thirds exported. using the ∙ Sales units equal production units each year. following informati Required: on. ∙ Part a. What are the estimated life-cycle revenues? SLC2002 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 lifecycle 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 lifecycle operating income, first year $3,824,000 Diff: 3 Terms: life-cycle costing, life-cycle budgeting Objective: 6 AACSB: Analytical skills 198) Stone and Information for one new product, hand-made lamps, is as follows: Bicker are ∙ Every six months a new lamp pattern will be put into production. Each new pattern will require $11,200 in setup costs. starting a ∙ The lamp product line incurred $48,000 in development costs and is expected to be produced over the next six years. new ∙ Direct costs of producing the lamps average $144 each. Each lamp requires 12 labor-hours and 2 machine-hours. business ∙ Indirect manufacturing costs are estimated at $160,000 per year. venture ∙ Customer service expenses average $16 per lamp. and are in ∙ Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for $224. the ∙ Sales units equal production units each year. process of evaluating Required: their product a. What are the estimated life-cycle revenues? lines. b. What is the estimated life-cycle operating income for the first year? Answer: a. Estimated lifecycle 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 lifecycle operating income for the first year $ 25,600 Diff: 2 Terms: life-cycle costing, life-cycle budgeting Objective: 6 AACSB: Analytical skills 199) Grace on for one new product, traditional parchment grade cards, is as follows: Greeting ∙ Sixteen times each year, a new card design will be put into production. Each new design will require $600 in setup Cards costs. Incorporat ∙ The parchment grade card product line incurred $75,000 in development costs and is expected to be produced over ed is the next four years. starting a ∙ Direct costs of producing the designs average $0.50 each. new ∙ Indirect manufacturing costs are estimated at $50,000 per year. business ∙ Customer service expenses average $0.10 per card. venture ∙ Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50. and are in ∙ Sales units equal production units each year. the process of Required: evaluating its a. What are the estimated life-cycle revenues? product b. What is the estimated life-cycle operating income for the first year? lines. c. What is the estimated life-cycle operating income per year for the years after the first year? Informati d. What is the total estimated life-cycle operating income? Answer: a. Estimated lifecycle 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 lifecycle 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 50,000 Customer service costs ($0.10 × 2,500 cards × 16) 4,000 83,600 Estimated lifecycle operating income (loss) for the first year $56,400 d. Estimated lifecycle 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 costbehavior patterns gives insight into the income that results 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-timeonly 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 longrun versus the shortrun. 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. Shortrun 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 targetcosting goals include value engineering, cross-functional teams, and supplychain 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 between locked in costs and costs incurred. Which of these types of costs does a traditional accounting system emphasize? the At which stage of the value chain are most costs locked-in? At which stage of the value chain are most costs incurred? difference 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 visual and audio learning aids along with a workbook that can be submitted to the company for grading and evaluation provides purposes, if the person so desires. materials that let The accounting system of Ski Valet is very traditional in its reporting functions with the calendar year being the company's people fiscal year. It includes an abundance of information that can be used for various reporting purposes. teach themselve The company has found that any new idea soon runs its course with an effective life of about three years. Therefore, the s how to company is always in the development stage of some new program. Program development requires experts in the area to snow ski. provide the know-how of the item being developed and a development team that puts together the video, audio, and It has six workbook materials. The actual costs of reproducing the packages are relatively inexpensive when compared to the different development costs. skill-level programs. Required: Each one includes 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 Florida, experiences peak periods and slower times. How should prices be adjusted during peak periods? During slow Orlando, 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 offers two product lines, IN2 and EL5. The demand of the IN2 product line is inelastic, while the demand of the EL5 Manufact product line is very elastic. If Clark initiates a price increase for both product lines, how will customer demand uring 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 ...
View Full Document

This note was uploaded on 09/18/2010 for the course ACCT 424 taught by Professor All during the Spring '10 term at DeVry Long Beach.

Ask a homework question - tutors are online