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CHAPTER 8 PRICING SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY It em

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21. 22. a 23. a 24. a 25.

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98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121.

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122. 123. 124. 125. 126. a 127. a 128. a 129. a 130. a 131. a 132. a 133. a 134. a 135. a 136. a 137. a 138. a 139. a 140. a 141. a 142. a 143. a 144. a 145.

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167. 168. a 169.

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True-False Statements 1. 2. 3. 4. 5.

1 1 1 2 2

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6. 7. 8. 9. 10.

2 2 3 3 3

C C K K K

11. 12. 13. 14. 15.

3 4 4 4 4

K K K C C

16. 17. 18. 19. 20.

a

a

Multiple Choice Questions 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2

K K K C C K K K K C AP AP AP AP AP K K AP AP AP AP AP AP AP

50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3

AP AP AP AP C C K K C AP AP C K AP AP K K C C K AP AP AP K

74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97.

3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4

AP AP AP AP AP AP AP K K K AP AP AP K K K C AP K K K K K C

Brief Exercises 146. 147. 148.

1 2 2

AP AP AP

149. 150. 151.

2 2 3

AP AP AP

152. 153. 154.

3 4 4

AP AP AP

Exercises 158. 159. 160. a

1 1 2

AP AP AP

161. 162. 163.

2 2 3

AP AP AP

164. 165. 166.

3 4 4

AP AN AN

This question covers a topic in an Appendix to the chapter.

a

170.

8-2

Test Bank for ISV Managerial Accounting, Fourth Edition

Completion Statements 171. 172.

1 2

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173. 174.

2 3

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175. 176.

4 4

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177. 178.

4 4

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179. 180.

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SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE It em

Typ Typee

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1. 2. 3. 26.

TF TF TF MC

27. 28. 29. 30.

MC MC MC MC

31. 32. 33. 34.

4. 5. 6. 7. 41. 42.

TF TF TF TF MC MC

43. 44. 45. 46. 47. 48.

MC MC MC MC MC MC

49. 50. 51. 52. 53. 54.

8. 9. 10. 11. 65.

TF TF TF TF MC

66. 67. 68. 69. 70.

MC MC MC MC MC

71. 72. 73. 74. 75.

12. 13. 14. 15. 16. 17. 18. 87.

TF TF TF TF TF TF TF MC

88. 89. 90. 91. 92. 93. 94. 95.

MC MC MC MC MC MC MC MC

96. 97. 98. 99. 100. 101. 102. 103.

19.

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127. 128. 129. 130. 131.

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Study Objective 1 MC 35. MC 39. MC 36. MC 40. MC 37. MC 146. MC 38. MC 158. Study Objective 2 55. MC 61. 56. MC 62. 57. MC 63. 58. MC 64. 59. MC 147. 60. MC 148. Study Objective 3 MC 76. MC 81. MC 77. MC 82. MC 78. MC 83. MC 79. MC 84. MC 80. MC 85. Study Objective 4 MC 104. MC 112. MC 105. MC 113. MC 106. MC 114. MC 107. MC 115. MC 108. MC 116. MC 109. MC 117. MC 110. MC 118. MC 111. MC 119. Study Objective 5 MC 126. MC 179. Study Objective 6a MC 137. MC 142. MC 138. MC 143. MC 139. MC 144. MC 140. MC 145. MC 141. MC 156. MC MC MC MC MC MC

Typ ypee

It em

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MC MC BE Ex

159. 171.

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149. 150. 160. 161. 162. 172.

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173.

C

MC MC MC MC MC

86. 151. 152. 163. 164.

MC BE BE Ex Ex

174.

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MC MC MC MC MC MC MC MC

120. 121. 122. 123. 124. 153. 154. 155.

MC MC MC MC MC BE BE BE

165. 166. 167. 168. 175. 176. 177. 178.

Ex Ex Ex Ex C C C C

157. 169. 170. 180.

BE Ex Ex C

C MC MC MC MC BE

Note: TF = True-False BE = Brief Exercise C = Completion MC = Multiple Choice Ex = Exercise The chapter also contains one set of eight Matching questions and two Short-Answer Essay questions.

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CHAPTER STUDY OBJECTIVES 1. Compute a target cost when the market determines a product price. To compute a target cost, the company determines its target selling price. Once the target selling price is set, it determines its target cost by setting a desired profit. The difference between the target price and desired profit is the target cost of the product. 2. Compute a target selling price using cost-plus pricing. Cost-plus pricing involves establishing a cost base and adding to this cost base a markup to determine a target selling price. The cost-plus pricing formula is expressed as follows: Target selling price = Cost + (Markup percentage × Cost). 3. Use time-and-material pricing to determine the cost of services provided. Under timeand-material pricing, two pricing rates are set—one for labor used on a job and another for the material. The labor rate includes direct labor time and other employee costs. The material charge is based on the cost of direct parts and materials used and a material loading charge for related overhead cost. 4. Determine a transfer price using the negotiated, cost-based, and market-based approaches. The negotiated price is determined through agreement of division managers. Under a cost-based approach, the transfer price may be based on variable cost alone or on variable cost plus fixed costs. Companies may add a markup to these numbers. The costbased approach often leads to poor performance evaluations and purchasing decisions. A market-based transfer price is based on existing competing market prices and services. A market-based system is often considered the best approach because it is objective and generally provides the proper economic incentives. 5. Explain issues involved in transferring goods between divisions in different countries. Companies must pay income tax in the country where they generate the income. In order to maximize income and minimize income tax, many companies prefer to report more income in countries with low tax rates, and less income in countries with high tax rates. This is accomplished by adjusting the transfer prices they use on internal transfers between divisions located in different countries. *6. Determine prices using absorption-cost pricing and variable-cost pricing. Absorptioncost pricing uses total manufacturing cost as the cost base and provides for selling and administrative costs plus the target ROI through the markup. The target selling price is computed as: Manufacturing cost per unit + (Markup percentage × Manufacturing cost per unit). Variable-cost pricing uses all of the variable costs, including selling and administrative costs, as the cost base and provides for fixed costs and target ROI through the markup. The target selling price is computed as: Variable cost per unit + (Markup percentage × Variable cost per unit).

8-4

Test Bank for ISV Managerial Accounting, Fourth Edition

TRUE-FALSE STATEMENTS 1.

In most cases, a company sets the price instead of it being set by the competitive market.

2.

In a competitive market, a company is forced to act as a price taker and must emphasize minimizing and controlling costs.

3.

The difference between the target price and the desired profit is the target cost of the product.

4.

In a competitive environment, the company must set a target cost and a target selling price.

5.

The cost-plus pricing approach establishes a cost base and adds a markup to this base to determine a target selling price.

6.

The cost-plus pricing model gives consideration to the demand side—whether customers will pay the target selling price.

7.

Sales volume plays a large role in determining per unit costs in the cost-plus pricing approach.

8.

In time-and-material pricing, the material charge is based on the cost of direct materials used and a material loading charge for related overhead costs.

9.

The first step for time-and-material pricing is to calculate the material loading charge.

10.

The material loading charge is expressed as a percentage of the total estimated cost of materials for the year.

11.

Divisions within vertically integrated companies normally sell goods only to other divisions within the same company.

12.

Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division.

13.

There are two approaches for determining a transfer price: cost-based and market-based.

14.

If a cost-based transfer price is used, the transfer price must be based on variable cost.

15.

A problem with a cost-based transfer price is that it does not provide adequate incentive for the selling division to control costs.

16.

In the formula for a minimum transfer price, opportunity cost is the contribution margin of goods sold externally.

17.

The market-based transfer price approach produces a higher total contribution margin to the company than the cost-based approach.

18.

A negotiated transfer price should be used when an outside market for the goods does not exist.

Pricing

8-5

19.

The number of transfers between divisions that are located in different countries has decreased as companies rely more on outsourcing.

20.

Differences in tax rates between countries can complicate the determination of the appropriate transfer price.

a

The absorption-cost approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost.

a

The first step in the absorption-cost approach is to compute the markup percentage used in setting the target selling price.

a

Because absorption cost data already exists in general ledger accounts, it is cost effective to use it for pricing.

a

The markup percentage in the variable-cost approach is computed by dividing the desired ROI/unit plus fixed costs/unit by the variable costs/unit.

a

Under the variable-cost approach, the cost base consists of all of the variable costs associated with a product except variable selling and administrative costs.

21.

22.

23. 24.

25.

Answers to True-False Statements It em

1. 2. 3. 4. 5.

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6. 7. 8. 9. 10.

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Test Bank for ISV Managerial Accounting, Fourth Edition

MULTIPLE CHOICE QUESTIONS 26.

Factors that can affect pricing decisions include all of the following except a. cost considerations. b. environment. c. pricing objectives. d. all of these are factors.

27.

In most cases, prices are set by the a. customers. b. competitive market. c. largest competitor. d. selling company.

28.

A company must price its product to cover its costs and earn a reasonable profit in a. all cases. b. its early years. c. the long run. d. the short run.

29.

Prices are set by the competitive market when a. the product is specially made for a customer. b. there are no other producers capable of manufacturing a similar item. c. a company can effectively differentiate its product from others. d. a product is not easily distinguished from competing products.

30.

All of the following are correct statements about the target price except it a. is the price the company believes would place it in the optimal position for its target audience. b. is used to determine a product's target cost. c. is determined after the company has identified its market and does market research. d. is determined after the company sets its desired profit amount.

31.

Companies that sell products whose prices are set by market forces are called a. price givers. b. price leaders. c. price takers. d. price setters.

32.

In which of the following situations would a company not set the prices of its products? a. When the product is not easily differentiated from competing products b. When the product is specially made for a customer c. When there are few or no other producers capable of making a similar product d. When the product can be effectively differentiated from others

33.

The calculation to determine target cost is a. variable manufacturing costs + fixed manufacturing costs. b. sales price – (variable manufacturing costs + fixed manufacturing costs). c. variable manufacturing costs + selling and administrative variable costs. d. sales price – desired profit.

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34.

Target cost is comprised of a. variable and fixed manufacturing costs only. b. variable manufacturing and selling and administrative costs only. c. total manufacturing and selling and administrative costs. d. fixed manufacturing and selling and administrative costs only.

35.

A company that is a price taker would most likely use which of the following methods? a. Time-and-material pricing b. Target costing c. Cost plus pricing, contribution approach d. Cost plus pricing, absorption approach

36.

Bond Co. is using the target cost approach on a new product. Information gathered so far reveals: Expected annual sales Desired profit per unit Target cost

600,000 units $0.25 $168,000

What is the target selling price per unit? a. $0.28 b. $0.50 c. $0.25 d. $0.53 37.

Well Water Inc. wants to produce and sell a new flavored water. In order to penetrate the market, the product will have to sell at $2.00 per 12 oz. bottle. The following data has been collected: Annual sales Projected selling and administrative costs Desired profit

50,000 bottles $8,000 $80,000

The target cost per bottle is a. $0.24. b. $0.40. c. $0.16. d. $0.60. 38.

Larry Cable Inc. plans to introduce a new product and is using the target cost approach. Projected sales revenue is $810,000 ($4.50 per unit) and target costs are $748,800. What is the desired profit per unit? a. $0.34 b. $2.08 c. $4.16 d. None of the above

39.

Wasson Widget Company is contemplating the production and sale of a new widget. Projected sales are $187,500 (or 75,000 units) and desired profit is $22,500. What is the target cost per unit? a. $2.50 b. $2.20 c. $2.80 d. $3.00

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Test Bank for ISV Managerial Accounting, Fourth Edition

40.

Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit per unit is $2.30. The expected unit sales price is $27.50 based on 10,000 units. What is the total target cost? a. $252,000 b. $275,000 c. $23,000 d. $298,000

41.

In cost-plus pricing, the markup consists of a. manufacturing costs. b. desired ROI. c. selling and administrative costs. d. total cost and desired ROI.

42.

The desired ROI per unit is calculated by a. multiplying the ROI times the investment and dividing by the estimated volume. b. multiplying the unit selling price by the ROI. c. dividing the total cost by the estimated volume and multiplying by the ROI. d. dividing the ROI by the estimated volume and subtracting the result from the unit cost.

43.

Bellingham Suit Co. has received a shipment of suits that cost $250 each. If the company uses cost-plus pricing and applies a markup percentage of 60%, what is the sales price per suit? a. $417 b. $400 c. $350 d. $625

Use the following information for questions 44–47. Custom Shoes Co. has gathered the following information concerning one model of shoe: Variable manufacturing costs Variable selling and administrative costs Fixed manufacturing costs Fixed selling and administrative costs Investment ROI Planned production and sales 44.

What is the total cost per pair of shoes? a. $50 b. $85 c. $210 d. $120

45.

What is the desired ROI per pair of shoes? a. $85.00 b. $210.00 c. $127.50 d. $212.50

$50,000 $25,000 $200,000 $150,000 $2,125,000 30% 5,000 pairs

Pricing 46.

What is the target selling price per pair of shoes? a. $177.50 b. $212.50 c. $142.50 d. $197.50

47.

What is the markup percentage? a. 150% b. 255% c. 850% d. 182%

8-9

Use the following information for questions 48 and 49. Lock Inc. has collected the following data concerning one of its products: Unit sales price Total sales Unit cost Total investment

$145 10,000 units $115 $1,200,000

48.

The ROI percentage is a. 20%. b. 30%. c. 35%. d. 25%.

49.

The markup percentage is a. 26.09%. b. 20.69%. c. 25%. d. 22.59%.

50.

A company using cost-plus pricing has an ROI of 24%, total sales of 12,000 units and a desired ROI per unit of $30. What was the amount of investment? a. $86,400 b. $1,500,000 c. $273,600 d. $473,685

Use the following information for questions 51–53. Brislin Products has a new product going on the market next year. The following data are projections for production and sales: Variable costs Fixed costs ROI Investment Sales

$250,000 $450,000 15% $1,400,000 200,000 units

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Test Bank for ISV Managerial Accounting, Fourth Edition

51.

What is the target selling price per unit? a. $4.55 b. $3.50 c. $2.30 d. $3.30