Chapter 20 Testbank PDF

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Chapter 20 Testbank Student: ___________________________________________________________________________

1.

Which of the following statements regarding price is/are true? i. Prices are determined by the market, subject to the constraint that costs must be covered in the long run. ii. Prices are based on costs, subject to the constraint that customers and competitors will exert an influence. ii. A balance of market forces and cost is important when making pricing decisions.

A. i B. i i C. ii and iii D. All of the given answers 2.

Which of the following is not an issue when making a pricing decision?

A. Legal issues like collusion and price discrimination. B. Political considerations C. Environmental regulations D. Competiti on 3.

The demand curve is also called the:

A. total revenue curve B. marginal revenue curve C. average revenue curve D. marginal cost curve

4.

The curve that shows the relationship between sales price and quantity sold is called the:

A. marginal revenue curve B. average cost curve C. demand curve D. revenue curve 5.

The marginal revenue curve:

A. shows the changes in total revenue that accompany a change in quantity sold. B. shows the relationship between sales price and units sold. C. shows the relationship between sales revenue and quantity. D. shows the average price at which any particular quantity can be sold. 6.

Which of the following statements is false regarding price elasticity?

A. The impact of price changes on sales volume is defined as price elasticity. B. Demand is elastic if a price increase has a large negative impact on sales volume. C. Demand is elastic if price changes have no impact on sales quantity. D. Demand is inelastic if price changes have little or no impact on sales quantity. 7.

Which of the following statements regarding the profit maximising model is/are true? i. The profit maximising model is limited because a firm's demand and marginal revenue are difficult to discern. ii. The marginal revenue and marginal cost model is valid for all forms of market. iii. Costing systems are not usually designed to measure the marginal changes in cost incurred as production and sales increase unit by unit.

A. i B. ii and iii C. ii i D. i and iii

8.

In the economic profit-maximising pricing model, how do the total revenue and total cost curves generally behave? Total revenue

A. Upward sloping at increasing rate B. Upward sloping at increasing rate C. Upward sloping at decreasing rate D. Downward sloping at constant rate 9.

Total cost

Upward sloping at decreasing rate Upward sloping at constant rate Upward sloping, rate decreases, then increases Downward sloping, then upward sloping

In the economic profit-maximising pricing model, how do the marginal revenue and marginal cost curves generally behave? Marginal revenue

A. Downward sloping B. Downward sloping C. Downward sloping D. Upward sloping

Marginal cost

Downward sloping Horizontal (zero slope) U-shaped U-shaped

10. Managers base prices on product costs due to many reasons. Which of the following is not one of the reasons?

A. Most companies sell many products and services and cost-based pricing provides a simple and direct approach. B. Cost-based pricing provides a good starting point for managers. C. The cost of a product or service provides a lower limit or floor, below which the price cannot be set in the long run. D. Cost-based pricing is useful for standard cost analysis. 11. Which of the following represents the cost-based pricing formula?

A. Price = cost + (mark-up % × cost) B. Price = cost + markup % C. Price = mark-up % × cost D. Price = cost + (mark-up % + cost)

12. Which of the following is not an advantage of the variable cost pricing formula?

A. Variable cost analysis is consistent with cost volume profit analysis. B. Variable cost data does not require the allocation of common fixed costs to individual product lines. C. Variable costs help managers understand the profit implications of changes in price. D. It is cost effective to use because it is required for external reporting. 13. If the average invested capital is $300 000 and the target return on investment is 20 per cent, what is the target profit?

A. $50 000 B. $60 000 C. $70 000 D. $75 000 14. Which of the following formulas represents the mark-up percentage on full cost?

A. Mark-up % = target profit / (annual volume × total cost per unit) B. Mark-up % = target profit × total cost per unit C. Mark-up % = target profit × annual volume D. Mark-up % = (target profit × total cost per unit) / annual volume 15. If the target profit is $60 000 for an annual volume of 480 units, the total annual fixed costs are $168 000 and the total variable cost per unit is $450, then what is the mark-up percentage on total variable cost?

A. 15.6 % B. 13.5 % C. 105.6 % D. 115.6 %

16. If the target profit is $60 000 for an annual volume of 480 units, the total annual fixed costs are $168 000 and the total variable cost per unit is $450, then what is the mark-up percentage on full cost?

A. 15.6 % B. 13.5 % C. 105.6 % D. 51.4 % 17. Which of the following statements regarding cost-plus pricing is/are true?

A. Cost-plus pricing formulas incorporate both fixed and variable costs. B. Cost-plus pricing formulas establish a starting point in setting prices. C. Cost-plus pricing formulas are useful for updating prices for existing products. D. All of the given answers 18. Which of the following statements about prices is false?

A. Prices must cover all costs and a normal profit margin. B. A variable cost-plus pricing formula requires a higher mark-up percentage than a total cost-plus pricing formula. C. Different definitions of cost base, each combined with a different mark-up percentage, will result in the same price for a product or service. D. If prices are set close to variable manufacturing costs, the firm will generally earn a higher profit margin.

19. Which of the following statements regarding absorption cost pricing formulas is/are true? i. Absorption cost pricing formulas provide a justifiable price that tends to be perceived as equitable by all parties. ii. Since absorption cost information is necessary for external reporting, it is cost effective to use it for pricing. iii. Absorption cost-plus pricing formulas generally will result in a higher mark-up percentage than variable manufacturing cost formulas.

A. i and ii B. ii and iii C. i and iii D. All of the given answers 20. Consider the following statements regarding cost-plus pricing formulas. i. Full cost pricing formulas have the advantage of keeping the manager's attention focused on covering total costs. ii. With cost-plus pricing formulas, management must consider market conditions and likely actions of competitors. iii. Variable cost-plus formulas have the advantage of not obscuring important information about cost behaviour. Which of the above statements is/are true?

A. i B. ii and iii C. i and iii D. All of the given answers

21. Sample Company reported the following costs during 2008 for the manufacture and sale of 2000 units:

The average amount of capital invested in the product line during the year was $500 000 and the targeted return on investment was 20 per cent. If Sample's price per unit was $245 and the mark-up percentage was 53 per cent, what pricing formula was used by the company?

A. Total variable costplus B. Variable manufacturing costplus C. Absorption costplus D. Time and materials costplus 22. Tots N Style Pty Ltd has the following data concerning a decorator playpen it manufactures:

If the company uses cost-plus pricing based on variable manufacturing costs, determine the mark-up percentage used by the company to obtain a price of $105.

A. 350 % B. 300 % C. 250 % D. 200 %

23. Tots N Style Pty Ltd has the following data concerning a decorator playpen it manufactures:

If the company uses cost-plus pricing based on total variable costs, determine the mark-up percentage used by the company to obtain a price of $105.

A. 150 % B. 300 % C. 250 % D. 200 % 24. Tots N Style Pty Ltd has the following data concerning a decorator playpen it manufactures:

If the company uses cost-plus pricing based on absorption costs, determine the mark-up percentage used by the company to obtain a price of $120.

A. 140 % B. 118 % C. 71 % D. 243 %

25. Tots N Style Pty Ltd has the following data concerning a decorator playpen it manufactures:

If the company uses cost-plus pricing based on full cost, determine the mark-up percentage used by the company to obtain a price of $105.

A. 100 % B. 75 % C. 50 % D. 25 % 26. The Houston Company manufactures office equipment. They are ready to introduce a new line of desktop copiers. The following data concerns the copiers:

If the company uses cost-plus pricing based on variable manufacturing cost, what price must the company charge when the mark-up percentage is 200 per cent?

A. $58 5 B. $45 0 C. $63 0 D. $54 0

27. The Houston Company manufactures office equipment. They are ready to introduce a new line of desktop copiers. The following data concerns the copiers:

If the company uses cost-plus pricing based on total variable cost, what price must the company charge when the mark-up percentage is 150 per cent?

A. $36 0 B. $52 5 C. $60 0 D. $49 5 28. The Houston Company manufactures office equipment. They are ready to introduce a new line of desktop copiers. The following data concerns the copiers:

If the company uses cost-plus pricing based on absorption cost, what price must the company charge when the mark-up percentage is 120 per cent?

A. $45 9 B. $42 0 C. $75 9 D. $59 4

29. The Houston Company manufactures office equipment. They are ready to introduce a new line of desktop copiers. The following data concerns the copiers:

If the company uses cost-plus pricing based on full cost, what price must the company charge when the mark-up percentage is 40 per cent?

A. $46 2 B. $56 7 C. $60 0 D. $51 3 30. Silco Pty Ltd manufactures various lines of computer equipment. They are planning to introduce a line of laptop computers in January 2008. Current plans call for the production and sale of 1000 computers with estimated production costs as follows.

The average amount of capital invested in the laptop computer line is $900 000 and Silco's target return on investment for the line is 18 per cent. What price must Silco charge if the company uses cost-plus pricing based on full cost?

A. $86 8 B. $90 0 C. $1 192 D. $1 930

31. Silco Pty Ltd manufactures various lines of computer equipment. They are planning to introduce a line of laptop computers in January 2008. Current plans call for the production and sale of 1000 computers with estimated production costs as follows.

The average amount of capital invested in the laptop computer line is $900 000 and Silco's target return on investment for the line is 18 per cent. What is the mark-up percentage if the company uses cost-plus pricing based on full cost?

A. 116.7 % B. 15.7 % C. 121.6 % D. 58.9 %

32. Silco Pty Ltd manufactures various lines of computer equipment. They are planning to introduce a line of laptop computers in January 2008. Current plans call for the production and sale of 1000 computers with estimated production costs as follows.

The average amount of capital invested in the laptop computer line is $900 000 and Silco's target return on investment for the line is 18 per cent. If Silco uses cost-plus pricing based on absorption cost, determine the mark-up percentage the company must use.

A. 21.6 % B. 15.7 % C. 29.5 % D. None of the given answers

33. Silco Pty Ltd manufactures various lines of computer equipment. They are planning to introduce a line of laptop computers in January 2008. Current plans call for the production and sale of 1000 computers with estimated production costs as follows.

The average amount of capital invested in the laptop computer line is $900 000 and Silco's target return on investment for the line is 18 per cent. What price must Silco charge if the company uses cost-plus pricing based on total variable cost?

A. $193 0 B. $71 2 C. $119 2 D. $103 0

34. Silco Pty Ltd manufactures various lines of computer equipment. They are planning to introduce a line of laptop computers in January 2008. Current plans call for the production and sale of 1000 computers with estimated production costs as follows.

The average amount of capital invested in the laptop computer line is $900 000 and Silco's target return on investment for the line is 18 per cent. What is the mark-up percentage if the company uses cost-plus pricing based on total variable cost?

A. 116.7 % B. 142.7 % C. 121.6 % D. 58.9 %

35. Town and Country Auto Repair uses time and material pricing. The Body Shop has the following cost data.

Determine the time charge per hour.

A. $18.0 0 B. $35.0 0 C. $25.5 0 D. $40.0 0

36. Town and Country Auto Repair uses time and material pricing. The Body Shop has the following cost data.

Determine the amount needed to be added to each dollar of material cost to obtain the material charge.

A. $0.4 8 B. $0.0 8 C. $0.0 6 D. $0.1 0

37. Town and Country Auto Repair uses time and material pricing. The Body Shop has the following cost data.

If a particular job takes 10 hours in labour and $500 in materials, determine the price charged for the job.

A. $77 5 B. $85 0 C. $39 0 D. $89 0 38. An approach to pricing in which two charges are determined, one charge for labour used on the job and another charge for the materials used on the job, is called:

A. time and material pricing B. variable cost pricing C. competitive bidding D. absorption cost pricing

39. Which of the following statements about time and material pricing is/are true? i. The labour charge includes the direct cost of the employee's time. ii. The labour charge includes a charge to cover various overhead costs. iii. The labour charge includes a handling charge for material.

A. i B. i and ii C. i and iii D. All of the given answers 40. Which of the following statements about time and material pricing is/are true? i. The material charge includes the direct cost of the employee's time. ii. The material charge includes the direct cost of materials used. iii. The material charge includes a charge for material handling and storage.

A. i i B. ii i C. ii and iii D. All of the given answers 41. How are the time charges calculated?

A. Hourly labour cost B. Hourly labour cost + annual overhead C. Hourly labour cost + [annual overhead (excluding material handling and storage) / annual labour hours] + hourly charge to cover profit margin D. Hourly labour cost + hourly charge to cover profit margin

42. Econo Auto Repair estimates the following costs for 2008.

What material charge formula would be used to include a charge for the handling and storage of material on every job?

A. Cost of material only B. Cost of material + $2 per labour hour C. Cost of material + $0.05 per $1 of material D. Cost of material + $0.50 per labour hour 43. Which of the following statements about competitive bidding is/are true?

A. In a competitive bidding situation, the criterion to select the contractor is always based solely on the design specifications of the job. B. Competitive bidding occurs when two or more companies submit a sealed bid for a product, service or project to a potential buyer. C. From the perspective of the bidder, quantitative factors are more important than qualitative factors in competitive bidding situations. D. In a competitive bidding situation, the criterion to select the contractor is always based solely on the design specifications of the job AND competitive bidding occurs when two or more companies submit a sealed bid for a product, service or project to a potential buyer. 44. If a firm has excess capacity, which of the following is a sensible bidding strategy?

A. Set a price to cover all costs. B. Base the bid on the incremental costs incurred because the job will contribute toward covering the company's fixed costs and profit. C. Base the bid solely on direct labour hours. D. Common fixed costs must be allocated to individual jobs before preparing the bid.

45. Which of the following statements about competitive bidding is/are true? i. The higher the price that is bid, the greater the profit, if the firm gets the contract. ii. Bidding a higher price increases the probability of obtaining the contract. iii. A company bidding low enough to ensure the acceptance of a contract may have bid too low to make an acceptable profit on the job.

A. i B. i i C. i and iii D. All of the given answers 46. Under competitive bidding when a company has no excess capacity, the bid price would normally include:

A. only the incremental costs of the job B. only the variable costs of the job plus a modest contribution margin C. the full cost of the job including capacityproducing costs D. the full cost of the job excluding capacityproducing costs 47. Which of the following statements regarding the manufacture of new products is/are true? i. Uncertainties about the potential market for the product pose problems when pricing these products. ii. Uncertainties regarding obstacles that will be encountered in manufacturing these products pose pricing problems. iii. Uncertainties about production costs will not influence pricing decisions because these types of products are generally sold in a non-competitive market.

A. i B. ii i C. i and ii D. All of the given answers

48. Price skimming is when:

A. the initial product price is set low and is kept constant. B. the initial product price is set high giving high short-term profits; then the price is slowly lowered. C. the initial high product price is set high and raised. D. the initial product price is set low and raised. 49. What term describes a pricing strategy in which the initial price is set relatively low for a new product in order to gain a large market share?

A. Penetration pricing B. Target pricing C. Designed pricing D. Market share pricing 50. The pricing strategy that results in greater initial sales volume but lower unit profits is called:

A. Skimming pricing B. Target pricing C. Predatory pricing D. Penetration pricing

51. The Mixed-Up Floor Company Ltd makes two products, carpet polish and floor deodoriser. Operating information from the previous year is as follows.

Fixed costs of $20 000 per year are presently allocated evenly between both products. If the product mix were to change, total fixed costs would remain the same. Calculate the contribution margin per machine hour for floor deodoriser.

A. $4.0 0 B. $2.0 0 C. $3.0 0 D. $0.2 5 52. The Mixed-Up Floor Co. Ltd makes two products, carpet polish and floor deodoriser. Operating information from the previous year is as follows.

Fixed costs of $20 000 per year are presently allocated evenly between both products. If the product mix were to change, total fixed costs would remain the same. Assuming everything produced for either product can be sold, how many units of each product should be produced and sold if machine hours are limited to 10 000? Carpet polish

A. B. C. D.