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Chapter 12—Pricing and Profitability AnalysisSAMPLE MCQTHIS IS TO GIVE STUDENTS YET ANOTHER OPPORTUNITY TOPRACTICE THEIR PROBLEM SOLVING SKILLS IN PREPARATIONFOR YOUR TEST.These MCQ are posted on blackboard to high light and complement certainaspects of the topic, facilitate those students who may h...

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Chapter 12—Pricing and Profitability Analysis

SAMPLE MCQ THIS IS TO GIVE STUDENTS YET ANOTHER OPPORTUNITY TO PRACTICE THEIR PROBLEM SOLVING SKILLS IN PREPARATION FOR YOUR TEST. These MCQ are posted on blackboard to high light and complement certain aspects of the topic, facilitate those students who may have missed my lecture, balance traditional with internet based learning and overall enhance student’s learning. The MCQ are not meant to suggest what questions may be in the exams, replace textbook studying and/ or preparing your homework of any kind.

George MULTIPLE CHOICE 1. Which of the following is NOT an example of a market structure? a. oligopoly b. monopoly c. barrier market d. perfectly competitive ANS: C 2. Which type of expenses does a monopoly usually incur that are different from the other types of market structures? a. marketing costs such as advertising, positioning, discounting, and coupons b. costs of differentiation such as advertising, rebates, coupons c. no special expenses d. legal and lobbying expenditures ANS: D 3. Which of the following is true regarding expenses related to specific market structure types? a. Monopolistic competition and oligopolies are the only structures where costs of differentiation have an impact. b. Both monopolies and monopolistic competition structures normally must expend legal and lobbying costs. c. In perfect competition and monopolistic competition, differentiation costs have an impact. d. In perfect competition and oligopolies, there are no special expenses related to the structure of the organization. ANS: A 4.

Market Structure Type

# of firms in industry Many (b)

Barriers to entry

Perfect Competition (a) Monopolistic Competition Oligopoly Few (c) Monopoly Very High Fill in the correct responses for the blanks with letters: a. (a)very low, (b)many, (c)high, (d)very unique b. (a)very low, (b)few, (c)high, (d)not unique c. (a)very high, (b)few, (c)low, (d)fairly unique d. (a)low, (b)one, (c)high, (d)very unique ANS: A

Uniqueness of product Not unique Some unique features

(d)

5. Monopolistic competition is best defined as a. a structure that has many buyers and sellers, but the products are differentiated on some basis. b. a structure where customers are willing to pay a little more for the unique feature that appeals to them. c. a structure that combines perfect competition and monopoly, but is closer to a competitive situation. d. all of these. ANS: D 6. Which of the following correctly describes the slope of the demand and supply curves? Demand Curve a. b. c. d.

Supply Curve

upward sloping no slope downward sloping downward sloping

downward sloping upward sloping no slope upward sloping

ANS: D 7. The following information pertains to three different products being sold by Andy Company: Product A B C

Old Price

New Price

Old Quantity

New Quantity

$10.00 20.00 30.00

$11.00 18.00 33.00

2,000 4,000 6,000

1,900 4,600 5,500

Which products have an inelastic demand curve? a. Product A b. Product B c. Product C d. both Product A and Product C ANS: D 8. The following information pertains to three different products being sold by Andy Company: Product A B C

Old Price

New Price

Old Quantity

New Quantity

$10.00 20.00 30.00

$11.00 18.00 33.00

2,000 4,000 6,000

1,900 4,600 5,500

Which products have an elastic demand curve? a. Product A b. Product B

c. Product C d. all of these ANS: B

9. Which of the following markets is characterized by the following: many buyers and sellers, a homogeneous product, easy entry into and exit from the industry, and all firms are price takers? a. perfectly competitive market b. monopolistic competition c. monopoly d. oligopoly ANS: A 10. Which of the following markets is characterized by the following: only a few firms in the industry, a fairly unique product, difficult entry into the industry, and spending for differentiation of the product? a. perfectly competitive market b. monopolistic competition c. monopoly d. oligopoly ANS: D 11. Which of the following markets is characterized by the following: many firms in the industry, a somewhat unique product, fairly easy entry into the industry, and spending for differentiation of the product? a. perfectly competitive market b. monopolistic competition c. monopoly d. oligopoly ANS: B 12. Which of the following markets is characterized by the following: a single firm in the industry, a unique product, and difficult entry into the industry? a. perfectly competitive market b. monopolistic competition c. monopoly d. oligopoly ANS: C Figure 18-1 The Bayview Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers: CUSTOMER Drugstore chains Gas station chains Supermarket chains Local pharmacies

PRICE PER CASE $4.50 $5.00 $6.00 $5.50

CASES SOLD 300,000 100,000 400,000 200,000

The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled $0.50 a case and special labels costing $0.02 per bottle. The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year. The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid. Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case. Bad debt expense averages 10% of sales. 13. Refer to Figure 18-1. What is the total cost per case for drugstore chains? a. $2.17 per case b. $2.20 per case c. $2.35 per case d. $2.45 per case ANS: C Manufacturing costs $2  300,000 = $600,000 Administrative costs 45,000 Handling costs $0.20  300,000 = 60,000 $705,000/300,000 cases = $2.35 per case

14. Refer to Figure 18-1. What is the profit per case for drugstore chains? a. $4.50 per case b. $2.20 per case c. $2.35 per case d. $2.15 per case ANS: D Manufacturing costs $2  300,000 = $600,000 Administrative costs 45,000 Handling costs $0.20  300,000 = 60,000 $705,000/300,000 cases = $2.35 per case $4.50 - $2.35 = $2.15 15. Refer to Figure 18-1. What customer type has the least total cost per case ? a. local pharmacies b. drugstore chains c. supermarket chains d. gas station chains ANS: B Drugstore chains

Manufacturing costs $2  300,000 = $600,000 Administrative costs 45,000 Handling costs $0.20  300,000 = 60,000 $705,000/300,000 cases = $2.35 per case Gas station chains Manufacturing costs $2  100,000 = $200,000 Marketing 50,000 Commissions .1 (100,000  $5) = 50,000 $300,000/100,000 = $3 Supermarket chains Manufacturing costs $2  400,000 = $ 800,000 Ordering 25,000 Shipping $0.50  400,000 = 200,000 Label $0.02  400,000  24 = 192,000 $1,217,000/400,000 = $3.0425 Local pharmacies Manufacturing costs $2  200,000 = $400,000 Handling $0.10  200,000 = 20,000 Commissions $0.25  200,000 = 50,000 Bad debt .10 x ($5.50  200,000 = 110,000 $580,000/200,000 = $2.90

16. Refer to Figure 18-1. What customer type is the most profitable ? a. local pharmacies b. drugstore chains c. supermarket chains d. gas station chains ANS: C Drugstore chains Manufacturing costs Administrative costs Handling costs

$4.50 - 2.35 = $2  300,000 =

$2.15 $600,000 45,000 $0.20  300,000 = 60,000 $705,000/300,000 cases = 2.35 per case

Gas station chains $5 - 3 = $2 Manufacturing costs $2  100,000 = $200,000 Marketing 50,000 Commissions .1 (100,000  $5) = 50,000 $300,000/100,000 = $3 Supermarket chains Manufacturing costs Ordering Shipping Label

$6 - 3.0425 = $2  400,000 =

$2.9575 $ 800,000 25,000 $0.50  400,000 = 200,000 $0.02  400,000  24 = 192,000 $1,217,000/400,000 = $3.0425

Local pharmacies Manufacturing costs Handling Commissions Bad debt

$5.50 - 2.90 = $2.60 $2  200,000 = $400,000 $0.10  200,000 = 20,000 $0.25  200,000 = 50,000 .10  ($5.50  200,000) = 110,000 $580,000/200,000 = 2.90

17. Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2012 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell 15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. What is the profit (loss) from Option One? a. $1,050,000 b. $210,000 c. $950,000 d. $110,000

ANS: D SUPPORTING CALCULATIONS: Revenues ($70  15,000) Less:

$1,050,000

Variable costs ($56  15,000) Fixed costs

$840,000 100,000

Profit

940,000 $ 110,000

18. Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2012 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell 15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. What is the profit (loss) from Option Two? a. $600,000 b. $100,000 c. $40,000 d. ($100,000) ANS: B 10,000) SUPPORTING CALCULATIONS: Less: Variable costs ($46  10,000) Revenues ($60  Fixed costs ($100,000 - $60,000) Profit

$600,000 $460,000 40,000

500,000 $100,000

19. Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2012 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell 15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. What is the profit (loss) from Option Three? a. $215,000 b. $1,200,000 c. $110,000

d. ($60,000) ANS: A SUPPORTING CALCULATIONS: Revenues ($80  15,000) Less:

$1,200,000 Variable costs Rebate costs [($10  15,000)  . 30] Fixed costs

$840,000 45,000 100,000

Profit

985,000 $ 215,000

20. Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were projected. Sales for 2012 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell 15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. Which option is preferred? a. Option One b. Option Two c. Option Three d. Options One and Three are equally preferred. ANS: C SUPPORTING CALCULATIONS: Option Three has the highest profit.

21. Which of the following statements is FALSE? a. The markup is a percentage applied to base cost. b. The markup is an absolute rule. c. A major advantage of markup pricing is that standard markups are easy to apply. d. The markup can be calculated using a variety of bases. ANS: B 22. Farr Company had the following information: Revenues Cost of goods sold:

$400,000 Direct materials Direct labor Overhead

Gross profit Selling and

$100,000 50,000 50,000

200,000 $200,000 75,000

administrative expenses Operating income

$125,000

What is the markup based on cost of goods sold? a. 50.0% b. 100.0% c. 37.5% d. 62.5% ANS: B SUPPORTING CALCULATIONS: ($75,000 + $125,000)/$200,000 = 100% 23. Farr Company had the following information: Revenues Cost of goods sold:

$400,000 Direct materials Direct labor Overhead

Gross profit Selling and administrative expenses Operating income What is the markup based on prime costs? a. 300.0% b. 133.3% c. 50.0% d. 166.7% ANS: D SUPPORTING CALCULATIONS: ($75,000 + $125,000 + $50,000)/$150,000 = 166.7%

$100,000 50,000 50,000

200,000 $200,000 75,000 $125,000

24. Jamie Corporation had the following information: Revenues Cost of goods sold:

$250,000 Direct materials Direct labor Overhead

$50,000 37,500 62,500

Gross profit Selling and administrative expenses Operating income

150,000 $100,000 37,500 $ 62,500

What is the markup based on materials? a. 400.0% b. 185.7% c. 42.9% d. 71.4% ANS: A SUPPORTING CALCULATIONS: ($62,500 + $37,500 + $62,500 + $37,500)/$50,000 = 400%

25. Jamie Corporation had the following information: Revenues Cost of goods sold:

$250,000 Direct materials Direct labor Overhead

Gross profit Selling and administrative expenses Operating income

$50,000 37,500 62,500

150,000 $100,000 37,500 $ 62,500

What would be the price for a product that has a cost of $500, assuming that the markup is based on cost of goods sold? a. $834 b. $625 c. $708 d. $2,000 ANS: A SUPPORTING CALCULATIONS:

$500 + (66.7%  $500) = $834

26. Gage Company had the following information: Revenues Cost of Goods Sold Selling and administrative expenses What is the markup on Cost of Goods sold? a. .1833 b. .6667 c. .3611 d. none of these

$600,000 60% $130,000

ANS: B Support: Cost of Goods Sold = .60  $600,000 = $360,000 Operating Income = $600,000 – $360,000 – $130,000 = $110,000 Markup on COGS = (selling and administrative expenses + operating income) / COGS .6667 = ($130,000 + $110,000) / $360,000

27. Perry Products is thinking of expanding their product line. Their current income statement is as follows: Revenues $600,000 Cost of Goods Sold: Direct Materials $250,000 Direct Labor 100,000 Overhead 80,000 430,000 Gross Profit 170,000 Selling and Administrative 70,000 Operating Income $100,000 The cost of the new product is $95 per unit made up of $50 of direct materials, $35 of direct labor and $10 of overhead per unit. What is the bid price assuming Perry utilizes a mark-up on direct materials? a. $70 b. $133 c. $119 d. $19.77 ANS: A Support: Markup on direct materials = Direct Labor + Overhead + Selling and Administrative + Operating Income / Direct Materials ($100,000 + $80,000 + $70,000 + $100,000) / $250,000 = 1.4 1.4 * $50 = $70

28. Which of the following is a FALSE statement about target costing? a. Target costing is a method of determining the cost of a product or service based on the price that customers are willing to pay.

b. The cost is calculated by subtracting the desired profit from the target price. c. Target costing is an interactive process. d. Target costing is cost driven. ANS: D

29. Price skimming occurs in which of the following life-cycle stages? a. Introduction b. Growth c. Maturity d. Decline ANS: A

30. a. b. c. d.

is the pricing of a new product at a low initial price to build market share quickly. Penetration pricing Predatory pricing Price skimming Target costing

ANS: A 31. a. b. c. d.

is where a higher price is charged at the beginning of a product's life cycle. Penetration pricing Predatory pricing Price skimming Target costing

ANS: C

32. a. b. c. d.

is said to occur when firms with market power price products "too high." Predatory prices Price discrimination Price gouging Penetration

pricing ANS: C

33. After the 2006 tornado in Oklahoma City, OK, businesses were trying to sell lumber for 50 percent above their regular prices. This is an example of a. predatory prices. b. price discrimination. c. price gouging. d. penetration pricing. ANS: C

34.

refers to charging different prices to different customers for essentially the same product.

a. b. c. d.

Gouging Price discrimination Skimming Penetration

pricing ANS: B

35. The Robinson-Patman Act allows price discrimination under which of the following circumstances? a. if revenues justify it b. if the competitive situation demands it c. if the costs remain the same for all customers d. The Robinson-Patman Act does not allow price discrimination under any situation. ANS: B

36. a. b. c. d.

on the international market is called dumping. Price discrimination Predatory pricing Price skimming Penetration

pricing ANS: B

37. Steele Corporation has the following information for January, February, and March 2011:

Units produced Units sold

January

February

March

10,000 7,000

10,000 8,500

10,000 10,500

Production costs per unit (based on 10,000 units) are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Variable selling and admin. expenses Fixed selling and admin. expenses

$12 8 6 4 10 4

There were no beginning inventories for January 2011, and all units were sold for $50. Costs are stable over the three months. What is the February ending inventory for Steele Corporation using the absorption costing method? a. $39,000 b. $45,000 c. $135,000 d. $300,000 ANS: C SUPPORTING CALCULATIONS: 4,500  ($12 + $8 + $6 + $4) = $135,000 38. The following information pertains to Mayberry Corporation: Beginning inventory Ending inventory Direct labor per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling and admin. costs per unit Fixed selling and admin. costs per unit

1,000 units 6,000 units $40 20 10 30 6 14

What is the value of the ending inventory using the absorption costing method? a. $240,000 b. $360,000 c. $600,000 d. $420,000 ANS: C SUPPORTING CALCULATIONS: ($40 + $20 + $10 + $30)  6,000 = $600,000 39. The following information pertains to Mayberry Corporation: Beginning inventory Ending inventory Direct labor per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling and admin. costs per unit Fixed selling and admin. costs per unit Absorption costing net income would be a. $150,000 greater than b. $150,000 less than c. $240,000 less tha...