Pricing and Profitability 8.

Leader Industries is planning to introduce a new product,

DMA. It is expected that 10,000 units of DMA will be
1. Which one of the following would cause the demand sold. The full product cost per unit is $300. Invested
curve for bagels to shift to the left? capital for this product amounts to $20 million. Leader’s
a. A decrease in the cost of muffins. target rate of return on investment is 20%. The markup
b. An increase in the population. percentage for this product, based on operating income
c. A decrease in the price of bagels. as a percentage of full product cost, will be
d. An increase in the supply of bagels. a. 42.9%. c. 133.3%.
2. Which one of the following would cause the demand b. 57.1%. d. 233.7%.
curve for prepared meals sold in supermarkets to shift to 9. Which one of the following situations best lends itself to a
the right? cost-based pricing approach?
a. An increase in the price of prepared meals. a. A paper manufacturer negotiating the price for
b. An increase in consumer income. supplying copy paper to a new mass
c. A decrease in the price of restaurant meals. merchandiser of office products.
d. An increase in the supply of prepared meals. b. An industrial equipment fabricator negotiating
3. If the demand for a product is elastic, a price increase pricing for one of its standard models with a
will result in major steel manufacturer.
a. no change in total revenue. c. A computer component manufacturer debating
b. an increase in total revenue. pricing terms with a customer in a new channel
c. a decrease in total revenue of distribution.
d. an indeterminate change in revenue. d. A computer component manufacturer debating
4. The advantages of incorporating full product costs in pricing with a new customer for a made to
pricing decisions include all the following except order, state of the art application.
a. ease in identifying unit fixed costs with 10. Basic Computer Company (BCC) sells its
individual products. microcomputers using bid pricing. It develops its bids on
b. full product cost recovery. a full cost basis. Full cost includes estimated material,
c. the promotion of price stability. labor, variable overheads, fixed manufacturing
d. a pricing formula that meets the cost-benefit overheads, and reasonable incremental computer
test; i.e., simplicity. assembly administrative costs, plus a 10% return on full
5. An economist determined the following market data for a cost. BCC believes bids in excess of $1,050 per
commodity. computer are not likely to be considered.
Price Quantity Supplied Quantity Demanded BCC’s current cost structure, based on its normal
$25 250 750 production levels, is $500 for materials per computer and
50 500 500 $20 per labor hour. Assembly and testing of each
75 750 250 computer requires 17 labor hours.
100 1,000 0 BCC expects to incur variable manufacturing overhead
of $2 per labor hour, fixed manufacturing overhead of $3
Based on this information, which one of the following per labor hour, and incremental administrative costs of
statements is correct? $8 per computer assembled.
a. In the short-term, there would be excess BCC has received a request from a school board for 200
supply at a price of $40. computers. Using the full-cost criteria and desired level
b. In the long-run, if producers’ costs per unit of return, which one of the following prices should be
decline, then a reasonable market clearing recommended to BCC’s management for bidding
price could be $65. purposes?
c. In the short-term, there would be excess a. $874.00. c. $961.40
demand at a price of $70. b. $882.00. d. $1,026.30.
d. In the long-run, if producers’ costs per unit 11. Companies that manufacture made-to-order industrial
increase, then a reasonable market clearing equipment typically use which one of the following?
price could be $70. a. Cost-based pricing.
6. If a product’s price elasticity of demand is greater than b. Market-based pricing.
one, then a 1% price increase will cause the quantity c. Material-based pricing.
demanded to d. Price discrimination.
a. increase by more than 1%. 12. Which one of the following is not a characteristic of
b. increase by less than 1%. market-based costing?
c. decrease by less than 1%. a. It has a customer-driven external focus.
d. decrease by more than 1%. b. It is used by companies facing stiff competition.
7. If the demand for a good is elastic, then a(n) c. It is used by companies facing minimal
a. decrease in price will increase total revenue. competition.
b. increase in price will increase total revenue. d. It starts with a target selling price and target
c. decrease in price will decrease total revenue. profit.
d. increase in price will have no effect on total 13. Almelo Manpower Inc. provides contracted bookkeeping
revenue. services. Almelo has annual fixed costs of $100,000 and
 variable costs of $6 per hour. This year the company 19. Which type of expenses does a monopoly usually incur
budgeted 50,000 hours of bookkeeping services. Almelo that are different from the other types of market
prices its services at full cost and uses a cost-plus structures?
pricing approach. The company developed a billing price a. marketing costs such as advertising,
of $9 per hour. The company’s mark-up level would be positioning, discounting, and coupons
a. 12.5%. c. 50.0%. b. costs of differentiation such as advertising,
b. 33.3%. d. 66.6%. rebates, coupons
14. Fennel Products is using cost-based pricing to determine c. no special expenses
the selling price for its new product based on the d. legal and lobbying expenditures
following information. 20. Which of the following correctly describes the slope of
Annual volume 25,000 units the demand and supply curves?
Fixed costs $700,000 per year Demand Curve Supply Curve
Variable costs $200 per unit a. upward sloping downward
Plant investment $3,000,000 sloping
Working capital $1,000,000 b. no slope upward sloping
Effective tax rate 40% c. downward sloping no slope
d. downward sloping upward sloping
The target price that Fennell needs to set for the new 21. Theta, Inc., sells three different products. The following
product to achieve a 15% after-tax return on information is provided by Theta:
investment (ROI) would be
a. $228. c. $258.
b. $238. d. $268.
15. A monopoly will maximize profits if it produces an output
where marginal cost is Which of the following is the price elasticity of demand
a. less than marginal revenue. for the product Beta? (Give the answer to one decimal
b. greater than marginal revenue. place.)
c. equal to marginal revenue. a. −1.5 c. −2.2
d. equal to price. b. 1.2 d. 2.5
16. At the long-run profit maximizing equilibrium of a firm in a 22. The Lancashire Corporation manufactures bottled water
perfectly competitive market, all of the following are with an average manufacturing cost of $2 per case (a
correct except that case contains 24 bottles). Bayview sold 1,000,000 cases
a. price equals marginal cost. last year to the following types of customers:
b. price equals average total cost.
c. economic profits are positive.
d. marginal cost equals marginal revenue.
17. 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 The drugstore chains have special handling costs of
differentiation have an impact. $0.20 a case and increased administrative assistance
b. Both monopolies and monopolistic competition costing $45,000 per year.
structures normally must expend legal and The gas station chains require special marketing
lobbying costs. promotions that cost $50,000. Sales commissions of
c. In perfect competition and monopolistic 10% are paid.
competition, differentiation costs have an The supermarket chains order electronically through EDI
impact. which costs $25,000 annually. Bayview is responsible for
d. In perfect competition and oligopolies, there shipping costs, which totaled $0.50 a case and special
are no special expenses related to the labels costing $0.02 per bottle
structure of the organization. Local pharmacies have special handling costs of $0.10
18. Oligopoly is a market structure: per case and sales commissions are paid to agents
a. that has many buyers and sellers, a costing $0.25 per case. Bad debt expense averages
homogeneous product, and allows easy entry 10% of sales.
into and exit from the industry.
b. in which barriers to entry are so high that there What is the profit per case for drugstore chains?
is only one firm in the market. a. $5.00 per case c. $2.68 per case
c. in which there are a few sellers and the b. $2.20 per case d. $2.32 per case
barriers to entry are usually cost related.
d. that has characteristics of both monopoly and
perfect competition and is much closer to the
competitive situation.
23. Johanson Company had the following information: 28. Inventory values calculated using variable costing as
opposed to absorption costing will generally be
a. equal. c. greater.
b. less. d. twice as much.
29. The following information pertains to Fondueland
Corporation:

What is the markup based on prime costs?

a. 300.0% c. 50.0%
b. 166.7% d. 133.3%
24. Consolidated Corporation had the following information:

What is the value of ending inventory using the variable

costing method?
a. $310,000 c. $390,000
b. $250,000 d. $200,000
What is the markup based on materials? 30. Which of the following statements is TRUE?
a. 71.4% c. 42.9% a. Absorption costing net income exceeds
b. 185.7% d. 400.0% variable costing net income when units
25. Which of the following is a FALSE statement about target produced and sold are equal.
costing? b. Variable costing net income exceeds
a. Target costing is a method of determining the absorption costing net income when units
cost of a product or service based on the price produced exceed units sold.
that customers are willing to pay. c. Absorption costing net income exceeds
b. The cost is calculated by subtracting the variable costing net income when units
desired profit from the target price. produced are less than units sold.
c. Target costing is an interactive process. d. Absorption costing net income exceeds
d. Target costing is cost driven. variable costing net income when units
26. Octagonal Company has the following information for produced are greater than units sold.
2018: 31. What is the primary difference between variable and
Selling price $150 per unit absorption costing?
Variable production costs $40 per unit a. inclusion of fixed factory overhead in product
produced costs
Variable selling and admin. expenses $16 per unit sold b. inclusion of fixed selling expenses in product
Fixed production costs $200,000 costs
Fixed selling and admin. expenses $140,000
c. inclusion of variable factory overhead in period
Units produced 10,000 units
Units sold 8,000 units
costs
There were no beginning inventories. d. inclusion of fixed selling expenses in period
What is the cost of ending inventory for Octagonal using costs
the variable costing method? 32. Normandy Company has the following information
a. $80,000 c. $120,000 pertaining to its two divisions for 2018:
b. $180,000 d. $300,000
27. Bernardo Company reported the following units of
production and sales for August and September 2018:

What is the operating income for Normandy Company?

Net income under absorption costing for August was
a. $65,000 b. $325,000
$40,000; net income under variable costing for c. $41,000 d. $300,000
September was $50,000. Fixed manufacturing costs
were $600,000 for each month.
How much was net income for September using
absorption costing?
a. $50,000 c. $20,000
b. $80,000 d. $40,000
33. Consider the following portion of a segmented income 38. Emerald Printing Company projected the following
statement for the year just ended. Assume that the fixed information for next year:
expenses of Division X include $30,000 of direct Selling price per unit $ 60.00
expenses and that the discontinuance of the department Contribution margin per unit $ 45.00
will not affect the sales of the other departments nor Total fixed costs $150,000
reduce the common expenses. Tax rate 30%
What is the break-even point in dollars?
a. $415,000
b. $110,000
c. $200,000
d. $320,000
39. Assume the following cost behavior data for Alpha Arts
Company:
a. $(10,000) Sales price $ 20.00 per unit
b. $40,000 Variable costs $ 15.00 per unit
c. $10,000 Fixed costs $20,000
d. $100,000 Tax rate 30%
34. The following information pertains to Cumberland What volume of sales dollars is required to earn a
Corporation: before-tax income of $25,000?
a. $290,000
b. $140,000
c. $180,000
d. $250,000
40. Victoria Company produces two products, X and Y,
which account for 60 percent and 40 percent,
respectively, of total sales dollars. Contribution margin
ratios are 50 percent for X and 25 percent for Y. Total
What is the value of ending inventory using the fixed costs are $120,000. What is Patricia's break-even
absorption costing method? point in sales dollars?
a. $410,000 a. $328,767
b. $300,000 b. $300,000
c. $600,000 c. $342,856
d. $216,000 d. $375,000
41. In multiple-product analysis, direct fixed costs are
35. Burlywood Company has two divisions with the following a. the fixed costs which can be traced to each
segment margins for the current year: Rosewood, segment and would be avoided if the segment
$170,000; Sandalwood, $230,000. Common expenses of did not exist.
the company are $36,000. Calculate Burlywood b. fixed costs that are not traceable to the
Company's net income. segments and would be avoided if the segment
a. $452,000 did not exist.
b. $400,000 c. fixed costs which can be traced to each
c. $364,000 segment and would remain even if one of the
d. $500,000 segments were eliminated.
36. Biscuit Company sells its product for $50. In addition, it d. fixed costs that are not traceable to the
has a variable cost ratio of 55 percent and total fixed segments and would remain even if one of the
costs of $6,875. How many units must be sold in order to segments were eliminated.
obtain a before-tax profit of $12,000? 42. In a cost-volume-profit graph,
a. 480 units a. the total revenue line crosses the horizontal
b. 240 units axis at the break-even point.
c. 600 units b. beyond the break-even sales volume, profits
d. 839 units are maximized at the sales volume where total
37. Nonesuch Company sells only one product at a regular revenues equal total costs.
price of $7.50 per unit. Variable expenses are 60 percent c. an increase in unit variable costs would
of sales and fixed expenses are $30,000. Management decrease the slope of the total cost line.
has decided to decrease the selling price to $6.00 in d. an increase in the unit selling price would shift
hopes of increasing its volume of sales. What is the the break-even point in units to the left.
sales dollars level required to break even at the old price
of $7.50?
a. $50,000 End…
b. $12,000
c. $18,000
d. $75,000