1. Question ID: ICMA 10.P2.

274 (Topic: Pricing Strategy)

Which one of the following situations best lends itself to a cost-based pricing
approach?

 A. A computer component manufacturer debating pricing with a new customer

for a made to order, state of the art application.correct
 B. An industrial equipment fabricator negotiating pricing for one of its
standard models with a major steel manufacturer.wrong
 C. A computer component manufacturer debating pricing terms with a
customer in a new channel of distribution.
 D. A paper manufacturer negotiating the price for supplying copy paper to a
new mass merchandiser of office products.
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 55% of students.
Your Incorrect Answer Explanation for B:
Cost-based pricing focuses on what it costs to manufacture the product and the price
necessary to both recoup the company's investment and achieve a desired return on
its investment. Cost-based pricing involves determining all the fixed and variable
costs associated with a product or service. After the total costs attributable to the
product or service have been determined, managers add a desired profit margin
percentage to each unit. The goal of the cost-oriented approach is to cover all costs
incurred in producing or delivering products or services and to achieve a targeted
level of profit.
Cost-based pricing is used in a market where there is product differentiation, such as
automobile manufacturing and/or when a company is providing a unique product or
service. This is not one of those situations though, because the equipment is a
standard model.
Correct Answer Explanation for A:
Cost-based pricing focuses on what it costs to manufacture the product and the price
necessary to both recoup the company’s investment and achieve a desired return on
its investment. Cost-based pricing involves determining all the fixed and variable
costs associated with a product or service. After the total costs attributable to the
product or service have been determined, managers add a desired profit margin
percentage to each unit. The goal of the cost-oriented approach is to cover all costs
incurred in producing or delivering products or services and to achieve a targeted
level of profit.
Cost-based pricing is used in a market where there is product differentiation, such as
automobile manufacturing and/or when a company is providing a unique product or
service. A made to order, state of the art application is a unique product.
Furthermore, determining the full cost of the custom order would not be difficult,
since the volume of the order would be known. There would be development costs
for a made-to-order, state-of-the-art application that the computer component
manufacturer would need to be sure of covering, because those are costs that would
not exist if the order is not accepted. So calculating the full cost and adding a desired
profit margin percentage to the order would be a reasonable way of approaching the
pricing decision to avoid having a loss on the order.
Show Other Explanations
2. Question ID: ICMA 10Q.2.032 (Topic: Pricing Strategy)
Highfield Corporation expects to sell 10,000 units of its product at a target price of
$50 per unit. The current full cost of the product is $60 per unit. If Highland wants to
earn an operating profit margin of 20%, the target cost per unit is

 A. $40.correct
 B. $10.
 C. $12.
 D. $38.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 68% of students.
Your Incorrect Answer Explanation for D:
$38 is the target price of $50 minus 20% of the current full cost. This is not the target
cost needed to achieve a 20% operating profit margin.
Correct Answer Explanation for A:
The target price minus the target cost equals the target operating profit. The target
operating profit needs to be 20% of the target price.
Thus, the target cost per unit equals the target price minus 20% of the target price.
The target price is $50 per unit. The target cost (TC) is calculated using the following
formula:
TC = 50 − (0.20 × 50)
TC = 50 − 10
TC = 40
Proof: With a target cost of $40, operating profit will be $50 − $40 = $10. $10 ÷ $50 =
0.20, so the operating profit margin will be 20% of the selling price.
Show Other Explanations
4. Question ID: CMA 687 4.10 (Topic: Pricing Strategy)
Donnelly Corporation manufactures and sells T-shirts imprinted with college names
and slogans. Last year, the shirts sold for $7.50 each, and the variable cost to
manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to
break even. The net income last year was $5,040. Donnelly's expectations for the
coming year include the following:

 The sales price of the T-shirts will be $9

 Variable cost to manufacture will increase by one-third
 Fixed costs will increase by 10%
 The income tax rate of 40% will be unchanged
The selling price that would maintain the same contribution margin rate as last year
is

 A. Some amount other than those given.

 B. $9.00wrong
 C. $10.00correct
 D. $8.25
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 46% of students.
Your Incorrect Answer Explanation for B:
$9 is the new planned sales price of the T-shirts. However, this selling price would
not maintain the same contribution margin ratio as the company had last year.
Correct Answer Explanation for C:
Last year's contribution margin rate is 70%. The contribution margin is $5.25,
calculated as $7.50 − $2.25. The contribution margin ratio is $5.25 ÷ $7.50, or 0.70.
The variable cost will increase by 1/3 in the coming year. 1/3 of $2.25 is $0.75, so
the new variable cost will be $2.25 plus $0.75, or $3.00. To find what selling price
would maintain the same contribution margin as last year, we can use the following
formula:
X − 3 = 0.7X
Solving for X:
Subtract 0.7X from both sides of the equation:
0.3X − 3 = 0
Add 3 to both sides of the equation:
0.3X = 3
Divide both sides of the equation by 0.3:
X = 10
A selling price of $10 would create a contribution margin of $10 − $3, or $7. The
contribution margin ratio would be $7 ÷ $10, or 0.70, the same as last year's
contribution margin.
Show Other Explanations
5. Question ID: HTB 2.2.059 (Topic: Pricing Strategy)
A firm in which of the following industries is most likely to use a market-based as
opposed to a cost-based approach to pricing decisions?

 A. Competitive market, competitors’ products dissimilar.

 B. Competitive market, competitors’ products similar.correct
 C. Non-competitive market, competitors’ products similar.
 D. Non-competitive market, competitors’ products dissimilar.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 83% of students.
Your Incorrect Answer Explanation for D:
A company in a non-competitive market with a dissimilar product would be more
likely to use a cost-based approach to setting prices.
Correct Answer Explanation for B:
Companies operating in competitive markets, such as oil and gas, use the market-
based approach to price setting. In a competitive market, one company’s products or
services are very similar to another company’s products or services.
Show Other Explanations
6. Question ID: I22 2.53 (Topic: Pricing Strategy)
A company’s goal for the current year is to reach 10% operating profit margin
percentage. The sales department has estimated that the maximum price the
company can charge is $60 per unit and the company will be able to sell 500,000
units at this price. Fixed costs totaled $12,000,000 and the effective income tax rate
is 20%. What is the maximum variable cost per unit to achieve this goal? 

 A. $30.00.correct
 B. $54.00.
 C. $52.50.
 D. $28.50.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 71% of students.
Your Incorrect Answer Explanation for D:
This answer results from dividing the required operating profit per unit by (1 − the tax
rate) to find the required operating profit before taxes. Operating profit on the income
statement is not reduced by income taxes. Income taxes are not deducted until net
income before income tax has been calculated. Therefore, the income tax rate is not
relevant for solving this problem.
Please see the correct answer explanation for more information.
Correct Answer Explanation for A:
Operating profit on the income statement is not reduced by income taxes. Therefore,
the income tax rate is not relevant for solving this problem and should not be used to
adjust the required operating income per unit.
With a $60 selling price and an operating profit margin goal of 10% of the selling
price, the target operating profit per unit is 10% of $60, or $6.
Fixed cost per unit for 500,000 units is $24 ($12,000,000 / 500,000 units).
The formula, letting VC stand for variable cost per unit, is:
$60 − VC − $24 = $6
VC = $30 
Show Other Explanations
8. Question ID: HTB 2.2.056 (Topic: Pricing Strategy)
A newly developed product by Medina Co. is expected to sell 5,000 units per year
and the costs of producing this product are expected to be, in total, $450,000 per
year. Medina would like to have a gross profit of 30% of the sales price. In order to
achieve this, what price (rounded to the nearest dollar) does Medina need to set for
this product?

 A. $117
 B. $135
 C. $129correct
 D. $120wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 71% of students.
Your Incorrect Answer Explanation for D:
This is not the correct answer. Please see the correct answer for an explanation.
We have been unable to determine how to calculate this incorrect answer choice. If
you have calculated it, please let us know how you did it so we can create a full
explanation of why this answer choice is incorrect. Please send us an email at
[email protected]. Include the full Question ID number and the actual
incorrect answer choice -- not its letter, because that can change with every study
session created. The Question ID number appears at the top of the question. Thank
you in advance for helping us to make your HOCK study materials better.
Correct Answer Explanation for C:
The cost per unit is $90. The formula to determine what selling price will result in a
30% gross profit is: P – 90 = 0.3P. Solving for P: 0.7P = 90;  P = $128.57, or $129.
Show Other Explanations
9. Question ID: ICMA 10.P2.279 (Topic: Pricing Strategy)
Fennel Products is using cost-based pricing to determine the selling price for its new
product based on the following information.

Annual volume 25,000 units

Fixed costs $700,000 per year
Variable costs $200 per unit
Plant investment $3,000,000
Working capital $1,000,000
Effective tax
40%
rate
The target price that Fennel needs to set for the new product to achieve a 15% after-
tax return on investment (ROI) would be

 A. $228.wrong
 B. $238.
  C. $268.correct
 D. $258.
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 44% of students.
Your Incorrect Answer Explanation for A:
Using $228 as a sales price, the firm would break even. Since the firm wants to
achieve a 15% after-tax return on investment, this price is not correct.
Correct Answer Explanation for C:
The company requires a 15% after-tax return on investment. Investment is
$4,000,000, including $3,000,000 in the plant and $1,000,000 in working capital. So
the after-tax profit required is $4,000,000 × 0.15, which is $600,000.
To convert an after-tax profit to a before-tax profit, we divide it by 1 − the tax rate.
$600,000 ÷ (1 − 0.40) = $1,000,000 and $1,000,000 is the required before-tax profit.
The contribution margin needs to be enough to cover fixed cost of $700,000 plus the
profit requirement of $1,000,000. Therefore, the contribution margin needs to be
$1,700,000 to achieve an after-tax return on investment of 15%.
With sales of 25,000 units expected, this means the contribution margin per unit
needs to be $1,700,000 ÷ 25,000, or $68 per unit.
The variable cost per unit is $200. The price per unit minus the variable cost per unit
equals the contribution margin per unit. Therefore, the formula to use to calculate the
required price is
X − 200 = 68
Where X = the price per unit
Solving for X, we get X = $268.
Show Other Explanations
11. Question ID: CMA 1296 4.6 (Topic: Pricing Strategy)
Several surveys point out that most managers use full product costs, including unit
fixed costs and unit variable costs, in developing cost-based pricing. Which one of
the following is least associated with cost-based pricing?

 A. Fixed-cost recovery.
 B. Target pricing.correct
 C. Price justification.
 D. Price stability.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 55% of students.
Your Incorrect Answer Explanation for D:
Full product costing promotes price stability.
Correct Answer Explanation for B:
Target pricing starts with the expected price the product should be sold for in the
market, based on the company's knowledge of its customers and competitors. By
subtracting the per unit profit margin desired, the seller is able to estimate the unit
target cost. If the seller does not believe that it would be able to produce the product
at or below the target cost, the project would abandoned.
Show Other Explanations
14. Question ID: HTB 2.2.057 (Topic: Pricing Strategy)
Which one of the following pricing methods takes into consideration a product’s
entire life cycle?

 A. Transfer pricing
 B. Target pricingcorrect
 C. Cost-based pricing
 D. Market-based pricingwrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 30% of students.
Your Incorrect Answer Explanation for D:
Market-based pricing does not take into consideration a product’s entire life cycle,
Correct Answer Explanation for B:
Target pricing takes into consideration a product’s entire lifecycle. Target pricing is a
type of market-based pricing, but target pricing is the better answer to this question
because target pricing specifically involves determining a target price that over the
long run will cover the target cost per unit and the target operating income per unit.
Show Other Explanations
15. Question ID: I22 2.51 (Topic: Pricing Strategy)
A multinational retail company plans to introduce a new product in the market at the
start of the third quarter of the current year. Based on a budgeted production of
50,000 units, the budgeted direct materials, direct labor, and variable overhead costs
are $200,000, $150,000, and $125,000, respectively. The fixed manufacturing
overhead costs are $75,000. Estimated marketing costs are $50,000. Costing for the
product will be based solely on manufacturing costs and management wants to earn
20% profit on its selling price. What is the target selling price per unit to meet the
objectives of management? 

 A. $15.00.
 B. $13.75.correct
 C. $13.20.
 D. $14.40.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 32% of students.
Your Incorrect Answer Explanation for D:
This answer results from two errors:
 1. Using the markup on cost formula. This is a markup on selling price problem,
where the markup is a percentage of the selling price, not a percentage of the
cost. 
2. Including the marketing costs in the calculation of the total cost per unit of the
item. When pricing is based solely on manufacturing costs, the item cost used
includes only the manufacturing costs. Marketing costs are administrative and
selling costs.
Please see the correct answer explanation for more information.
Correct Answer Explanation for B:
This is a markup on selling price problem, where the markup is a percentage of the
selling price. The formula for the price when the item cost and the desired markup
percentage on the selling price are known is: 
Price = Item Cost / (1 − Markup Percentage)
The total per-unit cost is $11.00, calculated as follows:

Cost for
    50,000 Cost
units   Per Unit
Direct materials   $200,000      $ 4.00 
Direct labor   150,000      3.00 
Variable overhead   125,000      2.50 
Fixed overhead      75,000         1.50 
Total cost   $550,000      $11.00 
Price = $11 / (1 − 0.20)
Price = $13.75
Alternate approach:
Let X = Price
X − $11 = 0.2X
Add $11 to both sides of the equation and subtract 0.20X from both sides of the
equation:
X − $11 = 0.20X
0.8X = $11
Divide both sides by 0.8:
X = $13.75
Show Other Explanations
16. Question ID: ICMA 10.P2.275 (Topic: Pricing Strategy)
Basic Computer Company (BCC) sells its computers using bid pricing. It develops its
bids on a full cost basis. Full cost includes estimated material, labor, variable
overheads, fixed manufacturing overheads, and reasonable incremental computer
assembly administrative costs, plus a 10% return on full cost. BCC believes bids in
excess of $1,050 per computer are not likely to be considered.
BCC's current cost structure, based on its normal production levels, is $500 for
materials per computer and $20 per labor hour. Assembly and testing of each
computer requires 17 labor hours. BCC expects to incur variable manufacturing
overhead of $2 per labor hour, fixed manufacturing overhead of $3 per labor hour,
and incremental administrative costs of $8 per computer assembled.
BCC has received a request from a school board for 200 computers. Using the full-
cost criteria and desired level of return, which one of the following prices should be
recommended to BCC's management for bidding purposes?

 A. $874.00.
 B. $882.00.wrong
 C. $961.40.
 D. $1,026.30.correct
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 63% of students.
Your Incorrect Answer Explanation for B:
This answer omits the fixed manufacturing overhead as well as the 10% return on
full cost.
Correct Answer Explanation for D:
The question says to use the full-cost criteria and the desired return on full cost
(10%) in developing this bid. It further says that bids in excess of $1,050 per
computer are not likely to be considered. Therefore, the bid needs to be less than
$1,050 per computer (but all of the answer choices are less than $1,050 per
computer, so that information is not very helpful in selecting from among the answer
choices).
The full costs per computer are:

Materials $   500.00
Labor - 17 direct labor hours @ $20/hour 340.00
Variable overhead - 17 direct labor hours × $2 34.00
Incremental administrative costs 8.00
Fixed overhead - 17 direct labor hours × $3       51.00
  Total cost $   933.00
  Plus profit - $933 × 0.10       93.30
  Price $1,026.30
Fixed costs are included in this bid for two reasons. One, the problem says that BCC
expects to incur fixed manufacturing overhead of $3 per labor hour. That implies that
the fixed costs would not be incurred if the company does not produce this order.
That makes the fixed costs a relevant cost that needs to be covered. And two, the
problem tells us to use the full-cost criteria, and fixed costs are included in the full
cost.
Show Other Explanations
17. Question ID: ICMA 19.P2.016 (Topic: Pricing Strategy)
Which one of the following pricing methods focuses on setting the price based on
recouping the manufacturing cost of the product and achieving a desired profit?

 A. Life-cycle based pricing.

 B. Cost-based pricing.correct
 C. Target pricing.
 D. Market-based pricing.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 63% of students.
Your Incorrect Answer Explanation for D:
A market-based price is not based on the manufacturing price, but is instead based
on other prices in the market.
Correct Answer Explanation for B:
A cost-based price is based on the costs of producing the product and then having
some amount of profit as well.
Show Other Explanations
20. Question ID: HINT22 2.C.001 (Topic: Pricing Strategy)
Management has a target operating income of $106,000 for its 1,000 GB flash drive
product.
If the flash drives are sold in a monopolistically competitive market, management
estimates 6,000 flash drives will need to be sold to earn the target operating income
at the target price it has estimated for that market.
If the flash drives are sold in a monopoly market, management estimates only 1,200
units will need to be sold to earn the same target operating income at the target price
it has estimated for that market.
The fixed costs for the period are $74,000.
At the target price in the monopoly market, the flash drives’ contribution margin in
that market is three-fourths of its variable cost.
The target selling prices being used in the two markets are

 A. Monopolistic competition $230.00; monopoly $350.00.correct

 B. Monopolistic competition $30.00; monopoly $150.00.wrong
 C. Monopolistic competition $135.44; monopoly $206.10.
 D. Monopolistic competition $70.00; monopoly $190.00.
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 39% of students.
Your Incorrect Answer Explanation for B:
These would be the target prices per unit in each market if the contribution margin
per unit in the monopolistically competitive market were three-fourths of its variable
cost. However, the question says that the contribution margin per unit in
the monopoly market is three-fourths of its variable cost.
Correct Answer Explanation for A:
This firm is using target profit pricing. When target profit pricing is used, the firm sets
its target price to earn a target profit based on forecasts of total cost, total revenue,
and sales volume. The answer to this question requires the use of profit point
analysis (CVP analysis) to find the target prices being used, and it requires a
knowledge of market structures.
In the monopolistically competitive market where multiple firms operate in the
market, the contribution margin per unit being used is $30, calculated as the fixed
cost plus the target profit, divided by the sales volume. ($74,000 + $106,000) / 6,000
= $30.
In the monopoly market where the company will be the sole supplier, the contribution
margin per unit being used is $150, calculated as ($74,000 + $106,000) / 1,200 =
$150.
In the monopoly market, the contribution margin is 75% of variable cost. Therefore,
variable cost is $150 / 0.75 = $200. That variable cost is the same for both markets.
The target selling price in the monopoly market is the variable cost of $200 + the unit
contribution margin of $150 = $350; and the target selling price in the
monopolistically competitive market is the variable cost of $200 + the unit
contribution margin of $30 = $230.
Show Other Explanations
22. Question ID: ICMA 1603.P2.043 (Topic: Pricing Strategy)
The management of a company is attempting to reduce the cost for Product X by
analyzing the trade-offs between different types of product features and total product
cost. What type of cost reduction strategy is the company using?

 A. Kaizen.
 B. Total quality management.
 C. Value engineering.correct
 D. Activity-based costing.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 76% of students.
Your Incorrect Answer Explanation for D:
Activity-based costing is a costing method, not a cost-reduction strategy. Activity-
based costing is a method of allocating manufacturing overhead costs to products
based on cost drivers. ABC identifies the causal relationship between the incurrence
of cost and activities, determines the underlying driver of activities, establishes cost
pools  related to individual drivers, develops costing rates, and applies cost to
product on the basis of resources consumed (drivers). It is not a cost reduction
strategy that attempts to reduce the cost for a product by analyzing the trade-offs
between different types of product features and total product cost.
Correct Answer Explanation for C:
Value engineering is a cost-reduction strategy that attempts to reduce the cost for a
product by analyzing the trade-offs between different types of product features and
total product cost. Value engineering involves evaluation of all the business functions
in the value chain with the objective of reducing costs while satisfying customer
needs. This evaluation may lead to design improvements, materials specification
changes or modifications in manufacturing methods.
When performing value engineering, management distinguishes between a value-
added cost and a non-value-added cost. If a value-added cost were eliminated, it
would reduce the product’s value, or usefulness, to customers. Since value-added
costs cannot be eliminated, value engineering seeks to reduce their costs by
improving efficiency.
On the other hand, if a non-value-added cost were eliminated, it would not reduce
the value or utility of the product. A non-value-added cost is a cost the customer is
not willing to pay for. Examples of non-value-added costs are costs for expediting,
re-work and repair; and these are costs that can be reduced through improvements
to the manufacturing process.
Show Other Explanations
23. Question ID: CMA 693 4.3 (Topic: Pricing Strategy)
Delphi Company has developed a new project that will be marketed for the first time
during the next fiscal year. Although the Marketing Department estimates that 35,000
units could be sold at $36 per unit, Delphi's management has allocated only enough
manufacturing capacity to produce a maximum of 25,000 units of the new product
annually. The fixed costs associated with the new product are budgeted at $450,000
for the year, which includes $60,000 for depreciation on new manufacturing
equipment. Data associated with each unit of product are presented as follows.
Delphi is subject to a 40% income tax rate.

Variable
 
Costs
Direct material $ 7.00 
Direct labor 3.50 
Manufacturing overhead    4.00 
Total variable manufacturing cost $14.50 
Selling expenses    1.50 
Total variable cost $16.00 
Delphi Company's management has stipulated that it will not approve the continued
manufacture of the new product after the next fiscal year unless the after-tax profit is
at least $75,000 the first year. The unit selling price to achieve this target profit must
be at least
  A. $36.60.wrong
 B. $39.00.correct
 C. $34.60.
 D. $37.00.
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 65% of students.
Your Incorrect Answer Explanation for A:
This answer results from reducing fixed costs by the amount of the depreciation. The
depreciation is a fixed cost and should not be excluded.
Correct Answer Explanation for B:
If the management of Delphi has required that this project have an after-tax profit of
$75,000, the pre-tax required income must be included as a fixed cost. The pre-tax
income that is required is $125,000 ($75,000 ÷ 0.6). Adding this required pre-tax
income to the fixed costs of $450,000, the company now needs to cover $575,000 of
costs and pre-tax profit with the sale of the 25,000 units that can be sold. This means
that each unit must provide $23 of contribution ($575,000 ÷ 25,000). The variable
costs of $16 per unit plus the $23 required contribution per unit to cover the profit
equal a required selling price of $39 per unit. If the company sells each of the 25,000
units for $39, it will achieve an after-tax profit of $75,000.
Show Other Explanations
24. Question ID: ICMA 13.P2.049 (Topic: Pricing Strategy)
Adams Corporation’s goal is for operating income to equal 6% of sales. Adams
estimates that the highest selling price the market will bear is $115 per unit. Adams
expects to sell 100,000 units, incur fixed costs of $3,500,000, and has an effective
income tax rate of 40%. To achieve these plans, the target variable cost per unit
must be 

 A. $73.10.correct
 B. $108.10.
 C. $62.75.
 D. $68.50.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 72% of students.
Your Incorrect Answer Explanation for D:
If variable costs were $68.50, the company would be profitable but would not
achieve the desired amount of operating profit. The company's goal for operating
profit is $690,000. This variable cost would provide an after-tax profit of $690,000.
Operating profit is calculated before taxes.
Correct Answer Explanation for A:
Total revenue is $115 × 100,000, or $11,500,000. The company’s desired operating
income is thus 6% of $11,500,000, or $690,000. Letting X represent the variable cost
per unit (and 100,000X the total variable cost for 100,000 units) in the formula for
operating profit, we get the following:
Revenues – Variable costs – Fixed costs = Operating profit
11,500,000 – 100,000X – 3,500,000 = 690,000
Solving for X:
8,000,000 – 100,000X = 690,000
7,310,000 = 100,000X
X = $73.10
Show Other Explanations
25. Question ID: HTB 2.2.058 (Topic: Pricing Strategy)
Which one of the following statements best represents the order of the steps in
developing target prices?

 A. Determine market price, calculate target cost, and use value engineering to
reduce costs.correct
 B. Use kaizen costing to reduce costs, determine desired mark-up, and set
market price.
 C. Use value engineering and kaizen costing to reduce costs and determine
desired price.
 D. Use value engineering to reduce costs, calculate target costs, and set
desired price.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 71% of students.
Your Incorrect Answer Explanation for D:
This is not the order of the steps in the process of developing target prices.
Correct Answer Explanation for A:
Target pricing involves first determining what the target price should be based on the
market price, then calculating what the target cost must be in order to earn an
adequate operating profit at the target price. If the actual calculated cost does not
provide an adequate operating profit at the target price, then value engineering is
one way to reduce the cost to the target cost.
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26. Question ID: ICMA 10.P2.276 (Topic: Pricing Strategy)
Companies that manufacture made-to-order industrial equipment typically use which
one of the following?

 A. Cost-based pricing.correct
 B. Price discrimination.
 C. Market-based pricing.
 D. Material-based pricing.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 71% of students.
Your Incorrect Answer Explanation for D:
Material-based pricing is based upon the actual amount and type of material used in
the product. It is a variation on time-and-material pricing that would be used where
the amount of time required to produce an order is known but the cost of the material
varies depending on the customer's material specifications. Material-based pricing
would not be the best pricing for a made-to-order piece of industrial equipment,
because the material to be used would not be subject to customer specification, and
furthermore there would be no pre-determined time standards for a piece of
equipment that is being made to order.
Correct Answer Explanation for A:
Cost-based pricing focuses on what it costs to manufacture the product and the price
necessary to both recoup the company’s investment and achieve a desired return on
its investment. Cost-based pricing involves determining all the fixed and variable
costs associated with a product or service. After the total costs attributable to the
product or service have been determined, managers add a desired profit margin
percentage to each unit. The goal of the cost-oriented approach is to cover all costs
incurred in producing or delivering products or services and to achieve a targeted
level of profit.
Companies that provide unique products and services usually use cost-plus pricing.
These companies include not only manufacturers of custom-made equipment but
also service professionals such as attorneys and public accountants.
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27. Question ID: ICMA 19.P2.020 (Topic: Pricing Strategy)
Product X was launched ten years ago as an innovative product. The initial price was
relatively high, which yielded a high profit margin. The market for Product X is now
becoming very competitive, and demand for the product is slowing. What pricing
strategy should the company follow for Product X based on the current market
conditions?

 A. Pricing for Product X should be at its highest level to recoup its innovation
R&D.
 B. Because of the increased competition, Product X’s price should be
decreased.correct
 C. Prices should be held steady with only inflation adjustments.
 D. The company should sell Product X below cost so that it can force
competitors out of the market.wrong
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 77% of students.
Your Incorrect Answer Explanation for D:
Selling a product below the cost of production is rarely a good pricing strategy.
Correct Answer Explanation for B:
This is a good marketing strategy in this case. Because of increased competition, the
price will need to be reduced, or customers will be lost.
Show Other Explanations
3. Question ID: CIA 1193 IV.11 (Topic: Pricing Strategy)
A retail company determines its selling price by marking up variable costs 60%. In
addition, the company uses frequent selling price markdowns to stimulate sales. If
the markdowns average 10%, what is the company's contribution margin ratio?

 A. 37.5%
 B. 43.75%
 C. 27.5%
 D. 30.6%correct
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 40% of students.
Correct Answer Explanation for D:
The contribution margin is equal to selling price minus variable costs (Sales − VC =
CM). If variable costs are $100 per unit, then the sales price is $160 per unit ($100 ×
160%). If there is a markdown of 10%, then the new sales price will $144 ($160 ×
90%) and the new contribution margin will be $44 ($144 − $100). The new
contribution margin ratio will be 30.6% ($44 ÷ $144).
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7. Question ID: ICMA 10.P2.277 (Topic: Pricing Strategy)
Which one of the following is not a characteristic of market-based pricing?

 A. It is used by companies facing stiff competition.

 B. It starts with a target selling price and target profit.
 C. It has a customer-driven external focus.
 D. It is used by companies facing minimal competition.correct
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 65% of students.
Correct Answer Explanation for D:
This is not a true statement. Companies operating in competitive markets, such as
oil and gas, use market-based pricing in order to be competitive. Companies
facing minimal competition do not need to use market-based pricing. In fact, there
would probably not be any market prices in a market with little competition.
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10. Question ID: CIA 1195 IV.75 (Topic: Pricing Strategy)
Which of the following price adjustment strategies is designed to stabilize production
for the selling firm?

 A. Quantity discounts.
 B. Functional discounts.
 C. Cash discounts.
  D. Seasonal discounts.correct
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 47% of students.
Correct Answer Explanation for D:
Seasonal discounts are a good method used by manufactures to smooth or stabilize
the production cycle. The best example is a ski manufacturer offering discounts to
retailers during the spring and summer months. Out-of-season discounts encourage
the retailers to order early and can smooth out some of the seasonality of the ski
manufacturer's business.
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12. Question ID: HTB 2.2.060 (Topic: Pricing Strategy)
Harding Inc. prices its main product by adding 30% to the manufacturing cost per
unit. Harding’s variable manufacturing costs are $12 per unit, variable selling and
administrative costs are $1 per unit, and fixed manufacturing costs per quarter total
$2,000,000. Anticipated quarterly sales were 50,000 units. Harding’s market has
become more competitive with similar companies offering a selling price of $60 per
unit for a similar product. This has resulted in decreased demand for Harding’s
product, causing actual quarterly sales to be 40,000 units. Harding’s selling price per
unit for the next quarter should be

 A. $80.60
 B. $63.00
 C. $67.60
 D. $60.00correct
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 42% of students.
Correct Answer Explanation for D:
This scenario describes a short-run pricing decision, made to meet competitive
pressure. Since the market in which the company operates includes companies
offering similar products, the price should be the market price, which has decreased
to $60 per unit. At $60 per unit, the company should be able to maintain quarterly
sales of 50,000 units, whereas at any price above $60, sales volume and profits will
fall. At a price of $60 per unit and a volume of 50,000 units, the company will cover
its variable costs and its fixed costs and will earn operating income of $350,000,
calculated as [($60 − $13) × 50,000] − $2,000,000 = $350,000. For the long-term, if
management wants to maintain a 30% markup on cost, it needs to find ways to cut
the company’s total manufacturing cost (fixed and variable) to $46.15 per unit,
because $46.15 + (0.30 × $46.15) = $60.00. Note: $46.15 is calculated as follows:
X + 0.3X = 60
Solving for X:
1.3X = 60
X = 46.15
Show Other Explanations
13. Question ID: ICMA 10.P2.278 (Topic: Pricing Strategy)
Almelo Manpower Inc. provides contracted bookkeeping services. Almelo has annual
fixed costs of $100,000 and variable costs of $6 per hour. This year the company
budgeted 50,000 hours of bookkeeping services. Almelo prices its services at full
cost and uses a cost-plus pricing approach. The company developed a billing price
of $9 per hour. The company’s mark-up level would be

 A. 66.6%.
 B. 33.3%.
 C. 50.0%.
 D. 12.5%.correct
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 64% of students.
Correct Answer Explanation for D:
The full cost per hour is $6 variable costs plus $2 fixed costs ($100,000 annual fixed
costs ÷ 50,000 budgeted hours of service). The full cost is therefore $8 per hour. The
billing price is $9 per hour, and the difference is $1 per hour. $1 per hour divided by
the full cost of $8 per hour = a markup percentage of 0.125 or 12.5%.
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18. Question ID: CIA 1185 IV.9 (Topic: Pricing Strategy)
A manufacturer produces a product that sells for $10 per unit. Variable costs per unit
are $6 and total fixed costs are $12,000. At this selling price, the company earns a
profit equal to 10% of total dollar sales. By reducing its selling price to $9 per unit,
the manufacturer can increase its unit sales volume by 25%. Assume that there are
no taxes and that total fixed costs and variable costs per unit remain unchanged. If
the selling price were reduced to $9 per unit, the profit would be:

 A. $6,000
 B. $4,000
 C. $5,000
 D. $3,000correct
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 58% of students.
Correct Answer Explanation for D:
The first step is to find the current sales volume using the facts given about the
current situation.
Letting X stand for sales volume, Total Revenue is 10X. Total Variable Cost is 6X.
And since Profit is 10% of Total Revenue, and Total Revenue is 10X, Profit is
0.10(10X), which is equal to X. Therefore, our equation is:
10X − 6X − 12,000 = X
Solving for X:
4X − 12,000 = X
3X − 12,000 = 0
3X = 12,000
X = 4,000
We can prove this answer with a short income statement:

Revenue: $10 × 4,000 $40,000  

Variable Cost: $6 ×
   24,000  
4,000
Contribution margin $16,000  
Fixed cost   12,000  
Profit 4,000 which is 10% of total revenue of $40,000
Now that we know the current sales volume is 4,000 units, we can calculate the
increased sales volume when it increases by 25%: 4,000 × 1.25 = 5,000 units.
Now, we can create another income statement using a volume of 5,000 units and a
sales price of $9, to answer the question:

Revenue: $9 × 5,000 $45,000

Variable Cost: $6 × 5,000    30,000
Contribution margin $15,000
Fixed cost   12,000
Profit 3,000
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19. Question ID: ICMA 10.P2.273 (Topic: Pricing Strategy)
Leader Industries is planning to introduce a new product, DMA. It is expected that
10,000 units of DMA will be sold. The full product cost per unit is $300. Invested
capital for this product amounts to $20 million. Leader’s target rate of return on
investment is 20%. The markup percentage for this product, based on operating
income as a percentage of full product cost, will be

 A. 42.9%.
 B. 233.3%.
 C. 57.1%.
 D. 133.3%.correct
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 69% of students.
Correct Answer Explanation for D:
The target rate of return on investment is 20%. 20% of $20,000,000 invested is
$4,000,000. So $4,000,000 is the annual amount of increase in operating income
that the company needs from the sale of DMA in order to achieve its target of a 20%
return on investment.
The total annual cost of the new product is $300 × 10,000, or $3,000,000. The
markup amount is the amount of profit: $4,000,000. So the markup percentage,
based on operating income as a percentage of full product cost, is $4,000,000 ÷
$3,000,000, which is 1.333 or 133.3%.
The markup percentage on cost needs to be 133.3% to achieve a 20% return on
investment.
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21. Question ID: ICMA 10.P2.269 (Topic: Pricing Strategy)
The advantages of incorporating full product costs in pricing decisions include all of
the following except

 A. a pricing formula that meets the cost-benefit test; i.e., simplicity.

 B. the promotion of price stability.
 C. full product cost recovery.
 D. ease in identifying unit fixed costs with individual products.correct
Study Unit 15: C.3. Pricing Strategy covers the information for this question.
This question is answered correctly on the first attempt by 44% of students.
Correct Answer Explanation for D:
Using all of the costs to set prices does not make it easier to identify the fixed costs
by product. It only makes sure the fixed costs are covered by the prices set.
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