5) Samuels Company is considering pricing its 10,000-gallon petroleum tanks using either variable
manufacturing or full product costs as the base. The variable cost base provides a prospective price of
$6,000 and the full cost base provides a prospective price of $6,100. The difference between the two prices
is ________.
A) the estimated amount of profit
B) that the variable cost base estimates fixed costs in the markup percentage while the full cost base
includes an amount for fixed costs
C) known as price discrimination
D) caused by the inability of most companies to estimate fixed cost per unit with any degree of reliability
6) Which of the following can be used to arrive at the target rate of return on investment?
A) dividing target annual operating income by invested capital
B) multiplying target annual operating income by the rate of fixed preference dividend
C) dividing invested capital by estimated dividend rate
D) multiplying earnings available to equity stakeholders by price-equity ratio
7) The amount of markup percentage is usually higher if ________.
A) there is idle capacity
B) demand is strong
C) competition is intense
D) demand is elastic
8) When making pricing decisions managers should include fixed cost per unit in the cost because
________.
A) it leads to reporting higher operating income for the period
B) it allows managers to report positive contribution as long as prices are above variable costs
C) in the long run, the price of a product must exceed the full cost of the product
D) it requires the management accountant to perform a detailed analysis of cost-behavior patterns to
separate product costs into variable and fixed components
9) Which of the following statements is true regarding cost-plus pricing?
A) It starts with a target price which is the estimated price for a product.
B) A company uses a markup percentage that estimates a product price that covers full product costs and
earns the required return on investment.
C) It first determines product characteristics and target price on the basis of customer preferences and
then computes a target cost.
D) The cost-plus price chosen has already been studied for customer reaction to the price.
10) Which of the following is an advantage of using full cost of the product as the cost base?
A) Managers are informed regarding the minimum long-run cost they need to recover to stay in business.
B) Using the full cost of the product as a basis for pricing increases the temptation to cut prices below full
costs.
C) Fixed cost allocations can be arbitrary while using full cost of the product as the cost base.
D) It requires a detailed analysis of cost behavior for computations and hence promotes a better
understanding of the cost behavior.
Answer the following questions using the information below:
Judith Vending Company has invested $800,000 in a plant to make vending machines. The target
operating income desired from the plant is $120,000 annually. The company plans annual sales of 1,200
vending machines at a selling price of $1,000 each.
11) What is the target rate of return on investment for Judith Vending Company?
A) 18.0%
B) 15.0%
C) 14.0%
D) 66.7%
12) What is the markup percentage as a percentage of cost for Judith Vending Company?
A) 10.00%
B) 11.11%
C) 12.68%
D) 13.62%
13) What is the cost base of each vending machine for Judith Vending Company?
A) $1,000
B) $950
C) $900
D) $850
14) What is the target rate of return on investment for Crimpson Company?
A) 22.0%
B) 18.0%
C) 14.9%
D) 12.9%
15) What is the markup percentage as a percentage of cost for Crimpson Company?
A) 22.0%
B) 18.0%
C) 12.0%
D) 11.0%
16) What is the cost base of each juicer machine for Crimpson Company?
A) $357.29
B) $352.35
C) $338.64
D) $328.00
Answer the following questions using the information below:
Wilde Corporation budgeted the following costs for the production of its one and only product for the
next fiscal year:
Direct materials $1,125,000
Direct labor 775,000
Manufacturing overhead
Variable 840,000
Fixed 645,000
Selling and administrative
Variable 360,000
Fixed 480,000
Total costs $4,225,000
Wilde has an annual target operating income of $900,000.
17) The markup percentage for setting prices as a percentage of total manufacturing costs is ________.
A) 51.4%
B) 125.3%
C) 185.6%
D) 245.8%
18) The markup percentage for setting prices as a percentage of variable manufacturing costs is ________.
A) 51.40%
B) 87.04%
C) 65.30%
D) 21.30%
19) The markup percentage for setting prices as a percentage of the variable cost of the product is
________.
A) 328.9%
B) 36.6%
C) 228.5%
D) 65.3%
20) The markup percentage for setting prices as a percentage of the full cost of the product is ________.
A) 328.9%
B) 36.6%
C) 228.5%
D) 21.3%
21) Sandra Clothing Company has invested $48,000,000 in its business. The target rate of return for the
company is 15%. It has long-term assets of $20,000,000. Cost of debt for the company is 12%. It expects to
sell 8,000 units in the upcoming year. What will be the target operating income per unit for Sandra
Clothing Company?
A) $300
B) $375
C) $720
D) $900
22) In cost-plus pricing, the markup is a rigid number that determines the actual selling price.
23) The target rate of return on investment is another way of referring to the markup percentage.
24) Cost bases that include fewer costs also have lower markups.
25) Markups tend to be higher in more competitive markets.
26) Using only the variable cost as a base may tempt managers to cut prices as long as prices are above
variable cost.
27) A full-cost formula for pricing does not require the management accountant to perform a detailed
analysis of cost-behavior patterns to separate product costs into variable and fixed components.
28) One market-based pricing method is called the time and materials method.
29) A full-cost formula for pricing does not require the management accountant to perform a detailed
analysis of cost-behavior patterns.
30) Nancy Company has budgeted sales of $300,000 with the following budgeted costs:
Direct materials $60,000
Direct manufacturing labor 40,000
Factory overhead
Variable 30,000
Fixed 50,000
Selling and administrative expenses
Variable 20,000
Fixed 30,000
Compute the average markup percentage for setting prices as a percentage of:
a. The full cost of the product
b. The variable cost of the product
c. Variable manufacturing costs
d. Total manufacturing costs
31) Timothy Company has budgeted sales of $780,000 with the following budgeted costs:
Direct materials $168,000
Direct manufacturing labor 132,000
Factory overhead
Variable 96,000
Fixed 108,000
Selling and administrative expenses
Variable 72,000
Fixed 100,000
Compute the average markup percentage for setting prices as a percentage of:
a. Total manufacturing costs
b. The variable cost of the product
c. The full cost of the product
d. Variable manufacturing costs
Objective 13.6
1) Life-cycle costing is the name given to ________.
A) a method of cost planning to reduce manufacturing costs to targeted levels
B) the process of examining each component of a product to determine whether its cost can be reduced
C) the process of managing all costs along the value chain
D) a system that focuses on reducing costs during the manufacturing cycle
2) An understanding of life-cycle costs can lead to ________.
A) additional costs during the manufacturing cycle
B) less need for evaluation of the competition
C) cost effective product designs that are easier to service
D) mutually beneficial relationships between buyers and sellers
3) Life-cycle budgeting is particularly important when ________.
A) the development period for R&D is short and inexpensive
B) there are significant nonproduction costs
C) most costs are locked in during production
D) a low percentage of costs are incurred before any revenues are received
4) Life-cycle budgeting and life-cycle costing help highlight ________.
A) an increase in customer-service costs due to using inferior materials
B) high production costs caused by a complex design
C) large ordering costs due to the great number of component parts used
D) an increase in annual operating income resulting from the new product
5) Life-cycle budgeting ________.
A) has little in common with target pricing.
B) is most useful to companies that manufacture small items such as household plastics.
C) helps companies estimate revenues over a multiyear horizon.
D) gives companies more insight into total costs when manufacturing costs consume the majority of the
resources.
6) Customer life-cycle costs are the ________.
A) costs incurred by the selling company to satisfy the customer.
B) refer to the costs to the customers for buying and using a product.
C) same as the selling life-cycle prices.
D) replacement costs of using a product or service.
Answer the following questions using the information below:
Purple Purpose Inc., is in the process of evaluating a new product using the following information:
• A new transformer has two production runs each year, each with $10,000 in setup costs.
• The new transformer incurred $30,000 in development costs and is expected to be produced over the
next three years.
• Direct costs of producing the transformers are $40,000 per run of 4,500 transformers each.
• Indirect manufacturing costs charged to each run are $45,000.
• Destination charges for each transformer average $1.00.
• Customer service expenses average $0.20 per transformer.
• The transformers are selling for $25 the first year and will increase by $3 each year thereafter.
• Sales units equal production units each year.
7) What are estimated life-cycle revenues?
A) $225,000
B) $477,000
C) $729,000
D) $756,000
8) What is the estimated life-cycle operating income for the first year?
A) ($5,800)
B) (2,600)
C) 2,600
D) 5,800
9) What is the estimated life-cycle operating income for the first three years?
A) $63,600
B) $96,600
C) $123,600
D) $150,600
Answer the following questions using the information below:
Jamal, Kareem, Rashid and Associates are in the process of evaluating its new client services for the
business consulting division.
• Estate Planning, a new service, incurred $100,000 in development costs and employee training.
• The direct costs of providing this service, which is all labor, averages $27 per hour.
• Other costs for this service are estimated at $400,000 per year.
• The current program for estate planning is expected to last for two years. At that time, a new law will
be in place that will require new operating guidelines for the tax consulting.
• Customer service expenses average $95 per client, with each job lasting an average of 400 hours. The
current staff expects to bill 40,000 hours for each of the two years the program is in effect. Billing averages
$42 per hour.
10) What are estimated life-cycle revenues?
A) $1,680,000
B) $90,500
C) $3,360,000
D) $181,000
11) What is estimated life-cycle operating income for the first year?
A) $190,500
B) $81,000
C) $90,500
D) $181,000
12) What is the estimated life-cycle operating income for the first two years?
A) $3,360,000
B) $281,000
C) $190,500
D) $90,500
Answer the following questions using the information below:
Knowledge Transfer Associates is in the process of evaluating its new client services for the business
systems consulting division.
• Server Planning, a new service, incurred $250,000 in development costs.
• The direct costs of providing the service, which is all labor, averages $50 per hour.
• Other costs for this service are estimated at $300,000 per year.
• The current program for server planning is expected to last for two years. At that time, expected new
operating systems are likely to make the service non viable.
• Customer service expenses average $250 per client, with each job lasting an average of 40 hours. The
current staff expects to bill 15,000 hours for each of the two years the program is in effect. Billing averages
$90 per hour.
13) What are the estimated life-cycle revenues?
A) $2,700,000
B) $3,000,000
C) $3,400,000
D) $1,350,000
14) What is the estimated life-cycle operating income for the first year?
A) $206,250
B) $162,500
C) $(43,750)
D) $43,750
15) A life-cycle budget is usually prepared to budget for costs and production for a period of one year.
16) Customer life-cycle costs focus on the total costs incurred by a customer to acquire, use, maintain, and
dispose of a product or service.
17) Customer life-cycle costs do not influence the prices a company can charge for its products.
18) Managing environmental costs is an example of life-cycle costing and value engineering.