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Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 13 Pricing Decisions and Cost Management
Objective 13.1
1) Companies should only produce and sell units as long as ________.
A) there is customer demand for the product
B) the competition allows it
C) the revenue from an additional unit exceeds the cost of producing it
D) there is a generous supply of low-cost direct materials
2) Too high a price may ________.
A) deter a customer from purchasing a product
B) increase demand for the product
C) indicate supply is too plentiful
D) decrease a competitor's market share
3) Companies must always examine their pricing ________.
A) based on the supply of the product
B) based on the cost of producing the product
C) through the eyes of their customers
D) through the eyes of their competitors
4) Which of the following statements is true about the factors that affect pricing decisions?
A) Information about competitors' technologies is not useful for pricing decisions.
B) Information about a competitor in a perfect market affects pricing decisions.
C) Increase in price of a substitute product does not affect pricing decisions.
D) Fluctuations in exchange rates between different countries' currencies affect pricing decisions.
5) In a perfectly competitive market, which of the following is a primary factor influencing pricing
decisions?
A) cost of production
B) availability of raw materials in the market
C) information on competitor's cost structure
D) value customers place on product
6) Which of the following statements is true of the cost of producing a product?
A) It controls pricing in highly competitive markets.
B) It affects the willingness of a company to supply a product.
C) It includes manufacturing costs, but not product design costs for pricing decisions.
D) It is not a factor to be taken into account while pricing a product.
7) In a noncompetitive environment, the key factor affecting pricing decisions is the ________.
A) customer's willingness to pay
B) price charged for alternative products
C) information on competitor's cost structure
D) minimum price acceptable to the firm
8) Which of the following statements is true of costs and pricing decisions?
A) Companies get profit from selling products only when they are the price makers.
B) Companies supply products as long as the price the customer is willing to pay for its products exceeds
the price that is charged by the competitor.
C) Companies supply products as long as there is a demand for the product in the market regardless of
the price at which the products are sold.
D) Companies supply products as long as the revenues from selling the additional units exceed the cost
of producing them.
9) Three major influences on pricing decisions are ________.
A) competition, costs, and customers
B) competition, demand, and production efficiency
C) continuous improvement, customer satisfaction, and supply
D) variable costs, fixed costs, and mixed costs
10) Companies must always examine pricing decisions through the eyes of their creditors.
11) A company operating in a perfectly competitive market has more leeway to set higher prices than a
firm that is a monopolist.
12) For a company operating in a perfectly competitive market, cost information affects the pricing
decisions of the company.
13) Fluctuations in exchange rates between different countries' currencies affect costs and pricing
decisions of a company.
14) In markets with little or no competition, the key factor affecting price is the cost of production to the
company.
15) As companies increase supply, the cost of producing an additional unit initially declines but
eventually increases.
16) If U.S dollar strengthens against the Japanese Yen, Japanese producers selling goods in U.S markets
will have to increase the prices of products to recover the extra cost arising from currency fluctuation.
17) Claudia Geer, controller, discusses the pricing of a new product with the sales manager, James Nolan.
What major influences must Claudia and James consider in pricing the new product? Discuss each
briefly.
Objective 13.2
1) Short-term pricing decisions ________.
A) use costs that may be irrelevant for long-term pricing decisions
B) are more opportunistic
C) tend to decrease prices when demand is strong
D) have a time horizon of more than one year
2) Long-run pricing decisions ________.
A) have a time horizon of less than one year
B) include adjusting product mix in a competitive environment
C) and short-run pricing decisions generally have the same relevant costs
D) use prices that include a reasonable return on investment
3) Which of the following is true of long-run pricing?
A) It is fixed at a level that recovers the variable cost of the company and a pre-determined profit
markup.
B) It is generally a function of the market factors and the cost involved in production is generally not a
consideration.
C) It is a strategic decision designed to build long-run relationships with customers based on stable and
predictable prices.
D) It is based only on internal requirements like cost and estimated rate of return as in the long run these
requirements are the driving factors of any organization.
4) For long-run pricing decisions, using stable prices has the advantage of ________.
A) minimizing the need to monitor competitor's prices frequently
B) reducing the need to change cost structures frequently
C) reducing competition
D) helping to build buyer-seller relationships
5) Purple Trees manufactures rustic furniture. The cost accounting system estimates manufacturing costs
to be $240 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus
capacity available. It is Purple Trees' policy to add a 75% markup to full costs.
A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic
style. Purple Trees is invited to submit a bid to the hotel chain. What per unit price will Purple Trees most
likely bid on this long-term order?
A) $168 per unit
B) $180 per unit
C) $252 per unit
D) $420 per unit
6) Zolas' Heaters is approached by Ms. Leila, a new customer, to fulfill a large one-time-only special order
for a product similar to one offered to regular customers. Zolas' Heaters has excess capacity. The
following per unit data apply for sales to regular customers:
Direct materials $400
Direct manufacturing labor 120
Variable manufacturing support 60
Fixed manufacturing support 200
Total manufacturing costs 780
Markup (20% of total manufacturing costs) 156
Estimated selling price $936
If Ms. Leila wanted a long-term commitment, and not a one-time-special order, for supplying this
product, calculate the most likely price to be quoted assuming the markup remains same?
A) $780
B) $580
C) $520
D) $936
7) Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-
only special order for a product similar to one offered to regular customers. Golden Generator Supply has
excess capacity. The following per unit data apply for sales to regular customers:
Direct materials $1,700.00
Direct manufacturing labor 100.00
Variable manufacturing support 200.00
Fixed manufacturing support 150.00
Total manufacturing costs 2,150.00
Markup (30% of total manufacturing costs) 645.00
Estimated selling price $2,795.00
If Mr. Stephen wanted a long-term commitment, and not a one-time-only special order, for supplying this
product, calculate the most likely price to be quoted assuming the markup remains same?
A) $2,000
B) $2,150
C) $2,795
D) $2,800
8) Gracius Manufacturing is approached by a European customer to fulfill a one-time-only special order
for a product similar to one offered to domestic customers. Gracius Manufacturing has a policy of adding
a 10% markup to full costs and currently has excess capacity. The following per unit data apply for sales
to regular customers:
Variable costs:
Direct materials $30
Direct labor 10
Manufacturing overhead 20
Marketing costs 10
Fixed costs:
Manufacturing overhead 100
Marketing costs 20
Total costs 190
Markup (10% of total costs) 19
Estimated selling price $209
If the European customer wanted a long-term commitment, and not a one-time-only special order, for
supplying this product, calculate the most likely price to be quoted assuming the markup remains same?
A) $70.00
B) $190.00
C) $209.00
D) $239.00
9) Grounded Coffee Products manufactures coffee tables. Grounded Coffee Products has a policy of
adding a 20% markup to full costs and currently has excess capacity. The following information pertains
to the company's normal operations per month:
Output units 20,000 tables
Machine-hours 8,000 hours
Direct manufacturing labor-hours 10,000 hours
Direct materials per unit $105
Direct manufacturing labor per hour $10
Variable manufacturing overhead costs $322,500
Fixed manufacturing overhead costs $1,200,000
Product and process design costs $1,100,000
Marketing and distribution costs $1,125,000
For long-run pricing of the coffee tables, what price will most likely be used by Grounded Coffee?
A) $134.76
B) $161.70
C) $222.25
D) $266.70
10) Quick Connect manufactures high-tech cell phones. Quick Connect has a policy of adding a 20%
markup to full costs and currently has excess capacity. The following information pertains to the
company's normal operations per month:
Output units 1,250 phones
Machine-hours 750 hours
Direct manufacturing labor-hours 700 hours
Direct materials per unit $20
Direct manufacturing labor per hour $8
Variable manufacturing overhead costs $175,000.00
Fixed manufacturing overhead costs $126,300
Product and process design costs $143,000
Marketing and distribution costs $153,645
For long-run pricing of the cell phones, what price will most likely be used by Quick Connect?
A) $95.00
B) $135.00
C) $175.00
D) $210.00
11) Which one of the following activities would most likely be considered a long-run pricing decision?
A) one-time-only special order pricing
B) product mix adjustments in a competitive market
C) setting prices to generate a reasonable rate of return on investment
D) changing prices in response to weak demand
12) Short-run prices should at least recover ________.
A) full cost of producing a product
B) fixed manufacturing overhead
C) variable cost of producing a product
D) variable and fixed manufacturing overhead
13) Which of the following is regarded as a purpose of cost allocation?
A) It helps in identifying the potential customers for a product.
B) It provides the profit margin earned.
C) It helps in maintaining decorum among managers.
D) It provides information for economic decisions.
14) A price-bidding decision for a one-time-only special order includes an analysis of all ________.
A) manufacturing costs
B) cost drivers related to the product
C) direct and indirect variable costs of each function in the value chain
D) fixed manufacturing costs
15) In a long-run, it is worthwhile to sell a product only if the selling price exceeds ________.
A) direct costs of the product
B) manufacturing costs of the product
C) fixed cost of the product
D) full cost of the product and a markup
16) Purple Trees manufactures rustic furniture. The cost accounting system estimates manufacturing costs
to be $240 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus
capacity available. It is Purple Trees' policy to add a 75% markup to full costs.
Purple Trees is invited to bid on a one-time-only special order to supply 100 rustic tables. What is the
lowest price Purple Trees should bid on this special order?
A) $7,200
B) $12,000
C) $14,400
D) $42,000
17) Weather Inc., is invited to bid on a one-time-only special order to supply 100 air conditioners. What is
the lowest price Weather Inc. should bid on this special order?
A) $14,250
B) $18,525
C) $25,000
D) $24,700
18) A medium sized motel chain is currently expanding and has decided to create more rooms and air
condition all of its rooms, which are currently not air conditioned. Weather Inc. is invited to submit a bid
to the motel chain. What per unit price will Weather Inc. most likely bid for this special order of 200
units? Assume that the price is being fixed for a long-term commitment.
A) $190.00 per unit
B) $142.50 per unit
C) $247.00 per unit
D) $230.00 per unit
19) Zolas' Heaters is approached by Ms. Leila, a new customer, to fulfill a large one-time-only special
order for a product similar to one offered to regular customers. Zolas' Heaters has excess capacity. The
following per unit data apply for sales to regular customers:
Direct materials $400
Direct manufacturing labor 120
Variable manufacturing support 60
Fixed manufacturing support 200
Total manufacturing costs 780
Markup (20% of total manufacturing costs) 156
Estimated selling price $936
For Zolas' Heaters, what is the minimum acceptable price of this one-time-only special order?
A) $580
B) $780
C) $520
D) $1,014
Answer the following questions using the information below:
Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. Golden Generator Supply has
excess capacity. The following per unit data apply for sales to regular customers:
Direct materials $1,700.00
Direct manufacturing labor 100.00
Variable manufacturing support 200.00
Fixed manufacturing support 150.00
Total manufacturing costs 2,150.00
Markup (30% of total manufacturing costs) 645.00
Estimated selling price $2,795.00
20) For Golden Generator Supply, what is the minimum acceptable price of this one-time-only special
order?
A) $1,800
B) $2,000
C) $2,150
D) $2,580
21) If Golden Generator Supply accepts the order at $2,350, what is the amount contributed towards fixed
costs and profit on a sales order of 1,000 units?
A) $200,000
B) $350,000
C) $795,000
D) $1,000,000
Answer the following questions using the information below:
Gracius Manufacturing is approached by a European customer to fulfill a one-time-only special order for
a product similar to one offered to domestic customers. Gracius Manufacturing has a policy of adding a
10% markup to full costs and currently has excess capacity. The following per unit data apply for sales to
regular customers:
Variable costs:
Direct materials $30
Direct labor 10
Manufacturing overhead 20
Marketing costs 10
Fixed costs:
Manufacturing overhead 100
Marketing costs 20
Total costs 190
Markup (10% of total costs) 19
Estimated selling price $209
22) For Gracius Manufacturing, what is the minimum acceptable price of this one-time-only special
order?
A) $40
B) $60
C) $70
D) $190
15
23) What is the full cost of the product per unit for Gracius Manufacturing?
A) $40
B) $70
C) $190
D) $209
24) Grounded Coffee Products manufactures coffee tables. Grounded Coffee Products has a policy of
adding a 20% markup to full costs and currently has excess capacity. The following information pertains
to the company's normal operations per month:
Output units 20,000 tables
Machine-hours 8,000 hours
Direct manufacturing labor-hours 10,000 hours
Direct materials per unit $105
Direct manufacturing labor per hour $10
Variable manufacturing overhead costs $322,500
Fixed manufacturing overhead costs $1,200,000
Product and process design costs $1,100,000
Marketing and distribution costs $1,125,000
Grounded Coffee Products is approached by an overseas customer to fulfill a one-time-only special order
for 1,000 units. All cost relationships remain the same except for a one-time setup charge of $20,000. No
additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid
per unit on this one-time-only special order?
A) $146.125
B) $1346.125
C) $126.125
D) $946.125
25) Quick Connect manufactures high-tech cell phones. Quick Connect has a policy of adding a 20%
markup to full costs and currently has excess capacity. The following information pertains to the
company's normal operations per month:
Output units 1,250 phones
Machine-hours 750 hours
Direct manufacturing labor-hours 700 hours
Direct materials per unit $20
Direct manufacturing labor per hour $8
Variable manufacturing overhead costs $175,000.00
Fixed manufacturing overhead costs $126,300
Product and process design costs $143,000
Marketing and distribution costs $153,645
Quick Connect Products is approached by an overseas customer to fulfill a one-time-only special order
for 120 units. All cost relationships remain the same except for a one-time setup charge of $1,500. No
additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid
per unit on this one-time-only special order?
A) $24.48
B) $160.48
C) $176.98
D) $200.00
26) Which of the following is explains the cost-plus approach to pricing decisions?
A) arriving at a price for the product based on the competitive pricing prevalent in the market
B) arriving at a price based on the perceived value to a customer given the cost of design and added
features
C) arriving at a price based on the demand and supply trends in the market
D) arriving at a price that earns a specific return given the cost of the product
27) Cost allocation is not required to cost inventories for reporting to external parties.
28) Companies operating in markets that are not competitive favor cost-based approaches.
29) Cost allocation is necessary for accurate income measurement.
30) Two different approaches to pricing decisions are market based and cost based.
31) Long-run pricing is an operational decision and not a strategic decision as perceived by many.
32) In long-run pricing, costs include all manufacturing and non-manufacturing costs but exclude all
future direct and indirect costs.
33) Cost allocation encourages design of products that are simpler to manufacture and less costly to
service.
34) Companies operating in competitive markets generally use the market-based approach.
35) Companies operating in competitive markets should ideally use cost-plus approach to pricing.
36) Greentree Incorporated manufactures rustic furniture. The cost accounting system estimates
manufacturing costs to be $120 per table, consisting of 60% variable costs and 40% fixed costs. The
company has surplus capacity available. It is Greentree's policy to add a 30% markup to full costs.
a. Greentree Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest
price Greentree should bid on this one-time-only special order?
b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic
style. Greentree Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per
unit Greentree should bid on this long-term order?
37) Longball Company manufactures basketball backboards. The following information pertains to the
company's normal operations per month:
Output units 15,000 boards
Machine-hours 4,000 hours
Direct manufacturing labor-hours 5,000 hours
Direct manufacturing labor per hour $12
Direct materials per unit $100
Variable manufacturing overhead costs $150,000
Fixed manufacturing overhead costs $300,000
Product and process design costs $200,000
Marketing and distribution costs $250,000
Required:
a. For long-run pricing, what is the full-cost base per unit?
b. Longball Company is approached by an overseas city to fulfill a one-time-only special order for 1,000
units. All cost relationships remain the same except for an additional one-time setup charge of $40,000.
No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable
bid per unit on this one-time-only special order?
38) Explain the differences between short-run pricing decisions and long-run pricing decisions.
1) Which of the following is true of target pricing?
A) It is used for short-term pricing decisions.
B) It is one form of cost-based pricing.
C) Its estimates are based on customers' perceived value of the product.
D) It is calculated by adding a markup component to the cost base.
2) Which of the following is true of reverse engineering?
A) It is the process of building a new product by first determining the selling price of the product.
B) It is the process by which a company analyzes its own process to reduce cost.
C) It is the process by which a company markets a product by analyzing competitors marketing strategy.
D) It is the process by which the competitor's products are disassembled and analyzed.
3) The department usually in the best position to identify customers' needs is the ________.
A) production department
B) sales and marketing department
C) design department
D) distribution department
