4) Relevant costs for target pricing are ________.
A) variable manufacturing costs
B) variable manufacturing and variable nonmanufacturing costs
C) all fixed costs
D) all future costs, both variable and fixed
5) Place the following steps for the implementation of target costing in order:
A = Derive a target cost
B = Develop a target price
C = Perform value engineering
D = Determine target operating income
A) B D A C
B) B A D C
C) A D B C
D) A B C D
6) Which of the following is an objective of value engineering?
A) to reduce cost by eliminating all value-added activities
B) to streamline and add non-value added activities
C) to reduce the total cost of the product
D) to understand competitors’ product design
7) Managers need to understand customers because ________.
A) they are the key in influencing the board decisions and help in formulating policies with the suppliers
B) they guide the managers to formulate pricing policies
C) they are more knowledgeable as they easy access to price and other information online
D) they influence the costing decisions of the product
8) ________ identifies an estimated price customers are willing to pay and then computes the cost to be
achieved to earn the desired profit.
A) Cost-plus pricing
B) Target costing
C) Kaizen costing
D) Peak-load costing
9) Which of the following is true of target costing?
A) In target costing, all future costs are considered for long-run pricing.
B) In target costing, cost is the starting point for determining the price of the product.
C) In target costing, input from suppliers and distributors are not relevant.
D) In target costing, a key goal is to minimize value added activities of a product.
10) In relation to target costing, which of the following best describes target cost per unit?
A) It is the targeted cost of producing one unit to achieve the current year’s budgeted profit.
B) It is the estimated long-run cost of a product that enables the company to achieve its target operating
income.
C) It is the cost that can be achieved by ensuring that the company produced its products at maximum
efficiency.
D) It is the budgeted cost that the company estimates in producing a unit in the current budget period.
11) When target costing and target pricing are used together ________.
A) the target cost is established first, then the target price
B) the target cost is the estimated long-run cost that enables a product or service to achieve a desired
profit
C) the focus of target pricing is to undercut the competition
D) target costs are generally higher than current costs
12) The product strategy in which companies first determine the price at which they can sell a new
product and then design a product that can be produced at a low enough cost to provide adequate
operating income is referred to as ________.
A) cost-plus pricing
B) target costing
C) kaizen costing
D) full costing
Answer the following questions using the information below:
After conducting a market research study, Ed Manufacturing decided to produce a new interior door to
complement its exterior door line. It is estimated that the new interior door can be sold at a target price of
$240. The annual target sales volume for interior doors is 20,000. Ed has target operating income of 20% of
sales.
13) What are target sales revenues?
A) $960,000
B) $3,840,000
C) $4,800,000
D) $5,760,000
14) What is the target operating income?
A) $960,000
B) $3,840,000
C) $4,800,000
D) $5,760,000
15) What is the target cost?
A) $5,760,000
B) $4,800,000
C) $3,840,000
D) $960,000
16) What is the target cost for each interior door?
A) $288
B) $240
C) $192
D) $48
Answer the following questions using the information below:
Sales of Blair Inc. have been on a steady decline for the last 12 months. A market research study
conducted revealed that the product of Blair Inc. can be sold only for $400 as opposed to the current
market price charged of $500 per unit. Blair Inc. has decided to revise its sales price to $400. The annual
sales target volume of the product after price revision is 200 units. Blair Inc. wants to earn 18% on its sales
amount.
17) What are the target sales revenues?
A) $94,400
B) $80,000
C) $65,600
D) $18,000
18) What is the target operating income?
A) $16,992
B) $14,400
C) $11,808
D) $3,240
19) What is the total target cost?
A) $77,408
B) $65,600
C) $53,792
D) $14,760
20) What is the target cost per unit?
A) $387.04
B) $328.00
C) $268.96
D) $73.80
Answer the following questions using the information below:
Block Island TV currently sells large televisions for $360. It has costs of $280. A competitor is bringing a
new large television to market that will sell for $300. Management believes it must lower the price to $300
to compete in the market for large televisions. Marketing believes that the new price will cause sales to
increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 100,000
televisions per year.
21) What is the target cost per unit if target operating income is 25% of sales?
A) $75
B) $90
C) $225
D) $270
22) What is the change in operating income if marketing is correct and only the sales price is changed?
A) $2,200,000
B) $600,000
C) $(2,200,000)
D) $(5,800,000)
23) What is the target cost if the company wants to maintain its same income level, and marketing is
correct (rounded to the nearest cent)?
A) $225.00
B) $227.27
C) $246.68
D) $280.00
Answer the following questions using the information below:
Silicon Technologies, currently sells 17″ monitors for $270. It has costs of $210. A competitor is bringing a
new 17″ monitor to market that will sell for $230. Management believes it must lower the price to $230 to
compete in the market for 17″ monitors. Silicon believes that the new price will cause sales to increase by
10%, even with a new competitor in the market. Silicon’s sales are currently 5,000 monitors per year.
24) What is the target cost if the target operating income is 25% of sales?
A) $230.00
B) $207.00
C) $172.50
D) $115.00
25) What is the change in operating income if marketing manager is correct and only the sales price is
changed?
A) $200,000
B) $190,000
C) $(190,000)
D) $(200,000)
26) Which of the following best describes reverse engineering?
A) It refers to the process of disassembling and analyzing competitor’s product.
B) It refers to the process of first setting the target cost and then designing the product.
C) It refers to the process of manufacturing and designing a product after analyzing the other products of
the firm.
D) It refers to the process of studying customer feedback and then designing a product to match customer
requirements.
27) When the firm uses the target-costing approach to pricing, the target cost per unit is the difference
between the per unit target price and the per unit target ________.
A) contribution margin
B) operating income
C) production costs
D) gross margin
28) Action Toys has a new video game cassette for the upcoming holiday season. It is trying to determine
the target cost for the game if the selling price per unit will be set at $60, the going price for video games,
and the firm wants to earn a target operating income of 15% of sales. What will be the target cost per unit
for the new game?
A) $60
B) $51
C) $27
D) $9
29) Target pricing is a form of cost-based pricing.
30) Reverse engineering is a systematic evaluation of all aspects of the value chain with the objective of
reducing costs.
31) In case of pricing for special orders, managers include all future costs, variable costs, and costs that
are fixed in the short run.
32) Reverse engineering has the objective of reducing costs while still satisfying customer needs.
33) Rework is an example of a value-added cost.
34) A value-added cost is a cost that, if eliminated,would increase the actual or perceived value or utility
(usefulness) customers experience from using the product or service.
35) Value engineering seeks to reduce value-added costs as well as nonvalue-added costs.
36) Value engineering entails improvements in product designs, and changes in materials specifications.
37) Market research can be an effective tool in understanding the features customers value.
38) Target cost per unit is arrived at by adding the target operating income to the target price of the
product.
39) Reverse engineering can be used to analyze competitors’ products to determine product designs and
materials and to understand the technologies competitors use.
40) Whether the firm uses the market-based approach or the cost-based approach for pricing decisions,
the market forces must be considered.
41) Developing a product that satisfies the need of the potential customers is the first step in
implementing target pricing and target costing.
42) Carbon Composite Poles manufactures fishing poles that have a price of $125.00. It has costs of $90. A
competitor is introducing a new fishing pole that will sell for $110.00. Management believes it must lower
the price to $110.00 to compete in the highly cost-conscious fishing pole market. Marketing department
believes that the new price will allow Carbon to maintain the current sales level of 200,000 poles per year.
Required:
a. What is the target cost for the new price if target operating income is 25% of sales?
b. What is the change in operating income for the year if only the selling price is changed and costs
remain the same?
c. What is the target cost per unit if the selling price is reduced to $110.00 and the company wants to
maintain its same income level?
43) Julian Pharma manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has
variable costs totaling $2,650 and fixed costs of $1,200 per unit, based on an average production run of
5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant
capacity can handle up to six runs a year for a total of 30,000 beds.
A competitor is introducing a new hospital bed similar to Deluxe that will sell for $3,800. Management
believes it must lower the price to compete. The marketing department believes that the new price will
increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the
same level of fixed costs. The company currently sells all the Deluxe beds it can produce.
Required:
a. What is the annual operating income from Deluxe at the current price of $5,000?
b. What is the annual operating income from Deluxe if the price is reduced to $3,800 and sales in units
increase by 25%?
c. What is the target cost per unit for the new price if target operating income is 30% of sales?
44) Marcon Tech Corp., currently sells radios for $7,000. It has costs of $5,400. A competitor is bringing a
new radio to market that will sell for $5,850. Management believes it must lower the price to $5,850 to
compete in the market for radios. The marketing department believes that the new price will cause sales
to increase by 10%, even with a new competitor in the market. Marcon’s sales are currently 1,000 radios
per year.
Required:
a. What is the target cost for the new target price if target operating income is 20% of sales?
b. What is the change in operating income if marketing department is correct and only the sales price is
changed?
c. What is the target cost if the company wants to maintain its same income level, and marketing
department is correct in its estimation?
34
45) Sail Safe currently sells motor boats for $60,000. It has costs of $46,500. A competitor is bringing a new
motor boat to the market that will sell for $55,000. Management believes it must lower the price to $55,000
to compete in the market for motor boats. The marketing department believes that the new price will
cause sales to increase by 12.5%, even with a new competitor in the market. Sail Safe’s sales are currently
2,000 motor boats per year. 3
Required:
a. What is the target cost for the new target price if target operating income is 20% of sales?
b. What is the change in operating income if marketing department is correct and only the sales price is
changed?
c. What is the target cost if the company wants to maintain its same income level, and marketing
department is correct?
47) What is the primary reason a firm would adopt target costing?
Objective 13.4
1) ________ is a cost that, if eliminated, would reduce the actual or perceived value or utility (usefulness)
customers experience from using the product or service.
A) Non-value-added cost
B) Discretionary cost
C) Value-added cost
D) Committed cost
2) Direct material costs are usually locked in when they are ________.
A) designed
B) assembled
C) sold
D) delivered
3) ________ describes when a resource is consumed or benefit forgone to meet a specific objective.
A) Cost incurrence
B) Locked-in cost
C) Resource utilization
D) Designed-in cost
4) Costs can be best managed before ________.
A) they are locked in
B) they are incurred
C) after they are locked in
D) after they are committed to
5) Which of the following is a disadvantage of using target costing?
A) It may lead to an increase in all the non-value added cost of the product
B) It may lead to a product being in development stage for a long time as the team repeatedly evaluates
alternative designs.
C) It may lead to increased employee participation in the cost reduction process of the organization
thereby making it impossible to co-ordinate the process.
D) It eliminates creativity in the manufacturing process as the focus is always on cost reduction and cost
elimination.
6) ________ focuses on reducing costs during the manufacturing stage.
A) Target costing
B) Kaizen costing
C) Cost-plus pricing
D) Life-cycle costing
7) Which of the following is an example of value added cost?
A) cost of machine breakdown
B) cost of defective products
C) rework costs
D) direct machining costs
8) In some industries, such as legal and consulting, most costs are locked in ________.
A) when they are incurred
B) during the design stage
C) during the customer-service stage
D) during the marketing stage
9) Which of the following costs can be classified into both value-added and non-value-added costs?
A) production control costs
B) machine breakdown costs
C) rework costs
D) direct material costs
10) A graph comparing locked-in costs with incurred costs will have ________.
A) locked-in costs rising much faster initially, but dropping to zero after the product is manufactured
B) the two cost lines running parallel until the end of the process, when they join
C) locked-in costs rising much faster initially than the incurred cost, but joining the incurred cost line at
the completion of the value-chain functions
D) no differences unless the product is manufactured inefficiently
11) Which of the following is true of locked-in costs?
A) Locked-in costs are the same as sunk costs.
B) Locked-in costs are always fixed costs.
C) Locked-in costs are incurred costs.
D) Locked-in costs are also called designed-in costs.
12) Costing systems measure ________.
A) locked in costs
B) sunk costs
C) cost incurrence
D) out of pocked costs
13) A locked-in cost is a(n) ________.
A) opportunity cost that is fixed in the short run
B) cost that can be changed in the short run
C) cost that has not yet been incurred, but based on decisions that have already been made, will be
incurred in the future
D) cost that has been incurred, but based on decisions that have already been made, will be not incurred
in the future
14) Value engineering cannot decrease value-added costs.
15) All costs are locked in at the design stage itself.
16) A non-value-added cost is a cost that, if eliminated, would reduce the actual or perceived value or
utility (usefulness) customers experience from using the product or service.
17) Spending more on the design phase of a new product usually reduces subsequent product-related
costs.
18) Companies seek to minimize value-added costs because they do not provide benefits to customers.
19) Supervision costs have both value-added and non-value-added components.
20) What are the undesirable effects of value engineering and target costing? How can these be reduced?
21) Explain the difference between locked in costs and costs incurred. Which of these types of costs does a
traditional accounting system emphasize? At which stage of the value chain are most costs locked-in? At
which stage of the value chain are most costs incurred? What implication does this have for good cost
management?
Objective 13.5
1) The cost-plus pricing approach is generally in the form ________.
A) Cost base + Markup component = Prospective selling price
B) Prospective selling price – Cost base = Markup component
C) Cost base + Gross margin = Prospective selling price
D) Variable cost + Fixed cost + Contribution margin = Prospective selling price
2) In cost-plus pricing, the markup component ________.
A) is a rigid number
B) is ultimately determined by the market
C) provides a means to calculate the actual selling price
D) is the end rather than the start of pricing decisions
3) Which of the following can be used to determine markup percentage in the case of cost-plus pricing?
A) Target annual operating income / Invested capital
B) Estimated annual dividend / Invested capital
C) Target sales revenue / Target annual operating income
D) Estimated annual dividend / Target annual operating income
4) The markup percentage is most likely to be the lowest while using ________ as the cost base.
A) variable manufacturing cost
B) variable cost of the product
C) manufacturing cost
D) full cost of the product