Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
12) A company uses a long-run time horizon to price its product, an electronic component used in
aircraft. To produce a normal production run for a year of 100,000 units direct materials are $90,000;
direct labour is $180,000; and, rent on leased equipment is $106,000 per year. Currently re–work is
running at 4% of production, after testing. The company has the capacity to test 10 units per hour.
Manufacturing Overhead has two cost drivers: testing (cost driver is testing hours at $2.50 per hour); and,
rework (cost driver is units reworked at $80 per unit re–worked).
Calculate current total manufacturing costs for 100,000 units.
A) $320,000
B) $376,000
C) $396,000
D) $401,000
E) $721,000
13) Which of the following is true of alternative long-run pricing approaches?
A) A market-based approach only considers how customers will react.
B) A cost-based approach only considers how customers will react.
C) A market-based approach only considers costs.
D) A market-based approach is more logical in a competitive market.
E) In cost-plus pricing, selling price ignores market forces when setting the markup.
14) Most of a product’s life-cycle costs are locked in by decisions made during the ________ business
function of the value chain.
A) design
B) manufacturing
C) customer-service
D) marketing
E) research
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
15) Survey evidence suggest that most companies use which type of cost when making pricing decisions?
A) cost-plus
B) absorption product costing
C) variable product costs
D) variable manufacturing costs
E) manufacturing function costs
16) Valley West Amusement Park is evaluating its ticket prices. It is open during the summer months for
15 weeks. The following information pertains to last year’s tourist season.
Costs are expected to remain the same for this year.
Average tourists per day on Friday thru Tuesday 2,500
Average tourists per day on Wednesday and Thursday 1,000
Variable operating costs per day when open $4,100
Fixed overhead costs per year $180,000
Marketing costs per year $62,500
Customer service costs per year $5,000
Required:
What is the unit cost when establishing a long-run price for tour tickets?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
17) Taylor Stadium is evaluating ticket prices for its baseball games. Studies have shown that Monday
and Tuesday ball games average less than half the fans of games on other days. The following
information pertains to the stadium’s normal operations per season.
Average fans per game
5,000 fans
Average fans per Monday/Tuesday game
2,000 fans
Stadium operating hours per season for baseball
300 hours
Stadium capacity
7,000 seats
Variable operating costs per hour
$2,000
Fixed overhead costs per year for all events
$450,000
Marketing costs per season for baseball
$212,500
Customer service costs per season for baseball
$25,000
The stadium is open for 5 hours on each day a game is played. The stadium is available for some type of
use 300 days a year. All employees work by the hour except for the administrators. In addition, only one
game is played per day and each fan would have only one ticket per game.
What is the unit cost when establishing a long-run price for ball games assuming all tickets are priced the
same?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
18) 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?
12.5 Describe life-cycle pricing and discuss some non-cost factors in pricing decisions,
including fair business practices and environmental sustainability.
1) A business that engages in predatory pricing violates Canadian law.
2) Dumping occurs when a company is trying to get rid of out–of-style products and substantially reduces
their prices.
3) Collusive pricing occurs when companies in an industry conspire in their pricing and output decisions
to achieve a price above the competitive price.
4) Peak-load pricing focuses on direct costs when setting prices for peak and nonpeak periods.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
5) Price discrimination is the practice of charging some customers a higher price than is charged to other
customers.
6) Life-cycle budgeting is necessary before a company can determine the product life cycle of a given
product.
7) Developing life-cycle reports for each product requires tracking both costs and revenues on a product–
by-product basis over a number of accounting periods.
8) Customer life-cycle costs focus on the total costs to a customer of acquiring and using a product or
service until it is replaced.
9) Life-cycle costing, from an environmental sustainability perspective, considers the end of a products
life-cycle to include disposal and recycling costs.
10) Predatory pricing is a type of price discrimination that
A) allows prices to be cut to the level of variable costs.
B) is required when a company declares bankruptcy so that it can sell its remaining goods quickly.
C) is used in the food industry for perishable goods.
D) deliberately sets prices very low, sometimes even below costs, so as to minimize competition.
E) actually ensures more supply access as high prices reduce demand.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
11) To minimize the chances of violating pricing laws, a company should
A) maintain records that permit easy compilation of variable costs.
B) use a variable cost plus markup method of pricing.
C) keep a record of the upstream costs associated with low cost products.
D) use dumping only when a product is at the end of its life-cycle.
E) ensure that prices do not exceed variable costs plus fixed costs.
12) Collusive pricing occurs when
A) a company wants two products to sell for the same, or almost the same, amount.
B) a company wants a product to sell for the same as a competitor’s product.
C) two or more companies agree to sell a product at a price higher than should be expected.
D) competitors are part of the same large parent organization.
E) one large company dominates an industry.
13) Price discrimination to customers is the practice of
A) setting different prices for different products.
B) charging different prices for quantity amounts.
C) using variable costing for some products and full costing for other products when setting prices.
D) charging different prices to different customers or clients for the same products or services.
E) changing prices frequently.
14) An airline charges business and pleasure travellers different amounts. This is an example of
A) customer-preference pricing.
B) high-load pricing.
C) peak-load pricing.
D) price discrimination.
E) off-load pricing.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
15) Life-cycle budgeting differs from life-cycle costing in that
A) budgeting includes revenues and costs, and costing includes only the costs.
B) budgeting includes all products of a company and costing is only for individual products.
C) budgeting is for the development and production of a product while costing is for only the production
activities.
D) budgeting is for one accounting period and is a total dollar concept while costing is a per unit concept.
E) budgeting includes revenues, and costing includes only the costs.
Use the information below to answer the following question(s).
Satellite Inc. is in the process of evaluating its new products. A new signal receiver has two production
runs each year, each with $20,000 in setup costs. The new receiver incurred $60,000 in development costs
and is expected to be produced for three years. The direct costs of producing the receivers are $80,000 per
run of 5,000 receivers. Indirect manufacturing costs charged to each run are $90,000. Destination charges
for each receiver average $2.00. Customer service expenses average $0.40 per receiver. The receivers are
going to sell for $50 the first year and increase by $6 each year thereafter. Sales units equal production
units each year.
16) What is the Satellite Inc. life cycle budgeted revenue?
A) $500,000
B) $560,000
C) $1,620,000
D) $1,680,000
E) $1,500,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
17) What are the Satellite Inc. life cycle budgeted costs?
A) $424,000
B) $1,272,000
C) $639,000
D) $1,392,000
E) $298,000
18) What is the Satellite Inc. life cycle operating income?
A) $408,000
B) $76,000
C) $388,000
D) $348,000
E) $288,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
Use the information below to answer the following question(s).
N-C Associates is in the process of evaluating its new client services for the business consulting division.
Estate Planning, a new service, incurred $600,000 in development costs and employee training. The direct
costs of providing this service, which is all labour, averages $100 per hour. Other costs for this service are
estimated at $2,000,000 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 which will require new operating guidelines for the tax
consulting. Customer service expenses average $400 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 $140 per hour.
19) What is the N-C Associates’ life-cycle budgeted revenue?
A) $5,600,000
B) $8,000,000
C) $11,200,000
D) $22,400,000
E) $28,500,000
20) What is the N-C Associates’ life-cycle operating income (loss)?
A) $(1,480,000)
B) $(1,440,000)
C) $(2,080,000)
D) $11,200,000
E) $5,600,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
21) The life-cycle reporting process
A) is the same as traditional accounting reporting.
B) matches the company’s normal fiscal year reporting.
C) usually includes several accounting reporting periods.
D) tracks costs, but not revenues, from the beginning to the end of a product’s or service’s life.
E) is used only when yearly costs are not definable.
22) Which of the following is TRUE concerning Life cycle budgeting?
A) It obscures revenues in minor business functions.
B) It highlights only costs for the life cycle.
C) It has a calendar year focus.
D) It assumes that selling price is the same over the life cycle of the product.
E) It helps in setting prices to cover costs in all business functions.
23) Which of the following is not a benefit of life cycle reporting?
A) The full set of revenues associated with each product becomes visible.
B) The full set of costs associated with each product becomes visible.
C) The differences between products in the percentage of their total costs incurred at earl stages in the life
cycle are highlighted.
D) Upstream costs, such as R & D, are the only costs that are need to be added in when a life cycle report
is complete.
E) Interrelationships among business function cost categories are highlighted.
24) Which of the following is true of products with a long life cycle?
A) Their costs are more difficult to manage, early in their life cycle.
B) It is not as important to have accurate predictions of revenues.
C) They highlight the interrelationships with other parts of the life cycle.
D) They are highly visible and therefore must be carefully controlled.
E) A smaller fraction of the total life costs are actually incurred at the time when costs are locked-in.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
25) Customer life-cycle costs
A) are the costs the selling company incurs to satisfy the customer.
B) are the costs to the customer of buying and using a product until it is replaced.
C) are the same as the selling life-cycle prices.
D) are the replacement costs of using a product or service.
E) focus on marketing costs.
26) Dumping is closely related to predatory pricing and occurs when
A) companies get rid of obsolete inventory at prices below cost.
B) a business drops a large order at a customer location at a lower price if the customer accepts the order.
C) a Canadian company sells its products in another province below the variable cost.
D) a foreign company sells goods in Canada at a price below the market value in the home country.
E) a Canadian or foreign company sells its products below the variable cost.
27) Image Products is in the process of evaluating its new cosmetic products. One new product, Nice
Hair, has one production run each month with $8,000 in setup costs. Nice Hair incurred $20,000 in
development costs and is expected to be produced for three years. The direct costs of producing Nice
Hair are $28,000 per run of 15,000 bottles. Indirect manufacturing costs charged to each run are $44,000.
Destination charges for each batch average $9,000. Nice Hair sells for $10 in Canada and $20 in all other
countries. Sales are one-third domestic and two-thirds exported. Assume everything produced is sold.
Required:
What is the life-cycle budgeted operating income?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
28) Max and Marv are starting a new business venture and are in the process of evaluating their product
lines. One new product, hand-made wooden tables, has incurred $30,000 in development costs. These
costs are to be amortized over a three-year period, the expected product life cycle. The direct costs of each
table averages $90. Other costs for making the tables are estimated at $100,000 per year. The current sales
program for tables is expected to change every six months. At that time a new pattern will be put in place
with $7,000 of setup costs. Each table requires 12 labour hours and 2 machine hours. Current annual sales
are expected to be 2,000 units of each table at $140 each. Customer service expenses average $10 per table.
Required:
What is the life-cycle operating income?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
29) Henderson Company is in the process of evaluating a new part using the following information.
• Part SLC2002 has one production run each month, each with $16,000 in setup costs.
• Part SLC2002 incurred $40,000 in development costs and is expected to be produced over the next
three years.
• Direct costs of producing Part SLC2002 are $56,000 per run of 24,000 parts each.
• Indirect manufacturing costs charged to each run are $88,000.
• Destination charges for each run average $18,000.
• Part SLC2002 is selling for $12.50 in the Canada and $25 in all other countries. Sales are one-third
domestic and two-thirds exported.
• Sales units equal production units each year.
Required:
a. What are the estimated life-cycle revenues?
b. What is the estimated life-cycle operating income if the product life cycle is one year?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
30) Stone and Bicker are starting a new business venture and are in the process of evaluating their
product lines. Information for one new product, hand–made lamps, is as follows:
• Every six months a new lamp pattern will be put into production. Each new pattern will require
$11,200 in setup costs.
• The lamp product line incurred $48,000 in development costs and is expected to be produced over the
next six years.
• Direct costs of producing the lamps average $144 each. Each lamp requires 12 labour-hours and 2
machine-hours.
• Indirect manufacturing costs are estimated at $160,000 per year.
• Customer service expenses average $16 per lamp.
• Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for $224.
• Sales units equal production units each year.
Required:
a. What are the estimated life-cycle revenues?
b. What is the estimated life-cycle operating income if the product life cycle is one year?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
31) Grace Greeting Cards Incorporated is starting a new business venture and are in the process of
evaluating its product lines. Information for one new product, traditional parchment grade cards, is as
follows:
• Sixteen times each year, a new card design will be put into production. Each new design will require
$600 in setup costs.
• The parchment grade card product line incurred $75,000 in development costs and is expected to be
produced over the next four years.
• Direct costs of producing the designs average $0.50 each.
• Indirect manufacturing costs are estimated at $50,000 per year.
• Customer service expenses average $0.10 per card.
• Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50.
• Sales units equal production units each year.
Required:
a. What are the estimated life-cycle revenues?
b. What is the estimated life-cycle operating income if the product life cycle is one year?
c. What is the estimated life-cycle operating income per year for the years after the first year if all of the
development costs are charged to the first year?
d. What is the total estimated life-cycle operating income?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
32) Learning-4-Fun provides materials that let people teach themselves how to snow ski. It has six
different skill-level programs. Each one includes visual and audio learning aids along with a workbook
that can be submitted to the company for grading and evaluation purposes, if the person so desires.
The accounting system of Learning-4-Fun is very traditional in its reporting functions with the calendar
year being the company’s fiscal year. It does include an abundance of information that can be used for
various reporting purposes.
The company has found that any new idea soon runs its course with an effective life of about three years.
Therefore, the company is always in the development stage of some new program. Program development
requires experts in the area to provide the know-how of the item being developed and a development
team that puts together the video, audio, and workbook materials. The actual costs of reproducing the
packages is relatively cheap when compared to the development costs.
Required:
How might product-life-cycle reporting aid the company in improving its overall operations?
33) What advice would you give a company to avoid the appearance of predatory pricing?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 12 – Pricing Decisions, Product Profitability Decisions, and Cost Management
34) Under section 50(1) of the Competition Act companies cannot engage in price discrimination between
two customers with the intent to reduce or obstruct competition among customers. Provide the four key
elements of the price discrimination laws in Canada.