Chapter 18—Pricing and Profitability Analysis Key
1. The relationship between supply and demand helps set pricing.
2. Price elasticity of demand is the percent change in price demanded for a given percent change in quantity.
3. Goods that are price elastic have few substitutes while those that are inelastic have many substitutes.
4. Market structure affects price as well as the costs necessary to support that price.
5. The perfectly competitive market has many buyers and sellers, none of which are large enough to influence
the market.
6. There are three types of market structure: monopoly, oligopoly, and perfect competition.
7. Many companies base prices on cost while other companies use target-costing strategies.
8. The markup is pure profit, it does not include all costs not included in the base cost.
9. Cost-based pricing involves the calculated product cost plus the desired profit.
10. Target costing sets costs based on the price that customers are willing to pay.
11. The legal system supports business competition by allowing an open policy on pricing.
12. Predatory pricing and dumping are outlawed practices that set prices below cost intending to injure
competitors
13. Price discrimination is the charging of different prices to different customers to promote fairer competition.
14. Profits are measured to determine the viability of a firm and its adherence to government regulations, to
measure managerial performance, and to signal the market to encourage stockholders.
15. Absorption costing is used to calculate two measures of profit: gross profit and operating income.
16. Unlike absorption costing, variable costing only assigns unit-level manufacturing costs to a product.
17. Profit-related variances focus on the difference between budgeted and actual prices, volumes, and
contribution margin.
18. The sales volume variance communicates the impact the difference between actual and expected units sold
has on revenues.
19. The overall sales variance is the sum of the contribution margin and the sales price variance.
20. The sales volume variance is the difference between actual and expected volume sold multiplied by the
expected price.
21. The product life cycle describes the profit history of a product according to its introduction, growth,
maturity, and decline stages.
22. Product-level costs are highest in the maturity phase and fall through the decline phase.
23. Profits are lower in the introductory phase because revenues are low and investment and learning may be
high.
24. The biggest limitation to profitability analysis is its focus on past, not future performance.
25. Firms enjoy greater success when they include the impact of profits on their employees and the community.
26. The two factors that influence the ability of companies to adjust price are price elasticity
and __________ structure.
27. The percent change in quantity demanded for a given percent change in price is called
price __________ .
28. The pricing of a new product at a low initial price to build market share quickly is called __________.
29. When companies with market power price products too high it’s called price __________ .
30. When a company charges different prices for the same product to different customers it is referred to as
price __________ .
31. Another term for predatory pricing in the international market is __________ .
32. Using variable costing procedures, net income will be less than __________ when production is less than
sales volume.
33. The income measurement required for external financial reporting is called __________ costing.
34. The variance that compares actual volume with expected volume multiplied by expected price
is the __________ variance.
35. The variances used to analyze changes in profit from one period to another are
called __________ variances.
36. The __________ variance is the difference between actual and budgeted contribution margin.
37. The profit history of a product according to four stages is called the product __________ .
38. The stage where revenues always decrease is the __________ stage.
39. One limitation to profitability analysis is its focus on __________ performance.
40. Too much emphasis on short-run optimization can lead to __________ problems.
41. Which of the following is true regarding expenses related to specific market structure types?
42. Which of the following is NOT an example of a market structure?
43. Monopolistic competition is best defined as
44. Which type of expenses does a monopoly usually incur that are different from the other types of market
structures?
45.
Market Structure Type
# of firms in industry
Barriers to entry
Uniqueness of product
Perfect Competition
Many
(a)
Not unique
Monopolistic Competition
(b)
Some unique features
Oligopoly
Few
(c)
Monopoly
Very High
(d)
Fill in the correct responses for the blanks with letters:
46. Which of the following correctly describes the slope of the demand and supply curves?
Demand Curve
Supply Curve
47. The following information pertains to three different products being sold by Modular Company:
Product
Old Price
New Price
Old Quantity
New Quantity
A
$10.00
$11.00
2,000
1,900
B
20.00
18.00
4,000
4,600
C
30.00
33.00
6,000
5,500
Which products have an inelastic demand curve?
48. The following information pertains to three different products being sold by Modular Company:
Product
Old Price
New Price
Old Quantity
New Quantity
A
$10.00
$11.00
2,000
1,900
B
20.00
18.00
4,000
4,600
C
30.00
33.00
6,000
5,500
Which products have an elastic demand curve?
49. Which of the following markets is characterized by the following: many firms in the industry, a somewhat
unique product, fairly easy entry into the industry, and spending for differentiation of the product?
50. Which of the following markets is characterized by the following: only a few firms in the industry, a fairly
unique product, difficult entry into the industry, and spending for differentiation of the product?
51. Which of the following markets is characterized by the following: many buyers and sellers, a homogeneous
product, easy entry into and exit from the industry, and all firms are price takers?
52. Which of the following markets is characterized by the following: a single firm in the industry, a unique
product, and difficult entry into the industry?
53. Figure 18-1
The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a
case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
CUSTOMER
PRICE PER CASE
CASES SOLD
Drugstore chains
$5.00
375,000
Gas station chains
$5.50
125,000
Supermarket chains
$6.50
500,000
Local pharmacies
$6.00
250,000
The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled
$0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case. Bad debt expense
averages 10% of sales.
Refer to Figure 18-1. What is the total cost per case for drugstore chains?
54. Figure 18-1
The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a
case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
CUSTOMER
PRICE PER CASE
CASES SOLD
Drugstore chains
$5.00
375,000
Gas station chains
$5.50
125,000
Supermarket chains
$6.50
500,000
Local pharmacies
$6.00
250,000
The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled
$0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case. Bad debt expense
averages 10% of sales.
Refer to Figure 18-1. What is the profit per case for drugstore chains?
55. Figure 18-1
The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a
case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
CUSTOMER
PRICE PER CASE
CASES SOLD
Drugstore chains
$5.00
375,000
Gas station chains
$5.50
125,000
Supermarket chains
$6.50
500,000
Local pharmacies
$6.00
250,000
The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled
$0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case. Bad debt expense
averages 10% of sales.
Refer to Figure 18-1. What customer type has the least total cost per case ?
56. Figure 18-1
The Lancashire Corporation manufactures bottled water with an average manufacturing cost of $2 per case (a
case contains 24 bottles). Bayview sold 1,000,000 cases last year to the following types of customers:
CUSTOMER
PRICE PER CASE
CASES SOLD
Drugstore chains
$5.00
375,000
Gas station chains
$5.50
125,000
Supermarket chains
$6.50
500,000
Local pharmacies
$6.00
250,000
The drugstore chains have special handling costs of $0.20 a case and increased administrative assistance costing $45,000 per year.
The gas station chains require special marketing promotions that cost $50,000. Sales commissions of 10% are paid.
The supermarket chains order electronically through EDI which costs $25,000 annually. Bayview is responsible for shipping costs, which totaled
$0.50 a case and special labels costing $0.02 per bottle
Local pharmacies have special handling costs of $0.10 per case and sales commissions are paid to agents costing $0.25 per case. Bad debt expense
averages 10% of sales.
Refer to Figure 18-1. What customer type is the most profitable ?
57. Johanson Company had the following information:
Revenu
es
$400,000
Cost of
goods
sold:
Direct materials
$100,000
Direct labor
50,000
Overhead
50,000
200,000
Gross
profit
$200,000
Selling
and
admini
strative
expens
es
75,000
Operati
ng
income
$125,000
What is the markup based on cost of goods sold?
58. Johanson Company had the following information:
Revenu
es
$400,000
Cost of
goods
sold:
Direct materials
$100,000
Direct labor
50,000
Overhead
50,000
200,000
Gross
profit
$200,000
Selling
and
admini
strative
expens
es
75,000
Operati
ng
income
$125,000
What is the markup based on prime costs?
59. Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in
the sales of a new board game. The game sold only 10,000 units in 2014 when 30,000 were projected. Sales for
2015 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost
and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell
15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000.
Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in
rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be
redeemed.
What is the profit (loss) from Option One?
60. Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in
the sales of a new board game. The game sold only 10,000 units in 2014 when 30,000 were projected. Sales for
2015 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost
and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell
15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000.
Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in
rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be
redeemed.
What is the profit (loss) from Option Two?
61. Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in
the sales of a new board game. The game sold only 10,000 units in 2014 when 30,000 were projected. Sales for
2015 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost
and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell
15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000.
Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in
rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be
redeemed.
What is the profit (loss) from Option Three?
62. Scottish Company manufactures a variety of toys and games. John Chisholm, president, is disappointed in
the sales of a new board game. The game sold only 10,000 units in 2014 when 30,000 were projected. Sales for
2015 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost
and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell
15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000.
Anticipated volume for this option is 10,000 units. Option Three: Cut the price to $80 and include a $10 mail-in
rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be
redeemed.
Which option is preferred?
63. Which of the following statements is FALSE?
64. Consolidated Corporation had the following information:
Reven
ues
$250,000
Cost
of
goods
sold:
Direct materials
$50,000
Direct labor
37,500
Overhead
62,500
150,000
Gross
profit
$100,000
Sellin
g and
admin
istrati
ve
expen
ses
37,500
Opera
ting
incom
e
$ 62,500
What is the markup based on materials?
65. Consolidated Corporation had the following information:
Reven
ues
$250,000
Cost
of
goods
sold:
Direct materials
$50,000
Direct labor
37,500
Overhead
62,500
150,000
Gross
profit
$100,000
Sellin
g and
admin
istrati
ve
expen
ses
37,500
Opera
ting
incom
e
$ 62,500
What would be the price for a product that has a cost of $500, assuming that the markup is based on cost of goods sold?
66. Soloist Company had the following information:
Revenues
$900,000
Cost of Goods Sold
60%
Selling and administrative expenses
$195,000
What is the markup on Cost of Goods sold?
67. Girasol Products is thinking of expanding their product line. Their current income statement is as follows:
Revenues
$600,000
Cost of Goods Sold:
Direct Materials
$250,000
Direct Labor
100,000
Overhead
80,000
430,000
Gross Profit
170,000
Selling and Administrative
70,000
Operating Income
$100,000
The cost of the new product is $95 per unit made up of $50 of direct materials, $35 of direct labor and $10 of overhead per unit. What is the bid price
assuming Girasol utilizes a mark-up on direct materials?
68. Which of the following is a FALSE statement about target costing?
69. New England businesses were trying to sell lumber for 50 percent above their regular prices right after 2011
hurricane Irene hit. This is an example of:
70. Price skimming occurs in which of the following life-cycle stages?
71. The pricing of a new product at a low initial price to build market share quickly is called:
72. When a higher price is charged at the beginning of a product’s life cycle it is called:
73. When firms with market power price products “too high”, companies are:
74. The charging of different prices to different customers for essentially the same product is called:
75. The Robinson-Patman Act allows price discrimination under which of the following circumstances?
76. Dumping in the international market is a form of:
77. Lorillard Corporation has the following information for April, May, and June 2014:
April
May
June
Units produced
12,500
12,500
12,500
Units sold
8,750
10,625
13,125
Production costs per unit (based on 12,500 units) are as follows:
Direct materials
$15
Direct labor
10
Variable factory overhead
7.50
Fixed factory overhead
5
Variable selling and admin. expenses
12.50
Fixed selling and admin. expenses
5
There were no beginning inventories for April 2014, and all units were sold for $50. Costs are stable over the three months.
What is the May ending inventory cost for Lorillard Corporation using the absorption costing method?
78. Lorillard Corporation has the following information for April, May, and June 2014:
April
May
June
Units produced
12,500
12,500
12,500
Units sold
8,750
10,625
13,125
Production costs per unit (based on 12,500 units) are as follows:
Direct materials
$15
Direct labor
10
Variable factory overhead
7.50
Fixed factory overhead
5
Variable selling and admin. expenses
12.50
Fixed selling and admin. expenses
5
There were no beginning inventories for April 2014, and all units were sold for $50. Costs are stable over the three months.
What is the April ending inventory for Lorillard Corporation using the variable costing method?
79. Lorillard Corporation has the following information for April, May, and June 2014:
April
May
June
Units produced
12,500
12,500
12,500
Units sold
8,750
10,625
13,125
Production costs per unit (based on 12,500 units) are as follows:
Direct materials
$15
Direct labor
10
Variable factory overhead
7.50
Fixed factory overhead
5
Variable selling and admin. expenses
12.50
Fixed selling and admin. expenses
5
There were no beginning inventories for April 2014, and all units were sold for $50. Costs are stable over the three months.
What is the June ending inventory cost for Lorillard Corporation using the variable costing method?
80. Lorillard Corporation has the following information for April, May, and June 2014:
April
May
June
Units produced
12,500
12,500
12,500
Units sold
8,750
10,625
13,125
Production costs per unit (based on 12,500 units) are as follows:
Direct materials
$15
Direct labor
10
Variable factory overhead
7.50
Fixed factory overhead
5
Variable selling and admin. expenses
12.50
Fixed selling and admin. expenses
5
There were no beginning inventories for April 2014, and all units were sold for $50. Costs are stable over the three months.
What is the May ending inventory cost for Lorillard Corporation using the variable costing method?
81. The following information pertains to Guillotine Corporation:
Beginning inventory
1,000 units
Ending inventory
6,000 units
Direct labor per unit
$40
Direct materials per unit
20
Variable overhead per unit
10
Fixed overhead per unit
30
Variable selling and admin. costs per unit
6
Fixed selling and admin. costs per unit
14
What is the value of the ending inventory using the absorption costing method?
82. The following information pertains to Guillotine Corporation:
Beginning inventory
1,000 units
Ending inventory
6,000 units
Direct labor per unit
$40
Direct materials per unit
20
Variable overhead per unit
10
Fixed overhead per unit
30
Variable selling and admin. costs per unit
6
Fixed selling and admin. costs per unit
14
How much greater or less than variable costing net income is the absorption costing net income?
83. The following information pertains to Guillotine Corporation:
Beginning inventory
1,000 units
Ending inventory
6,000 units
Direct labor per unit
$40
Direct materials per unit
20
Variable overhead per unit
10
Fixed overhead per unit
30
Variable selling and admin. costs per unit
6
Fixed selling and admin. costs per unit
14
What is the value of the ending inventory using the variable costing method?
84. A disadvantage of absorption costing is
85. Octagonal Company has the following information for 2014:
Selling price
$150 per unit
Variable production costs
$40 per unit produced
Variable selling and admin. expenses
$16 per unit sold
Fixed production costs
$200,000
Fixed selling and admin. expenses
$140,000
Units produced
10,000 units
Units sold
8,000 units
There were no beginning inventories.
What is the ending inventory for Eastwood using the absorption costing method?