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Exam 15: Target Costing and Cost Analysis for Pricing Decisions

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Question 41

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If a company uses a cost-plus approach to pricing, it will find:

A) there are several different definitions of cost and the higher the cost, the higher the markup percentage.
B) there are several different definitions of cost and the higher the cost, the lower the markup percentage.
C) there is one definition of cost, and there is no relationship between cost and the markup percentage used.
D) there is one definition of cost, and there is no markup percentage with the cost-plus approach.
E) it is in violation of generally accepted accounting principles (GAAP) .

F) A) and B)
G) A) and C)

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Question 42

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If the target profit is $60,000 for a volume of 480 units, fixed costs are $168,000, and the variable cost per unit is $450, then the markup percentage on variable cost would be:

A) 104.56%.
B) 105.56%.
C) 106.00%.
D) 106.45%.
E) none of the other answers are correct.

F) A) and C)
G) A) and D)

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Question 43

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Under the time and material pricing method, a customer would be charged for: $\begin{array} { l c c c c } & \text { Material } & \text { Labor } & \text { Overhead } & \text { Profit } \\& \text { Costs } & \text { Costs } & \text { Costs } & \text { Margin } \\\text { A. } & \text { Yes } & \text { No } & \text { No } & \text { No } \\\text { B. } & \text { Yes } & \text { Yes } & \text { No } & \text { No } \\\text { C. } & \text { Yes } & \text { Yes } & \text { Yes } & \text { No } \\\text { D. } & \text { Yes } & \text { Yes } & \text { No } & \text { Yes } \\\text { E. } & \text { Yes } & \text { Yes } & \text { Yes } & \text { Yes }\end{array}$

The four tasks that follow take place with the concept known as target costing: 1-Value engineering. 2-Establish a target selling price. 3-Establish a target cost. 4-Establish a target profit. Which of the following choices depicts the correct sequence of these tasks?

Which of the following choices correctly denotes factors that can influence a company's pricing practices for goods and services? $\begin{array}{llll}&\begin{array}{c}\text { Market } \\\text { Conditions }\end{array} & \text { Costs } & \begin{array}{c}\text { Customer } \\\text { Demand }\end{array} \\\hline\text { A. } & \text { No } & \text { Yes } & \text { Yes } \\\text { B. } & \text { No } & \text { Yes } & \text { No } \\\text { C. } & \text { Yes } & \text { Yes } & \text { Yes } \\\text { D. } & \text { Yes } & \text { Yes } & \text { No } \\\text { E. } & \text { Yes } & \text { No } & \text { Yes }\end{array}$

Which of the following statements regarding price elasticity is false?

The Razooks Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available: $\begin{array} { l r } \text { Variable manufacturing cost } & \$ 180 \\\text { Applied fixed manufacturing cost } & 90 \\\text { Variable selling and administrative cost } & 60 \\\text { Allocated fixed selling and administrative cost } & 75\end{array}$ What price will the company charge if the firm uses cost-plus pricing based on absorption cost and a markup percentage of 120%?

Consider the following statements regarding the economic pricing model: I. The economic model is limited in use because a firm's demand curve is difficult to determine. II. The marginal revenue and marginal cost model is valid for all forms of market organization (perfect competition, oligopoly, and so forth) . III. Cost accounting systems are not designed to measure the marginal changes in cost incurred as production and sales increase. Which of the above statements is (are) true?

Which of the following terms describes a pricing strategy in which a new product's initial price is set high and then eventually lowered to appeal to a broader range of customers?

The controller for Shutterbug Photographic Supply has established the following cost pools and cost drivers: An order for 1,200 boxes of film-development chemicals has the following production requirements: $\begin{array}{l}\text { Machine setups }\\\begin{array} { l r } \text { Pounds of raw materials } & 16,000 \\\text { Pounds of hazardous chemicals } & \text { None } \\\text { Inspections } & 4 \\\text { Machine hours } & 400 \\\text { Direct materials and labor cost } & \$ 24,000\end{array}\end{array}$ Shutterbug established a target price by adding a 40% markup to total manufacturing cost. Required: A. Determine the order's target price by using the activity-cost pools. B. Assume that Halifax used a single, combined overhead rate based on weight of raw materials. 1. Determine the predetermined overhead rate. 2. Determine the expected cost of the order. 3. Determine the target price. C. Which approach above ("A" or "B") seems to be a more reasonable method to establish target prices? Explain.

From an economic perspective, a company's profit-maximizing quantity is found where:

Wardlaw Company, which experiences considerable seasonal variation in its activity and has a high level of fixed costs, is preparing a bid for a project. This particular project will be done during a slack period of the year. Required: A. How should the fixed costs be handled in the bidding approach to this project? B. Assume that the company wins the bid and performs the job on a profitable basis, consistent with the results as projected in the bid. Several months later, the customer contacts Wardlaw and requests a bid to do another job. This project, however, must be done during a peak season. How should Wardlaw's management respond? How do you think the customer will respond?

Dexter, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows: The average amount of capital invested in the laptop product line is $900,000 and Dexter's target return on investment is 18%. If Dexter uses cost-plus pricing based on absorption cost, the markup percentage the company must use would be:

Neptune Pool Company is involved in a number of competitive bidding situations. The following costs are anticipated for a project to be bid for Trimex Manufacturing: $\begin{array} { l r } \text { Direct materials used } & \$ 680,000 \\\text { Direct labor } & 2,450,000 \\\text { Allocated variable overhead } & 570,000 \\\text { Allocated fixed cost } & 230,000\end{array}$ Which of these costs would be treated differently if Neptune had either excess capacity or no excess capacity?

The curve that shows the change in total revenue that accompanies a change in quantity sold is called the:

When determining the markup to be used in a cost-plus pricing formula, many companies base the markup on a target:

Which of the following is (are) a key feature of target costing?

When pricing products, many companies use target costing and/or cost-plus pricing methods. Required: A. Briefly explain how target costing is applied to new products. B. How does target costing differ from cost-plus pricing? C. Can an activity-based costing system be used with target costing? Explain

The Razooks Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available: $\begin{array} { l r } \text { Variable manufacturing cost } & \$ 180 \\\text { Applied fixed manufacturing cost } & 90 \\\text { Variable selling and administrative cost } & 60 \\\text { Allocated fixed selling and administrative cost } & 75\end{array}$ What price will the company charge if the firm uses cost-plus pricing based on total variable cost and a markup percentage of 160%?

Penetration pricing is a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share.