Managerial accounting 5th edition jiambalvo test bank

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CHAPTER 8 Pricing Decisions, Analyzing Customer Profitability, and Activity-Based Pricing Summary of Questions by Objectives and Bloom’s Taxonomy Item SO BT Item SO True-False Statements 1.

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3 Multiple Choice Questions 32.

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2 Matching 129.

1, 3-6 K Exercises 130.

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3 Challenge Exercises 147.

4 AN 148. 5,6 Short-Answer Essays 150.

3 C 151. 3,4

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8- 2 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

TRUE-FALSE 1.

The most difficult part of determining the profit-maximizing price is determining the demand function.

2.

Even though the same percentage markup may be applied to all customers, some customers may be more profitable than others.

3.

Generally, the higher the price, the lower the quantity demanded.

4.

The selling price that maximizes revenues is the price that will also maximize profit.

5.

A demand function is the relation between price and quantity demanded.

6.

Charging a higher price per unit causes an increase in profits for the company because the selling price is larger than the variable cost.

7.

A company should never price a product below full cost.

8.

Fixed costs will affect a special order decision when the selling company is at capacity.

9.

A company cannot increase profits if it accepts a special order at a price below its incremental variable cost.

10.

In order for a special order to be accepted, the full cost of the product must be covered.

11.

When evaluating a special order, only costs that are incremental in nature should be a part of the analysis.

12.

A company should accept all orders for which a company has the capacity to produce.

13.

As long as fixed costs increase by less than the excess of incremental revenue over incremental cost, the acceptance of a special order will increase a company’s net income.

14.

The most difficult part of using cost-plus pricing is determining the demand function.

15.

Cost-plus pricing is circular for the manufacturing industry in that demand must be estimated to determine the fixed manufacturing costs per unit before the cost is marked up to obtain a selling price, which has a major impact on the quantity demanded.

16.

A company using cost-plus pricing starts with an estimate of the cost and adds a markup to arrive at a price that allows for a reasonable level of profit.

17.

Cost-plus pricing is the pricing method that begins with a careful analysis of competing products and customer needs and wants.

18.

Product cost can be easily adjusted after the design phase is complete as long as production has not begun.

19.

The target costing process begins with the design of the product.

Chapter 8

Pricing Decisions

8-3

20.

The first step in the target costing process is to estimate how much a product will cost to develop.

21.

Prices developed using target costing are based on competing products and customer needs and wants.

22.

Target costing establishes selling prices based on the full cost of the product.

23.

Target cost is computed by determining the appropriate selling price and then subtracting desired profit from it.

24.

In effect, a CPM system uses ABC to allocate costs to customers instead of to products and services.

25.

A customer’s profitability is calculated by dividing the sales revenue generated from each customer by the cost of goods sold for each customer.

26.

In a CPM system, costs are allocated to customers, who are the cost objectives.

27.

When order processing costs do not vary based on the size of the order, a customer who makes large, infrequent orders is generally more profitable than a customer who makes small, more frequent orders, for the same quantity and price.

28.

Activity-based pricing is utilized when a customer buying products is charged for the full cost of a product or service plus a markup added to the cost.

29.

In activity-based pricing, customers are offered separate prices for separate items or services they choose in addition to the price of goods they purchase.

30.

Suppliers adopting activity-based pricing may encourage customers to limit the variety of goods they purchase to mitigate the price to be charged.

31.

Activity-based pricing uses ABC concepts to determine one optimum uniform price to charge all customers.

Answers: 1 T 2 T 3 T 4 F 5 T 6 F 7 F

8 9 10 11 12 13

T T F F F T

14 15 16 17 18 19

F T T F F F

20 21 22 23 24 25

F T F T T F

26 27 28 29 30 31

T T F T T F

8- 4 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

MULTIPLE CHOICE 32.

Which one of the following does economic theory suggest?

A. Set a price that allows profit maximization B. Set a price that allows the minimum number of units to be sold at the highest unit price C. Set a price that will maximize revenues D. Set a price that will maximize market share

33.

Which of the following factors is considered in a product pricing decision made using cost-plus pricing?

A. Price customers are willing to pay B. Selling and administrative costs C. Competitors’ actions D. Fixed cost per unit

34.

What occurs to the quantity demanded as the price decreases?

A. It will increase.

B. It will decrease.

C. It will remain constant.

D. It will increase and then decrease.

35.

Which of the following stays constant when the price per unit changes?

A. Demand B. Contribution margin per unit C. Total fixed costs D. Profit

36.

Which of the following statements about price, demand, and profit is generally true?

A. As price increases, demand decreases.

B. As demand increases, profit decreases.

C. As price increases, demand increases.

D. As price decreases, demand decreases.

37.

Rosetone Retail sells one product with a variable cost of $3.50 per unit. The demand at different prices to be charged is shown below: Units Demanded Unit Price 10,000 $9 15,000 $8 20,000 $7 25,000 $6 If fixed costs are $42,000, what price should Rosetone charge in order to maximize profits?

A. $9 B. $8 C. $7 D. $6

Chapter 8

Pricing Decisions

8-5

38.

Which of the following statements about prices and profit is true?

A. Higher prices always lead to lower profits because fewer units will be sold.

B. Higher prices always lead to lower demand and higher profits.

C. Higher prices combine with lower demand to change the level of profits.

D. Higher prices will be offset by lower demand so profits will stay constant.

39.

What should be maximized when setting the price for a product?

A. Total revenue B. Contribution margin per unit C. Net income D. The number of units of product sold

40.

Winslow Carpet produces and sells berber carpet by the yard with a variable cost of $16 per yard. Total fixed costs are $280,000. The following chart represents the estimated demand at various price levels.

Yards Demanded 57,000 67,500 72,500 86,000

Unit Price $25 $24 $23 $21

Which price will generate the largest profit for Winslow Carpets?

A. $25 B. $24 C. $23 D. $21 41.

Wilkes Manufacturing sells one product with a variable unit cost of $18. The company knows that the price charged will affect demand. Fixed costs are $275,000. If sales exceed 50,000 units, the company will need to lease additional manufacturing space and equipment at an additional cost of $100,000 per year. The following chart represents the estimated demand at various price levels: Units Demanded 25,000 50,000 75,000 100,000

Unit Price $30 $28 $25 $23

Based on this information which of the following statements is true?

A. Selling the units at $23 will generate the largest profit.

B. Selling the units at either $23 or $28 will generate a profit of $225,000.

C. Selling the units at either $25 or $28 will generate a profit of $225,000.

D. Selling the units at $28 will generate the largest profit.

8- 6 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

42.

Testor Paints sells varnish with a variable cost of $6.50 per gallon. The company is unsure which price to charge in order to maximize profits. The price charged will also affect the demand.

Gallons Demanded 20,000 30,000 40,000 50,000

Unit Price Per Gallon $11 $10 $9 $8

If fixed costs are $80,000 and the chart above represents the demand at various prices, what price should be charged in order to maximize profits?

A. $11 B. $10 C. $9 D. $8 43.

Dollar Deals sells a single product that has a unit variable cost of $9 per unit. The company’s total fixed costs are $220,000. The company estimates demand at various activity levels as follows: Units Demanded 54,000 65,000 72,000 82,000

Unit Price $15 $14 $13 $12

What price should Dollar Deals charge to maximize profits?

A. $15 B. $14 C. $13 D. $12 44.

Calico Joe Fabrics sells a single product. The company estimates total fixed costs at $360,000 with demand, price, and total variable costs as follows: Units Demanded 73,000 83,000 93,000 103,000 113,000

Unit Price $31 30 29 28 27

Total Variable Costs $1,606,000 1,826,000 2,046,000 2,266,000 2,486,000

What price should Calico Joe Fabrics charge to maximize profits?

A. $31 B. $30 C. $29 D. $28 E. $27

Chapter 8

45.

Pricing Decisions

8-7

Calico Joe Fabrics sells a single product. The company estimates total fixed costs at $360,000 with demand and unit variable costs at various activity levels as follows: Units Demanded 73,000 83,000 93,000 103,000 113,000

Unit Price $31 30 29 28 27

Total Variable Costs $1,606,000 1,826,000 2,046,000 2,266,000 2,486,000

How much profit will Calico Joe Fabrics have if a price of $26 is charged and demand is 120,000?

A. $120,000 B. $3,120,000 C. $480,000 D. $2,760,000 46.

Calico Joe Fabrics sells a single product. The company estimates total fixed costs at $360,000 with demand and unit variable costs at various activity levels as follows: Units Demanded 73,000 83,000 93,000 103,000 113,000

Unit Price $31 30 29 28 27

Total Variable Costs $1,606,000 1,826,000 2,046,000 2,266,000 2,486,000

How would you best describe Calico’s variable cost per unit over the range shown?

A. It is constant.

B. It is increasing as volume increases.

C. It is decreasing as volume increases.

D. There is not enough information provided to determine the answer.

47.

Palm Decor sells a single product that has variable costs of $12 per unit. The company estimates the following demand at various unit prices: Units Demanded 31,000 37,000 44,000 56,000 60,000

Unit Price $19 18 17 16 15

What price should Palm Decor charge to maximize profits?

A. $19 B. $18 C. $17 D. $16

8- 8 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

48.

Right Air Supply sells a specialized air filter that has a variable cost of $10 each. Fixed costs are estimated to be $700,000 across all levels of sales shown below: Units Demanded 80,000 90,000 100,000 110,000 120,000

Unit Price $35 $33 $31 $30 $28

What price should Right Air Supply charge to maximize profits?

A. $35 B. $33 C. $31 D. $30 E. $28 49.

Right Air Supply sells a specialized air filter that has a variable cost of $10 each. Fixed costs are estimated to be $700,000 across all levels of sales shown below: Units Demanded 80,000 90,000 100,000 110,000 120,000

Unit Price $35 $33 $31 $30 $28

What information given, if any, is not relevant to the price maximization decision?

A. The selling prices B. The variable costs per unit C. The quantities demanded D. The total fixed costs 50.

Right Air Supply sells a specialized air filter that has a variable cost of $10 each. Fixed costs are estimated to be $700,000 across all levels of sales shown below: Units Demanded 80,000 90,000 100,000 110,000 120,000

Unit Price $35 $33 $31 $30 $28

What price should Right Air Supply charge to maximize revenues?

A. $35 B. $33 C. $31 D. $28

Chapter 8

51.

Pricing Decisions

8-9

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: Unit Price $45 $44 $43 $42

Unit Demand 7,200 7,800 8,400 8,800

How much is the contribution margin at a price of $45?

A. $324,000 B. $129,600 C. $12,600 D. $9,600 52.

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: Unit Price $45 $44 $43 $42

Unit Demand 7,200 7,800 8,400 8,800

What is the anticipated revenue at a price of $44?

A. $343,200 B. $132,600 C. $12,600 D. $387,200 53.

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: Unit Price $45 $44 $43 $42

Unit Demand 7,200 7,800 8,400 8,800

What is the anticipated profit at a price of $43?

A. $134,400 B. $14,400 C. $194,400 D. $361,200

8- 10 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

54.

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: Unit Price $45 $44 $43 $42

Unit Demand 7,200 7,800 8,400 8,800

What is the anticipated profit at a price of $42?

A. $12,000 B. $132,000 C. $249,600 D. $369,600 55.

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: Unit Price $45 $44 $43 $42

Unit Demand 7,200 7,800 8,400 8,800

What price should Maker Sun Chairs charge in order to maximize its profit?

A. $45 B. $44 C. $43 D. $42 56.

Tong Chin is the manager of an Asian restaurant. She is considering four price levels for an allyou-can-eat buffet. Her estimate of price and quantity demanded are: Buffet Meal Price $17.00 $16.00 $15.00 $14.00

Meals Demanded 3,200 3,700 4,000 4,400

Monthly operating costs include $16,400 of fixed costs and average variable costs of $9.40 per meal. Which price will yield the largest monthly profit?

A. $17 B. $16 C. $15 D. $14

Chapter 8

57.

Pricing Decisions

8-11

Ramsey Foods has analyzed its customer and order handling data for the past year and has determined the following costs: Order processing cost per order Additional costs if order must be expedited (Per order) Customer technical support calls (Per call) Relationship management costs (Per customer per year)

$5.50 $6.00 $3.50 $1,900

In addition to these costs, product costs amount to 75% of sales. In the prior year, Ramsey had the following experience with one of its customers, Turnkey Enterprises: Sales Number of orders Percent of orders marked rush Calls to technical support

$18,000 28 25% 14

Calculate the profit earned on the Turnkey Enterprises account.

A. $2,355 B. $4,153 C. $4,482 D. $2,229 58.

Allstate HVAC recently developed a low-end electronic thermostat that it plans on selling via a cable channel marketing program. The cable program’s fee for selling the item is 20% of revenue. For this fee, the program will advertise the thermostat over six 10-minute segments in September. Allstate’s fixed costs of producing the thermostats are $110,000 per production run.

The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered. Variable production costs are $25 per unit. In addition, it will cost approximately $5 per unit to ship the thermostats to customers. Production time will be less than three weeks. Henry Kristen, a product manager at Allstate, is charged with recommending a price for the thermostat. Based on his experience with similar items, focus group responses, and survey information, he has estimated the number of units that can be sold at various prices: Unit Price $74.99 $63.99 $54.99 $49.99

Quantity 15,000 20,000 25,000 35,000

At what price is profit maximized?

A. $74.99 B. $63.99 C. $54.99 D. $49.99

8- 12 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

59.

Allstate HVAC recently developed a low-end electronic thermostat that it plans on selling via a cable channel marketing program. The cable program’s fee for selling the item is 20% of revenue. For this fee, the program will advertise the thermostat over six 10-minute segments in September. Allstate’s fixed costs of producing the thermostats are $110,000 per production run.

The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered. Variable production costs are $25 per unit. In addition, it will cost approximately $5 per unit to ship the thermostats to customers. Production time will be less than three weeks. Henry Kristen, a product manager at Allstate, is charged with recommending a price for the thermostat. Based on his experience with similar items, focus group responses, and survey information, he has estimated the number of units that can be sold at various prices: Unit Price $90 $77 $65 $62

Quantity 5,000 8,000 11,000 13,000

At which price should the company sell it products?

A. $90 B. $77 C. $65 D. $62 60.

Vanana Tees sells its cool-zone t-shirts for $24 each. Unit product costs are as follows: Direct materials Direct labor Manufacturing overhead Total

$4.50 1.80 3.50 $9.80

A special order to purchase 1,200 shirts was recently received. There is enough capacity to fill the order. Filling this order will not disrupt current operations. Vanana expects to incur an additional $1.10 per unit for additional labor costs due to a slight modification the buyer wants made to the shirts. The manufacturing overhead costs consist of 30% allocated fixed costs. In negotiating a price, how much is Vanana Tees’ minimum acceptable selling price per t-shirt?

A. $6.30 B. $8.75 C. $9.85 D. $7.35 61.

Which of the following must be true for a company to accept a special order?

A. Variable costs must be less than the contribution margin.

B. Incremental revenues must be greater than incremental costs.

C. Opportunity costs must be greater than total revenue.

D. Total fixed costs must stay constant.

62.

When deciding to accept or reject a special order, which of the following costs is most likely to be irrelevant?

A. The wages of direct labor to make the order B. Depreciation on the machinery used to make the order C. The raw material used to make the order D. The electricity used to run the machine to make the order

Chapter 8

Pricing Decisions

8-13

63.

In accepting a special order, which one of the following is not considered?

A. Whether production capacity exists to complete the order B. Whether demand for other products will be affected C. Whether the fixed costs of production will increase D. Whether the contribution margin per unit is greater for products in the special order than the contribution margin for the same products sold to regular customers

64.

Which of the following is relevant in deciding whether to accept or reject a special order?

A. The impact the order will have on existing business B. The price that will be charged on the special order C. The impact the order will have on existing business and the price that will be charged on the special order D. None of these answer choices are correct.

65.

Which of the following statements is true of fixed costs of production in determining whether to accept or reject a special order?

A. They are increased in proportion to the amount that production increases when a special order is accepted.

B. They are often considered relevant if the plant is operating at capacity.

C. If the order can be completed without creating additional fixed costs, they are relevant.

D. They are always relevant in the decision.

66.

Wagner Enterprises is contemplating accepting a special order. The company determined that the order will cause an increase in fixed costs. Should the order be accepted?

A. No, as any increase in fixed costs will reduce the company’s profit B. Yes, as long as the total revenue is greater than the associated variable costs C. Yes, if the increase in fixed costs is less than the incremental revenue D. Yes, if the incremental revenue is greater than the total incremental costs

67.

Cinotti Bread Depot bakes and sells each bagel for $1.25. The cost of producing 600,000 bagels in the prior year was: Revenues Direct materials Direct labor Manufacturing overhead - fixed Manufacturing overhead - variable

$750,000 330,000 66,000 132,000 84,000

At the start of the current year, Cinotti received a special order for 15,000 bagels to be sold for $1.10 per bagel. The company estimates it will incur an additional $700 in total fixed costs in order to lease a special machine needed to bake the bagels in the customer’s logo shape. Also, this order will not affect any of its other operations. Should the company accept the special order?

A. No, profit will decrease by $2,950 B. No, profit will decrease by $2,250 C. Yes, profit will increase by $3,800 D. Yes, profit will increase by $500

8- 14 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

68.

Bell Supply House produces recycled paper that it sells by the case. Budgeted amounts for the coming year are as follows: Revenues (20,000 cases at $12 each) Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Net income

$240,000 $40,000 70,000 50,000 30,000

190,000 $ 50,000

LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case. This special order will have additional variable costs of $0.35 per case due to delivery costs. Bell Supply House has the capacity to produce this order and it will not affect any of its other operations. How much is the incremental revenue associated with accepting this special order?

A. $8,300 B. $25,000 C. $165,000 D. $9,000 69.

Bell Supply House produces recycled paper that it sells by the case. Budgeted amounts for the coming year are as follows: Revenues (20,000 cases at $12 each) Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Net income

$240,000 $40,000 70,000 50,000 30,000

190,000 $ 50,000

LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case. This special order will have additional variable costs of $0.35 per case due to delivery costs. Bell Supply House has the capacity to produce this order and it will not affect any of its other operations. How much is the incremental cost of accepting the special order?

A. $16,000 B. $46,000 C. $16,700 D. $19,000

Chapter 8

70.

Pricing Decisions

8-15

Bell Supply House produces recycled paper that it sells by the case. Budgeted amounts for the coming year are as follows: Revenues (20,000 cases at $12 each) Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Net income

$240,000 $40,000 70,000 50,000 30,000

190,000 $ 50,000

LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case. This special order will have additional variable costs of $0.35 per case due to delivery costs. Bell Supply House has the capacity to produce this order and it will not affect any of its other operations. How much is the incremental profit (loss) associated with the special order?

A. $8,300 B. $9,000 C. ($21,000) D. ($11,700) 71.

Element Boards makes skateboard wheels. Budget information regarding current period operations reflecting the sale of 200,000 wheels appears below: Revenue (200,000 wheels at $3.00) Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$600,000 120,000 220,000 50,000 70,000

The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of $2.75 per wheel. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company’s orders. However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. What is the incremental revenue associated with accepting the special order?

A. $616,500 B. $200 C. $16,700 D. $16,500

8- 16 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

72.

Element Boards makes skateboard wheels. Budget information regarding the current period is given below: Revenue (200,000 wheels at $3.00) Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$600,000 120,000 220,000 50,000 70,000

The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of $2.75 per wheel. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company’s orders. However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. What is the incremental cost associated with accepting the special order?

A. $16,500 B. $11,700 C. $18,800 D. $16,700 73.

Element Boards makes skateboard wheels. Budget information regarding the current period is given below: Revenue (200,000 wheels at $3.00) Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$600,000 120,000 220,000 50,000 70,000

The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of $2.75 per wheel. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company’s orders. However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. What is the incremental income (loss) associated with accepting the special order?

A. ($2,300) B. $2,700 C. ($2,700) D. ($200) 74.

P&T Furniture has a capacity to produce 40,000 oak shelves per year and is currently selling 36,000 shelves for $32 each. Bates Hotel has approached P&T about buying 1,200 shelves for a new hotel it is building and is willing to pay $26 for each shelf. The shelves can be packaged in bulk, saving P&T $1.50 per shelf compared to the normal packaging cost. Normally, the shelves have a unit variable cost of $27. The annual fixed costs of $450,000 will be unaffected by the special order and it will not affect any of its other operations. What would be the impact on profits if P&T accepts this special order?

A. Profits will decrease by $6,000.

B. Profits will increase by $31,200.

C. Profits will increase by $600.

D. Profits will decrease by $1,200.

Chapter 8

Pricing Decisions

8-17

75.

P&T Furniture has a capacity to produce 40,000 oak shelves per year and is currently selling all 40,000 shelves for $32 each. Bates Hotel has approached P&T about buying 1,200 shelves for a new hotel it is building and is willing to pay $26 each. The shelves can be packaged in bulk, saving P&T $1.50 per shelf compared to the normal packaging cost. Normally, the shelves have a unit variable cost of $27. The annual fixed costs of $450,000 will be unaffected by the special order and it will not affect any of its other operations. What is the minimum price per shelf that P&T should accept for this special order?

A. $27.00 B. $25.50 C. $30.50 D. $32.00

76.

Accent Furniture has a capacity of 30,000 desk chairs per year and is currently selling all 30,000 for $240 each. Country Bank has approached Accent for buying 800 chairs for only $210 each.

Accent has a normal variable cost of $165 per chair, including $50 per unit in direct labor per chair. Accent can produce the special order on an overtime shift. This would result in direct labor being paid overtime at 150% of the normal pay rate. The annual fixed costs will be unaffected by the special order and it will not affect any of its other operations. What will be the impact on profits of accepting the order?

A. Profit will decrease by $24,000.

B. Profit will increase by $16,000.

C. Profit will increase by $36,000.

D. Profit will decrease by $4,000.

77.

Tenna Electronics sells arc monitors for $55 per unit. Unit product costs are as follows: Direct materials Direct labor Manufacturing overhead Total

$14 20 3 $37

A special order to purchase 15,000 arc monitors was recently received from a customer. There is enough capacity to fill the order and filling this order would not disrupt current operations.

Tenna will incur an additional $2 per arc monitor for additional labor costs due to a slight modification the buyer wants made to the original product. One-third of the manufacturing overhead costs is fixed and will be incurred no matter how many units are produced. In negotiating a price, how much is the minimum selling price that Tenna Electronics should accept for this special order?

A. $34 B. $39 C. $38 D. $36 78.

Why is cost-plus pricing criticized?

A. It includes selling and administrative costs in determining the product cost.

B. It does not consider the fixed manufacturing overhead in determining the product cost.

C. It is inherently circular for manufacturing firms.

D. It requires a high level of technical expertise to price products using this method.

8- 18 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

79.

To what amount does a company set a price equal if it uses a cost-plus approach to pricing?

A. Total costs incurred B. Variable product costs plus a markup for profit C. Estimated total costs plus a markup for profit D. Total variable costs plus a share of the fixed costs

80.

Sky Blue Plans provides financial planning for senior citizens. The costs of preparing 800 financial plans in the prior year were: Direct labor $400,000 Variable overhead 296,000 Fixed overhead 250,000 Total cost $946,000 At the start of the current year, the company received an offer from MooseHaven, a retirement home for Moose members. MooseHaven wants Sky Blue Plans to prepare financial plans for its 150 assisted living citizens. Sky Blue has the capacity to prepare up to 1,000 plans in a given year, so this special order would not take away revenue from any of Sky Blue’s current clients.

MooseHaven is willing to pay $880 per plan. What will be the effect on Sky Blue Plan’s profit if it agrees to prepare plans for the 150 citizens of MooseHaven?

A. Profit will increase by $1,500.

B. Profit will decrease by $45,375.

C. Profit will increase by $132,000.

D. Profit will decrease by $1,500.

81.

Which of the following is not a valid criticism of cost-plus pricing?

A. It is difficult to determine the appropriate markup.

B. The method depends on technical expertise in determining a cost.

C. The firm’s demand curve is ignored in setting the price and quantity.

D. The method is inherently circular for manufacturing firms.

82.

Garden Corporation uses cost-plus pricing with a 30% mark-up. The company is currently selling 12,000 units at $21.45 per unit. Each unit has a variable cost of $11.50. In addition, the company incurs $60,000 in fixed costs annually. If demand falls to 10,000 units, how much will the company have to charge per unit in order to earn the same annual profit?

A. $22.45 B. $21.45 C. $23.44 D. $22.75

83.

SawTown Tools uses cost-plus pricing with a 30% mark-up. The company is currently selling 80,000 units at $65 per unit. Each unit has a variable cost of $47. In addition, the company incurs $240,000 in fixed costs annually. If demand falls to 40,000 units and the company wants to continue to charge the same price per unit, what markup percentage is the company using?

A. 22.6% B. 26.2% C. 36.1% D. 30.1%

Chapter 8

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8-19

84.

Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity.

The company is currently selling 40,000 units at $19.60 per unit. Each unit has a variable cost of $9. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge?

A. $15.25 B. $21.35 C. $19.60 D. $6.10

85.

Ragtown Grill uses cost-plus pricing with a 40% mark-up. The company is currently selling 20,000 units annually, but has a capacity of 30,000 units. Each unit has a variable cost of $15. In addition, the company incurs $60,000 in fixed costs annually. For how much is the company selling each unit?

A. $25.20 B. $21.00 C. $24.00 D. $23.80

86.

Segundo Office Tech uses cost-plus pricing and produces 100,000 calculators at a total cost of $3.5 million. Total fixed costs are $1.5 million. If the company increases production by 20% and uses a 30% markup, how much will the price per unit be?

A. $32.50 B. $42.25 C. $45.50 D. $54.40

87.

DT Company uses cost-plus pricing and has $30 per unit in variable costs and $800,000 per year in fixed costs. Demand is estimated to be 200,000 units annually. What is the price if a markup of 30% on total cost is used to determine the price?

A. $34.00 B. $39.00 C. $44.20 D. $43.00

88.

A company uses cost-plus pricing and has a total cost of $40.00 per unit at a volume of 120,000 units. The variable cost per unit is $25.00. What will the price be if the company expects a volume of 110,000 units and uses a markup of 50%?

A. $41.36 B. $62.05 C. $37.50 D. $60.00

89.

A company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units. If the company uses cost-plus pricing, which of the following should the company use to determine the price?

A. The company should use a unit cost of $8.70 per unit only at a volume of 40,000 units.

B. The company should use a unit cost of $8.70 at any volume level.

C. The company should use a unit cost of $8.70 at any volume within the relevant range.

D. The company should use a unit cost of $6.50 per unit only at a volume of 40,000 units.

8- 20 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

90.

A company has $8.00 per unit in variable costs and $4.00 per unit in fixed costs at a volume of 50,000 units. If the company marks up total cost by 60%, what price should be charged if 60,000 units are expected to be sold?

A. $7.20 B. $18.13 C. $19.20 D. $11.33

91.

Harp Widgets determined each deluxe widget it produces has a unit variable cost of $15.00, with total fixed costs of $600,000 for the period. Harp expects to sell 60,000 deluxe widgets and has applied a markup percentage of 35%. What contribution margin will Harp earn from the sale of each deluxe widget?

A. $33.75 B. $8.75 C. $18.75 D. $25.75.

92.

Magic Fun has total fixed costs of $4,000,000 and total variable cost of $2,000,000 during a month when it sold 200,000 units. What price will Magic Fun charge if it uses cost-plus pricing and a markup of 20%?

A. $30.00 B. $24.00 C. $36.00 D. $48.00

93.

Cain Manufacturing produces 40,000 clocks at a total cost of $908,000. Total fixed costs are $408,000. If Cain increases production by 20% and uses a 50% markup, how much will the selling price per unit be?

A. $49.35 B. $21.00 C. $31.50 D. $34.05

94.

A manufacturing company produces and sells 50,000 units of a single product. Total product costs are $8 per unit. If total sales are $550,000, what markup percentage is the company using?

A. 37.5% B. 72.7% C. 50.0% D. 137.5%

95.

A manufacturing company produces and sells 40,000 buckets. At this level of activity, variable costs total $80,000 and fixed costs total $120,000. If each bucket is sold for $8, what markup percentage is the company using?

A. 60% B. 160% C. 75% D. 133%

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96.

The chief engineer at Wilson Electronics has proposed the production of a digipad to be sold at a 30 percent markup on full cost. Management estimates that the fixed costs per year will be $150,000 and the variable cost of the digipad will be $28 per unit. If Wilson sells 30,000 digipads, what is the full cost of each unit?

A. $42.90 B. $33.00 C. $36.40 D. $9.90

97.

The chief engineer at Wilson Electronics has proposed the production of a digipad to be sold at a 30 percent markup. Management estimates that the fixed costs per year will be $150,000 and the variable cost of the digipad will be $28 per unit. If Wilson sells 30,000 digipads, how much is the selling price of each digipad?

A. $42.90 B. $33.00 C. $36.40 D. $9.90

98.

The target costing process for a new product A. starts with the features that customers want and the price customers are willing to pay.

B. is applied after the product has been designed.

C. focuses on creating products that include all possible product features to broaden the company’s market share.

D. adds a markup percentage for profit once the price of the product has been determined.

99.

Which of the following lists the steps in the target costing process in the proper order?

A. Analyze customer needs and wants, determine the desired profit, find the target cost, and design the product B. Design the product, analyze customer needs and wants, determine the desired profit, and find the target cost C. Analyze customer needs and wants, find the target cost, design the product, and determine the desired profit D. Analyze customer needs and wants, determine the desired profit, design the product, and find the target cost

100.

What is the basic premise of target costing?

A. Products should be designed to meet customer needs at a price customers are willing to pay that allows the company to make a reasonable profit.

B. Products should be designed at the least cost possible to enable the lowest price in the market.

C. Products should be designed based on features that competitors’ products include to enhance the company’s ability to compete more effectively.

D. The price with the highest profit should always be selected.

101.

In which stage are most of the manufacturing costs for a product determined?

A. Design stage B. Preproduction stage C. During production D. At the completion of production

8- 22 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

102.

A company believes it can sell 2,000,000 units of its proposed new bottle stopper at a price of $16.00 each. If the company desires to make a profit of $3,000,000 on the bottle stopper, what is the target cost for each bottle stopper?

A. $14.50 B. $16.00 C. $17.50 D. $9.67

103.

Light Bright believes it can sell 40,000 of its newly developed laser lights at a price of $24.00 each. There will be $680,000 in fixed costs associated with the laser light. If the company desires to make a profit of $100,000 on the laser light, what is the target variable cost for each laser light?

A. $4.50 B. $32.50 C. $28.33 D. $8.50

104.

A company believes it can sell 8,000 units of its proposed new garage door opener at a price of $100 each. If the company desires to make a profit of 30% of selling price on the garage door opener, what is the target cost per opener?

A. $130 B. $110 C. $70 D. $30

105.

Mays Tools believes it can sell 80,000 of its proposed new Dirt Dodgers at a price of $50 each.

If the company desires to make a profit of 60% of selling price, what is the target variable cost per Dirt Dodger?

A. $25.00 B. $30.00 C. $31.25 D. There is not enough information provided to determine the answer.

106.

Clinton Creations believes it can sell 10,000 of its proposed new waterproof camera at a price of $200 each. There will be annual fixed costs associated with developing, marketing and manufacturing the camera of $540,000. If the company desires to make a profit of 40%, how much is the target variable cost per camera?

A. $80 B. $120 C. $66 D. There is not enough information provided to determine the answer.

107.

Tire Kingdom requires a 60% profit margin on it dirt bike racing tires. At a price of $78 per tire the company expects to sell 16,000 tires. How much is the company’s target cost on each tire?

A. $31.20 B. $48.75 C. $130.00 D. $46.80

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108.

Mason Kitchenware requires a 30% profit margin on the selling price of its jar openers. At a price of $16 per opener, the company expects to sell 8,000 openers. Total fixed costs are expected to be $28,000. How much is the target cost per jar opener?

A. $17.30 B. $11.20 C. $7.70 D. $20.80

109.

A new product is being designed by an engineering team at Gray Security. Several managers and employees from the cost accounting department and the marketing department are also on the team to evaluate the product and determine the cost using a target costing methodology. An analysis of similar products on the market suggests a price of $135 per unit. The company requires a profit of 30% of selling price. How much is the target cost per unit?

A. $175.50 B. $81.00 C. $40.50 D. $94.50

110.

Sunshine Travel is designing a travel mug and has determined that a price of $8 will be attractive in the marketplace. The company seeks to earn a profit of 30% percent of selling price, and estimates it can sell 21,000 mugs. Total fixed costs are expected to be $23,100. How much is the target cost per mug?

A. $2.40 B. $5.60 C. $6.70 D. $4.50

111.

Sunshine Travel is designing a travel mug and has determined that a price of $8 will be attractive in the marketplace. The company seeks to earn a profit of 30% percent of selling price, and estimates it can sell 21,000 mugs. Total fixed costs are expected to be $23,100. By how much will the target cost change per mug if the profit is raised to 40% instead of 30%?

A. A decrease of $0.80 B. An increase of $0.80 C. An increase of $0.45 D. A decrease of $3.70

112.

Which one of the following is not assigned to individual customers when employing a customer profitability analysis?

A. Sales revenue B. Cost of goods sold C. Cost of filling the customer’s orders D. Cost of designing a new product

113.

Which one of the following might result from performing a customer profitability analysis?

A. Dropping some customers that are unprofitable B. Increasing prices or offering incentives to profitable customers C. Eliminating products that cause customers to complain D. Offering customers that use more services than others a special customer service unit that provides more one-on-one time

8- 24 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

114.

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Results for the year appear below: Cost Pool

Processing electronic orders Processing non-electronic orders Picking orders Packaging orders Returns

Cost

$400,000 120,000 240,000 180,000 15,000

Cost Driver

Quantity

Number of orders Number of orders Number of different products ordered Number of items ordered Number of returns

40,000 8,000 120,000 150,000 3,000

What is the cost allocation for two Internet orders for 22 items with 7 different products and one return?

A. $65.40 B. $33.20 C. $60.40 D. $40.40 115.

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Results for the year appear below: Cost Pool

Processing electronic orders Processing non-electronic orders Picking orders Packaging orders Returns

Cost

$400,000 120,000 240,000 180,000 15,000

Cost Driver

Quantity

Number of orders Number of orders Number of different products ordered Number of items ordered Number of returns

40,000 8,000 120,000 150,000 3,000

If all costs were assigned to customers based on the number of items ordered, what would be the cost per item ordered?

A. $6.37 B. $33.20 C. $1.20 D. $0.16 116.

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Results for the year appear below: Cost Pool

Processing electronic orders Processing non-electronic orders Picking orders Packaging orders Returns

Cost

$400,000 120,000 240,000 180,000 15,000

Cost Driver

Number of orders Number of orders Number of different products ordered Number of items ordered Number of returns

Quantity

40,000 8,000 120,000 150,000 3,000

One customer of First Décor placed 30 electronic orders with a total selling price of $25,400.

The direct cost of these orders is $17,200. The orders consist of five different products with a total of 2,200 items, and two returns. Using an activity-based costing method, how much are the indirect costs associated with serving this customer?

A. $2,960 B. $996 C. $2,660 D. $3,110

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117.

Activity-based pricing A. encourages customers to use as many services as possible that are provided by the seller.

B. charges customers for each service they use.

C. allows all customers to pay lower total prices.

D. reduces the direct costs of offering products for sale.

118.

For which of the following items might a customer be charged extra for an order under activitybased pricing?

A. Placing the order during non-peak times B. Requesting an order be delivered in three separate shipments C. Using an automated order system D. Tracking delivery via an online support utility

119.

Which one of the following is a goal of activity-based pricing?

A. To charge customers for the costs that they are creating B. To increase profits by charging all customers at higher prices C. To maintain all customers in the customer base D. To broaden market share

120.

A company estimates that ordering costs are $2.00 per order, picking costs are $1.00 for each different item ordered, packing costs are $0.07 per item, and return costs are $40.00 per return.

A customer orders $8,000 worth of goods with direct costs of $6,200. The customer places 70 orders, orders 24 unique items, 940 total items, and makes 7 returns. What is the customer profit?

A. $509.80 B. $1,290.20 C. $7,490.20 D. $1,800

121.

A company estimates that ordering costs are $3.20 per order, picking costs are $2.15 per unique item ordered, packing costs are $0.04 per item, and return costs are $15.00 per return. A customer orders $8,440 worth of goods with direct costs of $5,200. The customer places 85 orders, orders 72 unique items, 450 total items, and makes 5 returns. What is the customer profit?

A. $519.60 B. $3,240 C. $2,720.20 D. $7,920.20

122.

A company estimates that ordering costs are $4.00 per order, picking costs are $3.00 per unique item ordered, packing costs are $0.04 per item, and return costs are $70.00 per return. A customer makes 50 orders, orders 80 unique items, and 900 total items. The customer makes 11 returns. The pricing structure is to charge customers for the cost of the services that are provided. Using activity-based pricing for each of the above items, what will be the total amount of additional cost paid by the customer?

A. $1,246 B. $77.04 C. $1,540 D. $476

8- 26 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

123.

A company using activity-based pricing marks up the direct cost of goods by 30% and then adds the cost of the services that are provided. Indirect costs are charged as follows: $8.00 per order placed; $4.00 per separate item ordered; $30.00 per return. A customer places 10 orders with a total direct cost of $3,000, orders 300 separate items, and makes 5 returns. What will the customer be charged?

A. $3,000 B. $3,900 C. $5,330 D. $5,759

124.

Marquez Enterprises uses activity-based pricing and marks up the direct cost of goods by 40%.

In addition, the customer is charged for indirect costs based on the activities utilized. Indirect costs are as follows: $7 per order placed and $11 per return. A customer places 12 orders with a direct cost of $6,100 and makes 2 returns. How much in indirect costs will the customer be charged?

A. $18 B. $106 C. $6,206 D. $2,440

125.

A custom yacht-building company uses activity-based pricing. The company’s annual activity pools and related information follow: Cost Pool Estimated Cost Design $2,500,000 Production 4,000,000 Customer service 80,000

Cost Driver Number of designs Labor hours Number of customers

Driver Quantity 80 designs 125,000 labor hours 20 customers

The pricing structure is to charge customers for the cost of the services that are provided. One particular customer requested 2 different designs which led to the production of one yacht which took 2,400 labor hours to complete. What additional costs will be charged to this customer?

A. $143,300 B. $112,050 C. $139,300 D. $108,050 126.

A law firm uses activity-based pricing. The company’s annual activity pools and related information are as follows: Cost Pool Estimated Cost Consultation $125,000 Administrative costs 66,000 Client service 34,000

Cost Driver Number of consultations Admin labor hours Number of clients

Driver Quantity 200 consultations 6,000 labor hours 400 clients

The pricing structure is to charge customers for the cost of the services that are provided. The firm had four consultations with Doris Lansing and required 88 administrative labor hours. What additional costs will be charged to this customer?

A. $636 B. $721 C. $3,468 D. $3,553

Chapter 8

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8-27

A law firm uses activity-based pricing. The company’s annual activity pools and related information are as follows: Cost Pool Estimated Cost Consultation $125,000 Administrative costs 66,000 Client service 34,000

Cost Driver Number of consultations Admin labor hours Number of clients

Driver Quantity 200 consultations 6,000 labor hours 400 clients

The pricing structure is to charge customers for the cost of the services that are provided. The firm had two consultations with Randall’s Auto Shop and required 64 administrative labor hours. What additional costs will be charged to this customer?

A. $1,954 B. $2,039 C. $721 D. $1,442 128.

Veterinarians Johns & Doggins have analyzed their customer data for the past year and have determined the following costs: Customer inquiries cost each Additional costs if inquiry is after hours Dispensing of prescriptions Relationship management costs (Per customer per year)

$

12 20 18 800

In addition to these costs, product costs amount to 75% of sales. In the prior year, Johns & Doggins had the following experience with one of its customers, Millie Woods: Sales Total number of inquiries Percent of after-hours inquiries Prescriptions dispensed

$3,100 50 80% 26

For the coming year, Johns & Doggins have told Woods that she will be switched to an activitybased pricing system or will be dropped as a customer. In addition to regular prices, Woods will be required to pay: Inquiries After hours inquiries Prescription dispensing

$18 each $21 each $22 each

How much is the additional revenue to be charged to Woods account if activity is the same as in the prior year?

A. $2,312 B. $2,392 C. $3,112 D. $3,952

8- 28 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

Answers 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51

A D A C A C C C B D B B B A A D D D D B

52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71

A B A C B A A D C B B D C B D C B C A D

72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91

D D C B B C C C A B C A B A B C B A B C

92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111

C C A A B A A A A A A A C D C A B D B A

112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128

D A A A A B B A B C A C B A D B A

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MATCHING 129.

Match each of the following terms with the phrase that most closely describes it.

1.

Activity-based pricing

2.

Customer profitability analysis

3.

Target costing

4.

Economic pricing

5.

Cost-plus pricing

A.

A system that starts with what consumers are willing to pay for a product and tries to design a product at a cost that allows a reasonable profit

B.

A way of using activity-based methods to assess which customers are covering the costs they are generating

C.

A system that charges customers for the services they consume

D.

A system that prices based on the laws of supply and demand

E.

A system that sets prices based on costs

Answer 1.

2.

3.

4.

5.

C B A D E

8- 30 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

EXERCISES 130.

Suez Bakery produces and sells chocolate silk pies, each having a variable cost of $3.80.

Total fixed costs are $34,000. Management estimates demand at various activity levels as follows: Units Demanded 6,000 7,200 8,000 8,900 10,100 a. b.

Unit Price $10.20 9.40 8.50 8.00 7.50

Calculate the total contribution margin at each price level.

Which price maximizes profit?

Answer a.

Quantity 6,000 7,200 8,000 8,900 10,100 b.

131.

Unit Price $10.20 9.40 8.50 8.00 7.50

Unit Variable Cost $3.80 3.80 3.80 3.80 3.80

Contribution Margin $38,400 40,320 37,600 37,380 37,370

$9.40

The editor of Times Daily is considering three alternative prices for his new monthly periodical. His estimate of price and quantity demanded are: Price $7.99 $6.50 $4.75

Quantity Demanded 27,000 36,000 57,000

Monthly costs of producing and delivering the magazines include $100,000 of fixed costs and variable costs of $2.50 per issue. Which price will yield the largest monthly profit?

Answer Quantity 27,000 36,000 57,000

Unit Price $7.99 6.50 4.75

Unit Variable Cost $2.50 2.50 2.50

$7.99 will yield the largest monthly profit.

Contribution Margin $148,230 144,000 128,250

Fixed Costs $100,000 100,000 100,000

Profit $48,230 44,000 28,250

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132.

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8-31

Kitchen Zone has come out with a new line of electric can openers that it plans to test market through a series of demonstrations at the local mall throughout the month of August. If the demonstrations result in enough sales, the program will be expanded to other malls in the region. The cost of the demonstrations is a flat fee of $2,400 to the mall owner/operator and a commission of 15% of revenue to the person giving the demonstrations. Kitchen Zone’s fixed costs of producing the can opener are $3,200 per production run. The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered (there will be no beginning or ending inventory). Variable production costs are $7 per can opener.

In addition, it will cost approximately $3.50 per set to ship each can opener to customers.

Based on experience with similar items, focus group responses, and survey information, estimates for unit amounts at estimated activity levels follow:

a. b.

Price Quantity $38 400 $52 360 $66 280 Calculate the expected profit for each price.

Which price maximizes company profit?

Answer a.

Quantity 400 360 280 b.

133.

Unit Unit Price Variable Cost $38.00 $16.20 52.00 18.30 66.00 20.40

Contribution Margin $ 8,720 12,132 12,768

Fixed Costs $5,600 5,600 5,600

Profit $3,120 6,532 7,168

$66 maximizes company profit

WDT, Inc. is a large company that publishes ‘how-to’ books for small construction projects.

WDT is considering the purchase of a new binding machine to bind the books. The variable cost of each book is estimated to be $7.40. Management has estimated demand at various prices as follows: Unit Price $16 15 13 11 9

Quantity 720 850 830 900 930

Calculate the profit-maximizing price for the “how-to” books.

Answer Quantity Unit Price 720 $16 850 15 830 13 900 11 930 9 Profit maximizing price = $15

Unit Variable Cost $7.40 7.40 7.40 7.40 7.40

Contribution Margin $6,192 6,460 4,648 3,240 1,488

8- 32 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

134.

Budget Enterprises is considering a special order from an overseas customer for 10,000 units at a price of $40.00 per unit. The company’s product normally sells for $52.00 per unit and has variable manufacturing costs of $21.00 per unit and variable selling costs of $4.00 per unit. Fixed manufacturing costs are $500,000 and fixed selling and administrative costs are $200,000. Budget Enterprises has the capacity to produce 100,000 units and is currently producing 80,000. If Budget accepts the order, it will incur legal and accounting fees of $7,000 in connection with the order, though variable selling costs will not be incurred on the special order and it will not affect any of its other operations. a.

How much are the incremental revenues associated with the special order? b.

How much are the incremental costs associated with the special order? c.

How much additional profit or loss will be incurred if the order is accepted?

Answer a.

$40.00 × 10,000 =

$400,000

b.

$21.00 × 10,000 =

$210,000 7,000 $217,000

c.

$400,000 – $217,000 =

$183,000 profit

135.

Canon Equipment produces a machete that it sells for $45 each. The cost of producing 20,000 machetes in the prior year was: Direct material Direct labor Variable overhead Fixed overhead Total cost

$220,000 100,000 140,000 120,000 $580,000

At the start of the current year, the company received an order for 2,000 machetes from a company in South America. Management of Canon has mixed feelings about the order. On the one hand, they welcome the order because they currently have excess capacity. This is also the company’s first international order. On the other hand, the company in South America is only willing to pay $37 for each machete. What will be the effect on profit of accepting the order?

Answer Accepting the order will result in $28,000 of incremental profit.

Incremental revenue ($37 × 2,000) Incremental costs: Direct material ($11 × 2,000) Direct labor ($5 × 2,000) Variable overhead ($7 × 2,000) Incremental profit

$74,000 $22,000 10,000 14,000

46,000 $28,000

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136.

1.4 × ($40 + ($500,000 ÷ 50,000)) = $70.00

b.

1.3 × ($40 + ($500,000 ÷ 100,000) = $58.50

Mayfair Furniture is considering the production of an automatic reclining office chair that the company would price at a markup of 30% above full cost. Management estimates that the variable cost of each chair will be $80 and total fixed costs per year will be $34,000. a.

Assuming sales of 800 chairs, what is the full cost of a chair? b.

Assume that the quantity demanded at the price calculated in part a. is only 680 chairs. What is the full cost of each chair and what is the anticipated selling price?

Answer a.

b.

138.

8-33

Janus Decor produces and sells stainless steel patio chairs. Janus uses cost-plus pricing. The chairs have a variable cost per unit of $40.00. Janus has annual fixed costs of $500,000. a.

If Janus can sell 50,000 chairs and has a markup of 40% of total cost, what price will Janus charge? b.

If Janus can sell 100,000 chairs and has a markup of 30% of total cost, what price will Janus charge?

Answer: a.

137.

Pricing Decisions

Variable cost per unit Fixed costs per unit ($34,000 ÷ 800) Full cost per unit

$ 80.00 42.50 $122.50

Variable cost per unit Fixed costs per unit ($34,000 ÷ 680) Full cost per unit

$ 80.00 50.00 $130.00

Full cost per unit Markup of 30% Price

$130.00 39.00 $169.00

A company believes it can sell 40,000 of its proposed new combo cell phone/garage door openers at a price of $250 each. There will be annual fixed costs associated with developing, marketing, and manufacturing the gadget of $5,000,000. If the company desires to make a profit of 20% of selling price on the phone/opener, what is the target variable cost per unit?

Answer Revenues ($250 × 40,000) Profit (0.20 × $10,000,000) Fixed costs Total variable cost Variable cost per phone/opener

$10,000,000 (2,000,000) (5,000,000) $3,000,000 $75

8- 34 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

139.

The product design team of Steed Motors is in the process of designing a new 20” dirt bike.

The company estimates that variable costs will be $80 per unit and fixed costs will be $120,000 per year. a.

Suppose the company wants to set its price equal to full cost plus 25% and it estimates that it can sell 4,000 units. What price will the company set? b.

Suppose the company sets a price as in Part a, but the number of units demanded at that price turns out to be 3,000. Revise the price in light of the change in demand. c.

Compare the two prices you calculated. Why are the prices different? What is likely to happen to the quantity demanded if the company is forced to raise its price to the price calculated in part b?

Answer a.

140.

Variable cost per unit Fixed cost per unit ($120,000 ÷ 4,000) Total Markup of 25% Price

$ 80.00 30.00 110.00 27.50 $137.50

b.

Variable cost per unit Fixed cost per unit ($120,000 ÷ 3,000) Total Markup of 25% Price

$ 80.00 40.00 120.00 30.00 $150.00

c.

The price in the second scenario is higher because the fixed costs are being spread over fewer units causing the fixed cost per unit to be higher. As the full cost goes up, so does the markup and price. However, if price goes up, demand is likely to fall, so the company will not sell as many units as previously estimated.

Sanders Oven Company is developing a “professional” model oven aimed at the home market. The company estimates that variable costs will be $980 per oven and total fixed costs will be $840,000 per year. a.

Suppose the company wants to set its price equal to full cost plus 40 percent. The company estimates that it can sell 4,000 units. What price will the company set? b.

What is the risk involved with setting the price based on an estimate of how many units will be sold?

Answer a.

b.

Variable cost per unit Fixed cost per unit ($840,000 ÷ 4,000) Total Markup of 40% Price

$ 980 210 1,190 476 $1,666

Price influences the quantity demanded, but the estimated quantity demanded is being used to determine the price.

Chapter 8

141.

Pricing Decisions

8-35

A cross-functional team at Enrich, Inc. is developing a new product using the target costing method. Product features in comparison to competing products suggest a price of $1,500 per unit. The company requires a profit of 30% of selling price. How much is the target cost per unit?

Answer $1,500 – (30% × $1,500) = $1,050

142.

Savor Enterprises has determined the following costs for customers: Order processing (per order) Additional handling costs if order marked rush (per order) Customer service calls (per call) Relationship management costs (per customer per year)

$ 8.00 10.00 14.00 3,500

In addition to these costs, product costs amount to 85 percent of sales. In the prior year, the company had the following experience with Hanson Electronics, one of its customers: Sales Number of orders Percent of orders marked rush Calls to customer service

$54,000 250 70% 160

Calculate the profitability of the Hanson Electronics account.

Answer Sales Expenses: Cost of goods sold (0.85 × $54,000) $45,900 Order processing (250 × $8.00) 2,000 Rush handling (0.7 × 250 × $10.00) 1,750 Customer service (160 × $14.00) 2,240 Relationship management costs 3,500 Profitability/(loss) on customer Hanson Electronics

143.

$54,000

55,390 ($1,390)

Randall Equipment uses activity-based pricing. The pricing structure is to charge customers the direct cost of the products they order with a markup of 40% on direct costs plus the cost of the services that are provided. The service costs are $8.00 per order, $2.00 for each product that is ordered, and $1.50 per pound for shipping.

Wilson, Inc. made 10 orders for goods with a total direct cost of $4,000. Wilson ordered 50 different products that weighed a total of 560 lbs. What is the total price paid by Wilson?

Answer Direct cost Markup on direct cost Ordering cost (10 × $8) Picking costs (50 × $2) Shipping (560 × $1.50) Total price paid

$4,000 1,600 80 100 840 $6,620

8- 36 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

144.

Moscovitz Produce developed the following information on indirect costs for assessing customer profitability.

Cost Pool

Processing electronic orders Processing nonelectronic orders

Annual Cost

Cost Driver

$1,000,000

Number of orders

$2,000,000

Number of orders

Picking orders

$3,000,000

Packaging orders

$1,500,000

Returns

$3,000,000

Number of different products ordered Number of items ordered Number of returns

Annual Driver Quantity

Customer Acme Deli

Boson Cafe

500,000

500

0

400,000

0

1000

1,000,000

800

1800

50,000,000

1,000,000

1,000,000

50,000

2

200

Acme Deli and Boson Cafe each generated revenues in the last year of $600,000 and had direct costs associated with their orders of $450,000. How much is the cost per unit of the cost driver in each of the cost pools?

Answer Cost Pool

Processing electronic orders Processing non-electronic orders Picking orders Packaging orders Returns

Annual Cost

$1,000,000 $2,000,000 $3,000,000 $1,500,000 $3,000,000

Annual Driver Quantity

Cost per Driver unit

500,000 400,000 1,000,000 50,000,000 50,000

$2.00 per order $5.00 per order $3.00 per item $0.03 per item $60 per return

Chapter 8

145.

Pricing Decisions

8-37

Project Depot has determined the following costs for its customers using an activity-based costing system: Order processing (per order) Additional handling costs if order marked rush (per order) Customer service calls (per call) Relationship management costs (per customer per year)

$

6 9 14 3,500

In addition to these costs, product costs amount to 85 percent of sales. In the prior year, the company had the following experience with one of its customers, Shannon Tools: Sales Number of orders Percent of orders marked rush Calls to customer service

$54,000 250 70% 160

For the coming year, Project Depot has told Shannon Tools that it will be switched to an activity-based pricing system. In addition to regular prices, Shannon Tools will be required to pay: Order processing (per order) Additional handling costs if order marked rush (per order) Customer service calls (per call)

$8 10 18

Calculate the expected profitability of the Shannon Tools account for the coming year if activity is the same as in the prior year.

Answer Revenue Sales $54,000 Order processing fee (250 × $8) 2,000 Rush order fee (0.70 × 250 × $10) 1,750 Customer service fee (160 × $18) 2,880 Total revenue Expenses: Cost of goods sold (0.85 × $54,000) 45,900 Order processing (250 × $6.00) 1,500 Rush handling (0.70 × 250 × $9.00) 1,575 Customer service (160 × $14.00) 2,240 Relationship management costs 3,500 Profitability of Shannon Tools account

$60,630

54,715 $ 5,915

8- 38 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

146.

APL Internet Services has analyzed its customer and order handling data for the past year and has determined the following costs: Order processing cost per order Customer tech support calls (per call) Additional costs if tech support is after hours Relationship management costs (per customer per year)

$

4 7 12 $950

In addition to these costs, product costs amount to 80% of sales. In the prior year, APL had the following experience with Tapper Recreation, one of its customers: Sales Number of orders Calls to tech support Percent of tech support calls after hours

$9,400 42 62 40%

For the coming year, APL has told Tapper Recreation that it will be switched to an activitybased pricing system. In addition to regular prices, Tapper will be required to pay: Order processing (per order) $ 7 Customer tech support calls (per call) 15 Additional costs if a tech support call is after hours 28 Calculate the total revenue to be billed to Tapper Recreation if activity is the same as in the prior year.

Answer Sales Order processing fees ($7 × 42) Tech support calls ($15 × 62) After hours tech support calls ($28 × 40% × 62) Total revenue

$ 9,400 294 930 694 $11,318

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Pricing Decisions

8-39

CHALLENGE EXERCISES 147.

Smythe Moving Company has estimated monthly sales of $255,000. It estimates $166,000 of total manufacturing costs with 25% of these costs fixed. Its selling and distribution costs are estimated at a total of $42,000 with 30% of these costs fixed. a. b. c.

Answer a.

b.

c.

How much is Smythe’s markup percentage on full cost to arrive at the target selling price?

How much is Smythe’s markup percentage on variable costs to arrive at the target selling price?

Which approach might a manager prefer and why?

Sales Manufacturing costs $166,000 Selling and distribution 42,000 Full cost Profit Markup = $47,000 ÷ $208,000 = 22.60%

$255,000

208,000 $ 47,000

Sales Manufacturing variable costs ($166,000 × 75%) Selling and distribution ($42,000 × 70%) Variable cost Contribution margin Markup = $101,100 ÷ $153,900 = 65.69%

$255,000 $124,500 29,400 `

153,900 $101,100

Managers will prefer the approach that allows them to generate the highest amount of profit. In this case, both methods use the same selling price. Only the basis on which the markup is calculated differs. While the profit based on variable costs displays ‘profit’ at $101,100, fixed costs have not been deducted, so the profit only appears to be greater.

8- 40 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

148.

Lawn Butler is a local operation that provides mowing services for 300 customers each month. The company has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Budgeted amounts for 2014 appear below: Cost Pool

Cost

Repairs made due to mowing damage Processing billings Travel costs to customer's home Return visits for inadequate services

Cost Driver

$18,200 4,180 57,750 24,000

Quantity

Number of repairs Number of invoices sent Number of miles driven Hours incurred for return visits

350 880 105,000 800

The direct cost of each mowing is $24. Two customers are of concern to management, each of whom seem to be ‘high maintenance’. Data on these customers follows: S. Wallace Number of mowings Number of repairs Number of invoices sent Number of miles driven Hours incurred for return visits Customer revenue

Quantity 52 7 26 416 6 $2,220

H. Willis Number of mowings Number of repairs Number of invoices sent Number of miles driven Hours incurred for return visits Customer revenue

Quantity 24 2 12 620 15 $1,080

Discuss the profitability of each customer and recommend to management what action should be taken.

Answer Cost Pool

Cost

Repairs made due to mowing damage Processing billings Travel costs to customer's home Return visits for inadequate services

$18,200 4,180 57,750 24,000

Revenue Cost of mowing ($24*52); ($24*24) Gross margin Other costs: Repairs made due to mowing damage Processing billings Travel costs to customer's home Return visits for inadequate services Total other costs ABC Customer profitability

÷ ÷ ÷ ÷

Driver Quantity

Cost per Driver Unit

350 880 105,000 800

$52.00 4.75 0.55 30.00

S. Wallace

H. Willis

$2,220 1,248 972

$1,080 576 504

364 124 229 180 897 $ 75

104 57 341 450 952 ($ 448)

While customer Wallace has generated only a small amount of profit, he is still contributing $75 of profit for the year. Although he requests a number of repairs and requires numerous billings, the company is still earning a profit on his account. Customer Willis’s location is apparently quite a distance away as seen by the number of miles driven in spite of fewer mowing. He also has required several return visits for issues that may be considered ‘picky’ by some. One option is to charge for return visits, but sales may be lost to competitors since customers often think they are entitled to ‘good’ service done right the first time. The company may consider applying late fee charges for past due accounts, to cover the cost of additional billings. In addition, a mileage fee may be charged for customers who live outside a designated area to offset the additional costs of traveling. Lawn Butler should also consider training its employees to avoid situations that require repairs to be made, such as mowing sprinkler heads and damaging property with the mowers.

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Pricing Decisions

8-41

Southeast Pools uses cost-plus pricing with a 30% mark-up on total cost. The company is currently building 320 pools per year with total variable cost of $5,760,000. In addition, the company incurs $720,000 in fixed costs annually and has a capacity to build 450 pools. a. How much will the company price each pool on average? b. If demand falls to 250 pools and the company wants to continue to earn the same markup percentage on total cost as earned in part a., what price should the company charge per pool? c. Identify two problems with cost-plus pricing.

Answer a.

Variable cost per pool Fixed cost per pool ($720,000 ÷ 320) Total Markup of 30% Price

$18,000 2,250 20,250 6,075 $26,325

b.

Variable cost per pool Fixed cost per pool ($720,000 ÷ 250) Total Markup of 30% Price

$18,000 2,880 20,880 6,264 $27,144

c.

One problem is choosing what markup percentage to use. A second problem relates to a circular issue. Demand must be estimated to determine the fixed manufacturing costs per unit in order to determine the price. However, the price affects the quantity demanded, causing the number of units demanded to change.

SHORT-ANSWER ESSAYS 150.

Explain why cost-plus pricing is “circular”?

Answer Cost-plus pricing lets both the price and the quantity be selected without regard to market conditions. When the price is set, the quantity demanded in the market will most likely not be the quantity used to set the price in the first place. This means that a new price will have to be computed based on the actual quantity demanded at the old price. But again, the new price will not likely result in the quantity used to set it being achieved.

151.

Explain the steps involved in target costing and contrast it to cost-plus pricing.

Answer Target costing starts with the price that consumers are willing to pay for a given quantity of a product with a set of features. Then the company’s desired profit is subtracted to determine how much the cost can be. It is then the task of the design team to assess if a product can be developed at that cost. Cost-plus pricing takes the costs as a given, adds a markup and just assumes that the quantity used in setting the price can be sold at the price determined.

8- 42 Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

152.

What is activity-based pricing and why is it used?

Answer Activity-based pricing charges customers not only for the goods they purchase, but also for the costs of servicing them. It will encourage customers to minimize the use of expensive services, thus allowing the company to use fewer resources.

153.

What is CPM? For what purpose might managers use it?

Answer CPM is customer profitability measurement. It is a system that allocates the indirect costs of servicing customers to cost pools, and then assigns the costs to customers’ accounts using cost drivers. Subtracting indirect and product costs from customer revenue, results in a measure of profitability. Managers use this analysis to assess how profitable each customer is, and often decide to eliminate or change pricing for customers who consume excessive amounts of resources.