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Quizzes Out of 33 questions, you answered 9 correctly with a final grade of 27%
Multiple Choice Quiz 9 correct (27%)
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The correct answer for each question is indicated by a .

1 CORRECT Which of the following has a major influence on pricing decisions?

A) Customer demand

B) Actions of competitors

C) Costs

D) all of the above

Feedback: Each of the items, plus political, legal, and image-related issues, plays a
significant role in the determination of price setting for products and services. LO 1
2 Which of the following statements is false?
INCORRECT
A) Product design issues and pricing considerations are interrelated.

B) In only a few industries, both market forces and cost considerations heavily influence
prices.
C) Domestic and foreign competitors strive to sell their products to the same customer.

D) Collusion in price setting occurs when the major firms in an industry all agree to set
their prices at high levels.
Feedback:
In most industries, both market forces and cost considerations heavily prices. LO 1

3 Which of the following curves shows the relationship between the sales price and the quantity
INCORRECT of units demanded?
A) Marginal cost curve

B) Marginal revenue curve

C) Demand curve

D) Total cost curve

Feedback:
The demand curve, or average revenue curve, shows the relationship between the sales
price and the quantity of units demanded. LO 2

4 Which of the following curves shows the relationship between total sales revenue and the
INCORRECT quantity sold?
A) Marginal cost curve

B) Marginal revenue curve

C) Total cost curve

D) Total revenue curve

Feedback:
The total revenue curve shows the relationship between total sales revenue and the
quantity sold. The total revenue curve tends to be curvilinear—increasing at a
decreasing rate. LO 2

5 CORRECT Which of the following curves shows the change in total revenues that accompanies a change in
total quantity sold?
A) Marginal cost curve

B) Marginal revenue curve

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C) Demand curve

D) Total cost curve

Feedback:
The marginal revenue curve shows the change in total revenues that accompanies a
change in total quantity sold LO 2

6 CORRECT Which of the following curves graphs the relationship between total cost and the quantity
produced and sold each month?
A) Marginal cost curve

B) Marginal revenue curve

C) Demand curve

D) Total cost curve

Feedback:
The total cost curve graphs the relationship between total cost and the quantity
produced and sold each month. LO 2

7 CORRECT Which of the following curves shows the change in total cost that accompanies a change in the
quantity produced and sold?
A) Marginal cost curve

B) Marginal revenue curve

C) Average revenue curve

D) Total cost curve

Feedback:
The marginal cost curve shows the change in total cost that accompanies a change in the
quantity produced and sold. LO 2

8
INCORRECT

The 130-unit level may be referred to as which of the of the following?

A) Break-even point.

B) Cross-elasticity point.

C) Profit-maximizing quantity and price level.

D) Target price level.

Feedback: The quantity and price level at which the firm maximizes its profits is the level
at which total revenues exceed total cost by the widest margin; which in the illustration
above is 130 units. LO 2
9 Which of the following statements is false?
INCORRECT
A) Demand is inelastic if a price decrease has a large positive impact on sales quantity.

B) Demand is elastic if a price decrease has a large positive impact on sales volume.

C) Demand is inelastic if a price increase has little or no impact on sales quantity.

D) Demand is elastic if a price increase has a large negative impact on sales volume.
Feedback:
Demand is inelastic if a price increase (or decrease) has little or no impact on sales
quantity. Demand is elastic if a price increase has a large negative impact on sales
volume, and vice versa. LO 2

10 Which of the following is a limitation of the profit-maximizing model?

INCORRECT
A) The marginal-revenue, marginal-cost paradigm is not valid in all forms of market
organization.
B) The firm's demand and marginal revenue curves are difficult to discern with precision.

C) Marginal cost is difficult to measure.

D) All of the above are true.

Feedback: The economic model of pricing decision serves as a useful model for
approaching pricing problem. However, it does have several limitations, as described in
Options A, B, and C. LO 2

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11
CORRECT

Using a markup percentage on variable manufacturing cost of 140%, calculate the selling
price.
A) $1,200

B) $700

C) $1,900

D) $1,100
Feedback:
The basic formula for cost-plus pricing is: Price = Cost + (Markup percentage x Cost).
Price = Variable manufacturing cost + (Markup percentage x Variable manufacturing
cost). The selling price is $1,200 (= $500 + (1.40 x $500)). LO 3

12
INCORRECT

Using a markup percentage on absorption manufacturing cost of 65%, calculate the selling
price.
A) $800

B) $1,080

C) $1,320

D) $2,120
Feedback:
The basic formula for cost-plus pricing is: Price = Cost + (Markup percentage x Cost).
Price = Absorption manufacturing cost + (Markup percentage x Absorption
manufacturing cost). The selling price is $1,320 (= $800 + (0.65 x $800)). LO 3

13
INCORRECT

Using a markup percentage on total cost of 35%, calculate the selling price.
A) $2,115

B) $1,215

C) $900

D) $2,120
Feedback:
The basic formula for cost-plus pricing is: Price = Cost + (Markup percentage x Cost).
Price = Total cost + (Markup percentage x Total cost). The selling price is $1,215 (=
$900 + (0.35 x $900)). LO 3

14 Most companies that use cost-plus pricing use either absorption manufacturing cost or total
INCORRECT cost as the basis for pricing products and services. Which of the following is a general reason
for this tendency?
A) Absorption-cost or total-cost pricing formulas provide a justifiable price that tends to be
perceived as equitable to all parties, including consumers,
B) Cost-plus pricing based on full costs gives management an idea of how competitors
with similar operations and cost structures may set prices.
C) Since absorption-cost information already exists, it is cost-effective to use it for pricing.

D) All of the above are reasons for companies to use either absorption manufacturing cost
or total cost as the basis for pricing products and services.

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Feedback:
In the long run, the price must cover all costs and a normal profit margin. Justifying a
price as the total cost of production, sales, and administrative activities, plus a
reasonable profit margin, seems reasonable to buyers. LO 3

15 To avoid blurring the effects of cost behavior on profit, some managers prefer to use cost-plus
INCORRECT pricing formulas based on either variable manufacturing costs or total variable costs. Which of
the following is a disadvantage of using variable costs?
A) It provides exactly the type of information necessary to accept or reject a special order
decision.
B) Variable costs are often perceived to be the floor for the price of a product or service.

C) The allocation of common fixed costs to individual products is not required with
variable-cost data.
D) Variable-cost information is more consistent with cost-volume-profit analysis.
Feedback:
The primary disadvantage of the variable-costing pricing formula is that when managers
perceive the variable cost of the product or service to be the floor for the price. The
 results can spell disaster for the firm. LO 3

16
INCORRECT

To the nearest tenth, what is the markup percentage using the cost-plus formula based on
total costs?
A) 22.9%

B) 40.0%

C) 20.0%

D) 65.7%
Feedback:
A formula for determining the markup percentage under cost-plus pricing based on total
costs is: Target profit/(Annual volume x Total cost per unit). The target profit is $80,000
(= $400,000 x 0.20). The markup percentage is 22.9% (= $80,000/$350,000). LO 3

17
INCORRECT

To the nearest tenth, what is the markup percentage using the cost-plus formula based on
total variable costs?
A) 22.9%

B) 65.7%

C) 115.0%

D) 153.3%
Feedback:
A formula for determining the markup percentage under cost-plus pricing based on total
variable costs is:

18 The markup percentage under cost-plus pricing based on total variable cost is 115.0%. Total
INCORRECT variable costs are $200,000 and total fixed costs are $150,000, based on a 500 unit annual
volume. Use the total variable-cost pricing method and calculate the per-unit selling price.
A) $700

B) $805

C) $860

D) $460
Feedback: Selling price = Total variable cost + (Markup percentage x Total variable
cost). The variable cost per unit is $400 (= $200,000/500). The selling price is $860 (=
$400 + (115.0% x $400)). LO 3
19 The markup percentage under cost-plus pricing based on total costs is 22.86%. Total variable
CORRECT costs are $200,000 and total fixed costs are $150,000, based on an annual volume of 500
units. Use the total-cost pricing method and calculate the selling price.

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A) $700

B) $805

C) $860

D) $460
Feedback: Selling price = Total cost + (Markup percentage x Total cost). The total price
per unit is $700 (= ($200,000 + $150,000)/500). The selling price is $860 (= $700 +
($700 x 22.86%)). LO 3
20 Total variable manufacturing costs are $100,000 and total fixed costs are $150,000, based on
INCORRECT an annual volume of 500 units. The markup percentage necessary to cover all fixed costs and
provide a reasonable profit is 330.0%. Use the variable manufacturing-cost pricing method and
calculate the selling price per unit.
A) $700

B) $805

C) $860

D) $460
Feedback: Selling price = Variable manufacturing cost + (Markup percentage x Variable
manufacturing cost). The variable manufacturing cost per unit is $200 (=
$100,000/500). The selling price is $860 (= $200 + (330.0% x $200)). LO 3
21 What is the numerator in the general formula for computing the markup percentage in
CORRECT cost-plus pricing to achieve a target return on investment (ROI)?
A) The profit required to achieve target ROI + Total annual costs not included in cost
base.
B) The profit required to achieve target ROI + Total annual fixed costs.

C) The profit required to achieve target ROI + Total variable cost per unit.

D) The profit required to achieve target ROI + Total annual costs.

Feedback:
The general formula for computing the markup percentage in cost-plus pricing to
achieve a target ROI is:

22 Which of the following statement is false when summarizing cost-plus pricing?

INCORRECT
A) Cost-plus pricing formulas are complex

B) Cost-plus pricing formulas establish a starting point in setting prices.

C) Cost-plus pricing formulas can be used with a variety of cost definitions.

D) Absorption-cost-plus or total-cost-plus pricing keeps managers focused on covering

total costs.
Feedback: Cost-plus formulas are simple, and can be applied mechanically without
taking the time of top management. LO 3
23 What is the pricing strategy of setting initial prices relatively low when introducing a new
CORRECT product to the market place called?
A) Predatory pricing.

B) Skimming pricing.

C) Penetration pricing.

D) Target costing.
Feedback:
This pricing strategy is known as penetration pricing. It is often used for products that
are of good quality, but do not stand out as vastly better than competing products. LO 4

24 What is the pricing strategy of the initial product price high to reap short-run profits called?
INCORRECT
A) Predatory pricing.

B) Penetration pricing.

C) Skimming pricing.

D) Target costing.
Feedback:
This pricing strategy is called skimming pricing. This pricing approach is used unique
products, where there are people who "must have it" whatever the price. LO 4, 11

25 Which of the following is a key principle of target costing?

INCORRECT

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A) Price-led costing

B) Focus on product design

C) Focus on process design

D) All of the above

Feedback: The key principles include: Price-led pricing, Focus on the customer, Focus on
product design, Focus on process design, Cross-functional teams, Life-cycle costs, and
Value-chain orientation. LO 5
26 In which of the key principles of target costing is the effort focused on eliminating
INCORRECT non-value-added costs.
A) Focus on customers

B) Focus on product design

C) Value-chain orientation

D) Life-cycle costs
Feedback:
In the key principle of target costing referred to as value-chain orientation, efforts are
made to eliminate non-value-added costs to reduce the projected target cost. LO 5

27 Which of the key principles of target costing focuses on the costs of product planning and
INCORRECT concept design, preliminary design, detailed design and testing, production, distribution, and
customer service?
A) Focus on customers

B) Focus on product design

C) Value-chain orientation

D) Life-cycle costs
Feedback:
Traditional cost-accounting systems have tended to focus on the production phase and
not paid enough attention to the product's other life-cycle costs. LO 5

28 Which of the following statements is false when examining the roles of activity-based costing
INCORRECT (ABC) in setting a target cost, how product-cost pricing can undermine a firm's pricing
strategy, and the roll of value engineering in target costing?
A) Activity-based costing (ABC) enables designers to break down the production process
of a new product into its component parts.
B) Use of a traditional, volume-based product-costing system seldom results in significant
cost distortion among product lines.
C) Target costing is an outgrowth of the concept of value engineering.

D) A manufacturer's computer-aided design and cost-accounting software are

interconnected under computer-integrated manufacturing (CIM), and the process of
target costing is sometimes computerized.
Feedback: Use of a traditional, volume-based product-costing system may result in
significant cost distortion among product lines. In many cases, high-volume and
relatively simple products are overcosted while low-volume and complex products are
undercosted. LO 6, 7, 8
29
INCORRECT

What should be the hourly labor cost charged to jobs?

A) $23.00

B) $ 7.00

C) $17.42

D) $33.50
Feedback: Time charges are determined as Hourly labor cost + [(Annual overhead cost
less material handling)/Annual labor hours] + Hourly charge to cover profit margin: The
hourly labor rate is $33.50 (= $15.00 + ($126,000/12,000) + $8.00). LO 9
30
INCORRECT

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What should be the material handling and storagecost per dollar of material?
A) $0.01

B) $0.10

C) $1.00

D) $1.10
Feedback: The per dollar of material cost to charge to each job should be determined by
dividing material handling and storage costs by the annual cost of materials: The
material handling and storage cost per dollar of material is $0.10 (=
$24,000/$240,000). LO 9
31 In a competitive bidding situation, when the firm has excess capacity, which of the following is
INCORRECT true about the bid price?
A) It should include a portion of fixed costs

B) It should include all of the fixed costs

C) It should exceed the variable cost of completing the product

D) It should be one dollar less than the normal price

Feedback: With excess capacity, any bid price that exceeds the variable cost of
completing the product or service would be acceptable. The excess will help cover
existing fixed costs and add to net profit. LO 10
32 In a competitive bidding situation, when the firm has no excess capacity, the bid price should
INCORRECT be which of the following?
A) Be greater than the total variable costs but less than total costs.

B) Equal to the opportunity costs.

C) At least equal to total costs

D) Never less than total costs

Feedback:
At a bid price equal to total cost, there will be no profit or loss on the bid. With no excess
capacity, the opportunity cost is the cost of the foregone sales price of the product, and
the product would likely not be bid at sales price in a competitive bidding situation. A
product may be bid at less than total costs if qualitative factors outweigh the firm's
desire to make a profit on the product. LO 10

33 What is the practice of temporarily reducing a price to broaden demand for a product, with the
CORRECT intention of later restricting the supply and raising the price?
A) Predatory pricing.

B) Skimming pricing.

C) Penetration pricing.

D) Target costing.
Feedback:
This practice is called predatory pricing and is prohibited by law. LO 11

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