HiltonPlatt 11e TB Ch15
HiltonPlatt 11e TB Ch15
Chapter 15
Target Costing and Cost Analysis for Pricing Decisions
Answer Key
1. Setting prices requires a balance between cost considerations and market forces.
TRUE
2. Due to cost-based pricing, an organization or industry can price its products below their
production costs indefinitely.
FALSE
3. The revenue curve shows the relationship between the sales price and quantity sold.
FALSE
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
4. The marginal revenue curve shows the relationship between the change in total revenue that
accompanies a change in quantity sold.
TRUE
5. If a company uses a cost-plus approach to pricing, it will find that there are several different
definitions of cost and the higher the cost, the higher the markup percentage.
FALSE
6. A firm typically uses only one of the three cost-plus pricing formulas.
FALSE
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
7. Penetration pricing is a pricing strategy in which a new product's initial price is set
relatively low in order to gain a large market share.
TRUE
FALSE
9. Matton Corporation manufactures a single product that has a cost of $350. The company
uses a 70% markup on cost to arrive at a selling price of $595, which results in a price that
virtually always exceeds that of the market leaders. If Matton changes to the approach known
as target costing, the company will first undertake a thorough study of competitors' prices.
TRUE
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-05
Feedback True: Correct! Target costing requires a thorough study of competitor prices.
Feedback False: Target costing requires a thorough study of competitor prices.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
FALSE
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-05
Feedback True: Target costing involves seven key principles.
Feedback False: Correct! Target costing involves seven key principles.
11. When a computer-integrated manufacturing (CIM) system is used, the process of target
costing sometimes is computerized.
TRUE
12. When activity-based costing is integrated with target costing, a product’s projected costs
always go up.
FALSE
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-06
Feedback True: Since cost is the target, ABC allows a focus on key activities that reduce projected costs.
Feedback False: Correct! Since cost is the target, ABC allows a focus on key activities that reduce projected costs.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
13. In many cases, traditional, volume based product costing may overcost low-volume and
complex products, while undercosting high-volume and relatively simple products.
FALSE
TRUE
FALSE
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
16. Much of the historical development of the target-costing approach has taken place in
German industry.
FALSE
17. Under the time and material pricing approach, the company determines one charge for the
labor used on a job, another charge for the materials, and then averages the two to apply one
charge for everything.
FALSE
TRUE
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
19. In a competitive bidding situation where all of the companies submitting bids offer a
roughly equivalent product or service, the amount of variable overhead becomes the sole
criterion for selecting the contractor.
FALSE
20. When a firm has excess capacity, a price that covers the incremental costs incurred
because of the job will contribute toward covering the company’s fixed cost and profit.
TRUE
21. The law prohibits price discrimination of quoting different prices to different customers
for the same product or service, but it permits predatory pricing to establish initial markets.
FALSE
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
22. One of the Congressional acts that restricts certain types of pricing behavior is the
Robinson-Patman Act.
TRUE
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-11
Feedback True: Correct! The Robinson-Patman Act, along with the Clayton Act and the Sherman Act, restrict certain types of pricing
behavior.
Feedback False: The Robinson-Patman Act, along with the Clayton Act and the Sherman Act, restrict certain types of pricing behavior.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-01
Feedback A: Although this factor can influence a company’s pricing decisions, there is a better answer choice.
Feedback B: Although this factor can influence a company’s pricing decisions, there is a better answer choice.
Feedback C: Although this factor can influence a company’s pricing decisions, there is a better answer choice.
Feedback D: Although this factor can influence a company’s pricing decisions, there is a better answer choice.
Feedback E: Correct! All of these factors can influence a company’s pricing decisions.
24. Which of the following choices correctly denotes factors that can influence a company's
pricing practices for goods and services?
Market Conditions Costs Customer Demand
A. No Yes Yes
B. No Yes No
C. Yes Yes Yes
D. Yes Yes No
E. Yes No Yes
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-01
Feedback A: This answer combination is incorrect.
Feedback B: This answer combination is incorrect.
Feedback C: Correct! All of these factors can influence a company’s pricing decisions.
Feedback D: This answer combination is incorrect.
Feedback E: This answer combination is incorrect.
15-9
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-01
Feedback A: Correct! This factor does not have a major influence on pricing decisions.
Feedback B: This factor has a major influence on pricing decisions.
Feedback C: This factor has a major influence on pricing decisions.
Feedback D: This factor has a major influence on pricing decisions.
Feedback E: This factor has a major influence on pricing decisions.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-01
Feedback A: While this statement is true, there is a better answer choice.
Feedback B: While this statement is true, there is a better answer choice.
Feedback C: While these statements are true, there is a better answer choice.
Feedback D: While these statements are true, there is a better answer choice.
Feedback E: Correct! All of these statements are true.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
27. The curve that shows the relationship between the sales price and quantity sold is called
the:
A. marginal revenue curve.
B. average cost curve.
C. profit curve.
D. demand curve.
E. revenue curve.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-02
Feedback A: This curve does not show the relationship between the sales price and quantity sold.
Feedback B: This curve does not show the relationship between the sales price and quantity sold.
Feedback C: This curve does not show the relationship between the sales price and quantity sold.
Feedback D: Correct! The demand curve shows the relationship between the sales price and quantity sold.
Feedback E: This curve does not show the relationship between the sales price and quantity sold.
28. The curve that shows the relationship between the total sales revenue and quantity sold is
called the:
A. marginal revenue curve.
B. average cost curve.
C. profit curve.
D. demand curve.
E. revenue curve.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-02
Feedback A: This curve does not show the relationship between the total sales revenue and quantity sold.
Feedback B: This curve does not show the relationship between the total sales revenue and quantity sold.
Feedback C: This curve does not show the relationship between the total sales revenue and quantity sold.
Feedback D: This curve does not show the relationship between the total sales revenue and quantity sold.
Feedback E: Correct! The revenue curve shows the relationship between the total sales revenue and quantity sold.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
29. On a graph where the horizontal axis represents quantity sold and the vertical axis
represents selling price, the basic demand curve in a competitive market can be graphed:
A. as a horizontal line.
B. as a vertical line.
C. as a downward sloping line to the right.
D. as an upward sloping line to the right.
E. in the same manner as the total revenue curve.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-02
Feedback A: This is incorrect for the basic demand curve.
Feedback B: This is incorrect for the basic demand curve.
Feedback C: Correct! The basic demand curve in a competitive market can be graphed as a downward sloping line to the right.
Feedback D: This is incorrect for the basic demand curve.
Feedback E: This is incorrect for the basic demand curve.
30. The curve that shows the change in total revenue that accompanies a change in quantity
sold is called the:
A. marginal revenue curve.
B. average cost curve.
C. profit curve.
D. demand curve.
E. revenue curve.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-02
Feedback A: Correct! This correctly describes the marginal revenue curve.
Feedback B: This curve is incorrect.
Feedback C: This curve is incorrect.
Feedback D: This curve is incorrect.
Feedback E: This curve is incorrect.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
31. The curve that shows the change in total cost that accompanies a change in quantity
produced and sold is called the:
A. marginal revenue curve.
B. marginal cost curve.
C. profit curve.
D. average revenue curve.
E. revenue curve.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-02
Feedback A: This curve is incorrect.
Feedback B: Correct! This description correctly describes the marginal cost curve.
Feedback C: This curve is incorrect.
Feedback D: This curve is incorrect.
Feedback E: This curve is incorrect.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-02
Feedback A: This description does not describe the profit maximizing quantity.
Feedback B: This description does not describe the profit maximizing quantity.
Feedback C: This description does not describe the profit maximizing quantity.
Feedback D: Correct! The profit maximizing quantity is where the marginal revenue curve intersects with the marginal cost curve.
Feedback E: This description does not describe the profit maximizing quantity.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-02
Feedback A: This statement about demand is incorrect.
Feedback B: This statement about demand is incorrect.
Feedback C: This statement about demand is incorrect.
Feedback D: Correct! Demand is elastic.
Feedback E: This statement about demand is incorrect.
34. Under which of the following condition(s) are prices said to be elastic?
15-14
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-02
Feedback A: This is a true statement.
Feedback B: This is a true statement.
Feedback C: Correct! It is false that demand is elastic if price changes have no impact on sales volume.
Feedback D: This is a true statement.
Feedback E: This is a true statement.
15-15
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 15-02
Feedback A: This statement is true, but there is a better answer choice.
Feedback B: This statement is true, but there is a better answer choice.
Feedback C: Correct! Both statements I and III are true.
Feedback D: One of these answers is false.
Feedback E: One of these answers is false.
38. In a typical business, the firm's overall demand would be influenced by interactions of
pricing policies and:
A. the company's reputation.
B. the quality of goods and services offered.
C. competing goods and services.
D. advertising and promotional campaigns.
E. All of these factors.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-02
Feedback A: Overall demand is influence by interactions of pricing policies and this factor; however, there is a better answer choice.
Feedback B: Overall demand is influence by interactions of pricing policies and this factor; however, there is a better answer choice.
Feedback C: Overall demand is influence by interactions of pricing policies and this factor; however, there is a better answer choice.
Feedback D: Overall demand is influence by interactions of pricing policies and this factor; however, there is a better answer choice.
Feedback E: Correct! All of these factors are correct.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
39. Consider the following statements about why prices are often based on product costs:
I. Companies sell many products and services, and cost-based approaches provide a simple
and direct pricing method.
II. The cost of a product or service provides a lower limit or floor, below which price should
not be set in the long run.
III. Determining a company's demand and marginal revenue curves is difficult, costly, and
time consuming.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-02
Feedback A: This statement is true, but there is a better answer choice.
Feedback B: This statement is true, but there is a better answer choice.
Feedback C: These statements are true, but there is a better answer choice.
Feedback D: These statements are true, but there is a better answer choice.
Feedback E: Correct! All of these statements are true.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-03
Feedback A: Correct! This is the correct cost-plus pricing formula.
Feedback B: This formula is incorrect.
Feedback C: This formula is incorrect.
Feedback D: This formula is incorrect.
Feedback E: This formula is incorrect.
15-17
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-03
Feedback A: This statement is false regarding the cost-plus approach to pricing.
Feedback B: Correct! This statement is true regarding the cost-plus approach to pricing.
Feedback C: This statement is false regarding the cost-plus approach to pricing.
Feedback D: This statement is false regarding the cost-plus approach to pricing.
Feedback E: This statement is false regarding the cost-plus approach to pricing.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 15-03
Feedback A: Correct! This statement is true regarding the cost-plus approach to pricing.
Feedback B: This statement is false regarding the cost-plus approach to pricing.
Feedback C: This statement is false regarding the cost-plus approach to pricing.
Feedback D: This statement is false regarding the cost-plus approach to pricing.
Feedback E: This statement is false regarding the cost-plus approach to pricing.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
43. Patterson and Clay Companies both use cost-plus pricing formulas and arrived at a selling
price of $1,000 for the same product. Patterson uses absorption manufacturing cost as the
basis for computing its dollar markup whereas Clay uses total cost. Which of the following
choices correctly denotes the company that would have (1) the higher cost basis for deriving
its dollar markup and (2) the higher markup percentage?
A. Patterson Patterson
B. Patterson Clay
C. Clay Patterson
D. Clay Clay
E. More information is needed to judge.
44. Durango Industries employs cost-plus pricing formulas to derive selling prices for its
various products. If the formulas are all used correctly, which of the following cost bases will
result in the highest selling price?
A. Variable manufacturing cost.
B. Absorption manufacturing cost.
C. Total variable cost.
D. Total cost.
E. None of these because if the formulas are applied correctly, all should result in the same
selling price through the use of varying markups.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
46. The difference between absorption manufacturing cost and total cost with respect to
product pricing is caused by:
A. variable manufacturing cost.
B. applied fixed manufacturing cost.
C. variable selling and administrative cost.
D. allocated fixed selling and administrative cost.
E. both variable selling and administrative cost and allocated fixed selling and administrative
cost.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
Feedback D: While this is one statement that causes the difference, there is a better answer choice.
Feedback E: Correct! Both of these cause the difference.
47. Collins Company uses cost-plus pricing and has calculated total variable manufacturing
cost, total absorption manufacturing cost, and total cost for one of its products. Which of these
costs would be the smallest?
A. Total variable manufacturing cost.
B. Total absorption manufacturing cost.
C. Total cost.
D. There is no difference between total absorption manufacturing cost and total cost.
E. More information is needed to correctly answer the question.
48. Which of the following formulas represents the markup percentage on total cost?
A. Target profit annual volume.
B. Target profit (annual volume total cost per unit).
C. (Annual volume total cost per unit) target profit.
D. Target profit variable cost.
E. (Target profit total cost per unit) annual volume.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-03
Feedback A: This formula is incorrect.
Feedback B: Correct! This is the correct formula.
Feedback C: This formula is incorrect.
Feedback D: This formula is incorrect.
Feedback E: This formula is incorrect.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
49. When determining the markup to be used in a cost-plus pricing formula, many companies
base the markup on a target:
A. return on investment.
B. sales margin.
C. capital turnover.
D. earnings per share.
E. debt-to-equity ratio.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-03
Feedback A: Correct! Many companies base the markup on a target return on investment.
Feedback B: This is typically not the target used.
Feedback C: This is typically not the target used.
Feedback D: This is typically not the target used.
Feedback E: This is typically not the target used.
50. The following costs relate to Tower Company: Variable manufacturing cost, $30; variable
selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated
fixed selling and administrative cost, $4. If Tower uses absorption manufacturing-cost pricing
formulas, the company's markup percentage would be computed on the basis of:
A. $30.
B. $38.
C. $45.
D. $57.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! Markup percentage would be computed on manufacturing costs of $30 + $15= $45.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-22
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
51. The following costs relate to Tower Company: Variable manufacturing cost, $30; variable
selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated
fixed selling and administrative cost, $4. If Tower uses total-cost pricing formulas, the
company's markup percentage would be computed on the basis of:
A. $30.
B. $38.
C. $45.
D. $57.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! Total cost pricing markup percentage would be computed on the basis of all the costs(manufacturing and selling): $30
+ $15 + $8 + $4 = $57.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-23
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
What price will the company charge if the firm uses cost-plus pricing based on total cost and a
markup percentage of 60%?
A. $63.
B. $168.
C. $175.
D. $280.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: Correct! This would be 60% of the total costs (manufacturing and selling) or 60% x ($60 + $30 + $10 + $5) = $105 + (60% x
$105) = $168.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-24
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
What price will the company charge if the firm uses cost-plus pricing based on absorption
manufacturing cost and a markup percentage of 110%?
A. $84.
B. $147.
C. $210.
D. $231.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! $70 + $40 = $110; $110 + ($110 x 1.1) = $231.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-25
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
What price will the company charge if the firm uses cost-plus pricing based on variable
manufacturing cost and a markup percentage of 110%?
A. $84.
B. $147.
C. $210.
D. $231.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: Correct! $70 + ($70 x 1.1) = $147.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-26
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
The Pines Company, which manufactures office equipment, is ready to introduce a new line
of portable copiers. The following copier data are available:
56. What price will the company charge if the firm uses cost-plus pricing based on total
manufacturing cost and a markup percentage of 160%?
A. $150.
B. $384.
C. $390.
D. $624.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! $180 + $60 = $240 total manufacturing costs; $240 + ($240 x 1.6) = $624.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
57. What price will the company charge if the firm uses cost-plus pricing based on total
variable cost and a markup percentage of 120%?
A. $420.
B. $459.
C. $594.
D. $672.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! $180 + $90 = $270; $270 + ($270 x 1.2) = $594.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
58. What price will the company charge if the firm uses cost-plus pricing based on total cost
and a markup percentage of 40%?
A. $462.
B. $513.
C. $567.
D. $594.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! Total cost = $180 + $90 + $60 + $75 = $405; $405 + ($405 x 40%) = $567.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
59. Musik Corporation uses a 140% markup on total cost and recently computed a selling
price of $1,560 for a particular product. On the basis of this information, the product's total
cost is:
A. $650.00.
B. $910.00.
C. $1,114.29.
D. $2,184.00.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: Correct! Price = Cost + (Markup percentage × Cost); $1,560 = X + (1.4X); X = $650.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
60. Fantasy Transport Company has average invested capital of $800,000 and a target return
on investment of 15%. The total cost per unit is $20 based on a volume level of 25,000 units.
Fantasy’s markup percentage on total cost is:
A. 9.375%.
B. 24.0%.
C. 47.5%.
D. 62.5%.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: Correct! $800,000 x 15% = $120,000 return; $120,000 ÷ 25,000 = $4.80; $4.80 ÷ $20 = 24%
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-29
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
61. If the target profit is $60,000 for a volume of 480 units, fixed costs are $168,000, and the
variable cost per unit is $450, then the markup percentage on variable cost would be:
A. 104.56%.
B. 105.56%.
C. 106.00%.
D. 106.45%.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: Correct! $450 x 480 = $216,000; $168,000 + $60,000 = $228,000 ÷ $216,000 = 105.56%.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-30
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
Variable costs:
Manufacturing $450,000
Selling and Administrative 100,000
Total variable costs $550,000
Fixed costs:
Manufacturing $300,000
Selling and Administrative 180,000
Total fixed costs 480,000
Total costs $1,030,000
The average amount of capital invested in the laptop product line is $900,000 and
Longwood’s target return on investment is 18%.
62. What price must Longwood charge if the company uses cost-plus pricing based on total
cost?
A. $868.
B. $900.
C. $1,000.
D. $1,192.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! $1,030,000 + ($900,000 x 18%) = $1,192,000; $1,192,000 ÷ 1,000 = $1,192.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
63. If Longwood uses cost-plus pricing based on absorption cost, the markup percentage the
company must use would be:
A. 15.72%.
B. 21.64%.
C. 29.56%.
D. 58.93%.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! Manufacturing costs = $450,000 + $300,000 = $750,000; $750,000 x (1 + X) = $1,192,000; X = 58.93%.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
64. What price must Longwood charge if the company uses cost-plus pricing based on total
variable cost?
A. $712.
B. $900.
C. $1,030.
D. $1,192.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! $1,030,000 + ($900,000 x 18%) = $1,192,000; $1,192,000 ÷ 1,000 = $1,192.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
65. Which of the following terms describes a pricing strategy in which a new product's initial
price is set high and then eventually lowered to appeal to a broader range of customers?
A. Penetration pricing.
B. Price skimming.
C. Customer pricing.
D. Designed pricing.
E. Market-share pricing.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-04
Feedback A: This is not the correct term.
Feedback B: Correct! This is the correct definition of price skimming.
Feedback C: This is not the correct term.
Feedback D: This is not the correct term.
Feedback E: This is not the correct term.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-04
Feedback A: This statement is incorrect.
Feedback B: This statement is incorrect.
Feedback C: Correct! This is the correct definition of price skimming.
Feedback D: This statement is incorrect.
Feedback E: This statement is incorrect.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
67. Which of the following terms describes a pricing strategy in which a new product's initial
price is set relatively low in order to gain a large market share?
A. Penetration pricing.
B. Price skimming.
C. Customer pricing.
D. Designed pricing.
E. Market-share pricing.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-04
Feedback A: Correct! This is the correct definition of penetration pricing.
Feedback B: This is not the correct term.
Feedback C: This is not the correct term.
Feedback D: This is not the correct term.
Feedback E: This is not the correct term.
68. Company A uses a pricing approach where the initial price for a product is set high and
then lowered, and Company B uses an approach where initial prices are set low in an effort to
gain market share. What terms best describe these practices?
Company A Company B
A. Predatory Skimming
B. Penetration Predatory
C. Skimming Penetration
D. Skimming Predatory
E. Predatory Penetration
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
69. Charlene Company, which desires to enter the market with a new product, will perform
the following tasks:
1—Design and engineer the product.
2—Determine the product's cost.
3—Determine the desired profit margin.
4—Determine the suggested selling price.
If Charlene uses target costing, which task would the company perform first?
A. 1.
B. 2.
C. 3.
D. 4.
E. None of the answers is correct.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-05
Feedback A: This is not the first step.
Feedback B: This is not the first step.
Feedback C: This is not the first step.
Feedback D: Correct! Charlene should first determine the suggested selling price.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
70. The four tasks that follow take place with the concept known as target costing:
1—Value engineering.
2—Establish a target selling price.
3—Establish a target cost.
4—Establish a target profit.
Which of the following choices depicts the correct sequence of these tasks?
A. 1, 3, 4, 2.
B. 3, 1, 4, 2.
C. 2, 4, 3, 1.
D. 2, 3, 1, 4.
E. Some other sequence not listed.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-05
Feedback A: This is the correct sequence.
Feedback B: This is not the correct sequence.
Feedback C: Correct! This is the correct sequence.
Feedback D: This is the correct sequence.
Feedback E: This answer is wrong because there is a correct sequence listed.
71. Charter Corporation manufactures a single product that has a cost of $350. The company
uses a 70% markup on cost to arrive at a selling price of $595, which results in a price that
virtually always exceeds that of the market leaders. If Charter changes to the approach known
as target costing, the company will first:
A. reduce its 70% markup rate.
B. trim its $350 cost.
C. attempt to re-engineer its product.
D. undertake a thorough study of competitors' prices.
E. change the markup so that it is based on sales rather than based on cost.
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-05
Feedback A: This statement is incorrect.
Feedback B: This statement is incorrect.
Feedback C: This statement is incorrect.
Feedback D: Correct! The company will undertake a thorough study of competitors’ prices when switching to target costing.
Feedback E: This statement is incorrect.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-05
Feedback A: Correct! This feature is typically absent in target costing.
Feedback B: This feature is not absent in target costing.
Feedback C: This feature is not absent in target costing.
Feedback D: This feature is not absent in target costing.
Feedback E: This feature is not absent in target costing.
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-05
Feedback A: While this is a key feature of target costing, there is a better answer choice.
Feedback B: While this is a key feature of target costing, there is a better answer choice.
Feedback C: While this is a key feature of target costing, there is a better answer choice.
Feedback D: While this is a key feature of target costing, there is a better answer choice.
Feedback E: Correct! All of these are key features of target costing.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
74. Flagler Electronics currently sells a camera for $240. An aggressive competitor has
announced plans for a similar product that will be sold for $205. Flagler’s marketing
department believes that if the price is dropped to meet competition, unit sales will increase
by 10%. The current cost to manufacture and distribute the camera is $175, and Flagler has a
profit goal of 20% of sales. If Flagler meets competitive selling prices, what is the company's
target cost?
A. $41.
B. $48.
C. $164.
D. $175.
E. $192.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-05
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! Target cost should be $205 x 80% = $164.
Feedback D: This amount is incorrect.
Feedback E: This amount is incorrect.
75. Miami Industries currently sells an industrial mixer for $900 that market leaders sell for
$820. The current costs to manufacture and distribute the mixer total $645, and the company
has a profit goal of 30% of sales. Miami uses target costing in its efforts to be a leader in the
marketplace. On the basis of this information, (1) what should Miami consider to be the initial
driver of the target-costing process and (2) what amount of cost reduction is needed for the
company to achieve its goals?
Initial Driver Cost Reduction
A. Current price of $900 $15
B. Current price of $900 $71
C. Market leaders’ price of $820 $15
D. Market leaders’ price of $820 $71
E. Market leaders’ price of $820 Some other amount
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-05
Feedback A: This answer combination is incorrect.
Feedback B: This answer combination is incorrect.
Feedback C: This answer combination is incorrect.
Feedback D: Correct! The company should meet the market leaders’ price of $820, which would mean a targeted cost reduction of $71,
calculated as: [$645 – ($820 x 70%)] = $645 - $574 = $71.
Feedback E: This answer combination is incorrect.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
76. Rudy Enterprises currently sells a piece of luggage for $200. An aggressive competitor
has announced plans for a similar product that will be sold for $170. Rudy’s marketing
department believes that if the price is dropped to meet competition, unit sales will increase
by 10%. The current cost to manufacture and distribute the luggage is $130, and Rudy has a
profit goal of 30% of sales. If Rudy meets competitive selling prices, what must happen to the
company's manufacturing and distribution cost?
A. Nothing, because the costs are within defined ranges and can actually increase by $10.
B. Nothing, because the costs are within defined ranges and can actually increase by $23.
C. Costs must decrease by $11.
D. Costs must decrease by $39.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-05
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! (1 – 0.3)$170 = $119; $130 - $119 = $11 drop in costs to meet profit goals.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
77. Delmar Enterprises produces bicycles in a highly competitive market. During the past
year, the company has added a 30% markup on the $250 manufacturing cost for one of its
most popular models. A new competitor manufactures a similar model, has established a $300
selling price, and is seriously eroding Delmar’s market share. Management now desires to use
a target-costing approach to remain competitive and is willing to accept a 20% return on sales.
If target costing is used, which of the following choices correctly denotes (1) the price that
Delmar will charge and (2) company's target cost?
Selling Price Target Cost
A. $300 $240
B. $300 $250
C. $325 $240
D. $325 $250
E. Some other combination of selling price and target cost.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-05
Feedback A: Correct! The competitive selling price is $300 and the amount of the target cost is (1 - 0.2) x $300 = $240.
Feedback B: This answer combination is incorrect.
Feedback C: This answer combination is incorrect.
Feedback D: This answer combination is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
78. Consider the following statements about activity-based costing and its use in pricing:
I. A company that uses target costing generally would have little need for activity-based
costing.
II. Companies that use cost-plus pricing methods would have little need for activity-based
costing.
III. The use of activity-based costing will often lead to better pricing decisions by managers.
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-06
Learning Objective: 15-07
Feedback A: This statement is not true.
Feedback B: This statement is not true.
Feedback C: Correct! Only Statement III is true.
Feedback D: Only one of these statements is true.
Feedback E: Only one of these statements is true.
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-08
Feedback A: This is not the correct tool.
Feedback B: This is not the correct tool.
Feedback C: Correct! Value engineering is a key component of target costing.
Feedback D: This is not the correct tool.
Feedback E: This is not the correct tool.
15-40
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-08
Feedback A: This is not the correct technique.
Feedback B: This is not the correct technique.
Feedback C: This is not the correct technique.
Feedback D: This is not the correct technique.
Feedback E: Correct! This statement is correct regarding value engineering.
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-09
Feedback A: While this statement is true, there is a better answer choice.
Feedback B: While these statements are true, there is a better answer choice.
Feedback C: While these statements are true, there is a better answer choice.
Feedback D: While these statements are true, there is a better answer choice.
Feedback E: Correct! All of these statements are true.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
82. Under the time and material pricing method, a customer would be charged for:
Material Costs Labor Costs Overhead Costs Profit Margin
A. Yes No No No
B. Yes Yes No No
C. Yes Yes Yes No
D. Yes Yes No Yes
E. Yes Yes Yes Yes
83. With the time and material pricing method, the hourly time charge is typically set equal
to:
A. the hourly labor cost.
B. the hourly labor cost + annual overhead.
C. the hourly labor cost + an hourly overhead charge + an hourly charge to cover the profit
margin.
D. annual overhead + an hourly charge to cover the profit margin.
E. the hourly labor cost + an hourly charge to cover the profit margin.
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-09
Feedback A: This formula is incorrect.
Feedback B: This formula is incorrect.
Feedback C: Correct! With the time and material pricing method, this is the correct formula for the hourly time charge.
Feedback D: This formula is incorrect.
Feedback E: This formula is incorrect.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
84. Inse Corporation uses time and material pricing. The repair department expects 20,000
direct labor hours of activity and has the following selected data:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-09
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: Correct! $800,000 + $480,000 + $220,000 = $1,500,000; $1,500,000 ÷ 20,000 = $75
15-43
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
Ralph’s Auto Repair uses time and material pricing. The body shop, which anticipates 10,000
direct labor hours of activity, has the following data:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-09
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! The time charge is $18 + ($75,000187,500 ÷ 10,000) +$11 = $36.5036.75 per hour.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-44
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
86. Assuming there is no profit markup on material cost, the amount to be added to each
dollar of material cost to obtain the total material charge is:
A. $0.06.
B. $0.08.
C. $0.10.
D. $0.13.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-09
Feedback A: This amount is incorrect.
Feedback B: Correct! $15,000 ÷ $187,500 = $0.08
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
87. If a particular job takes 20 hours of labor and $800 of materials, the price charged for the
job is:
A. $1,380.
B. $1,444.
C. $1,530.
D. $1,5949.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-09
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! ($36.5036.75 x 20 hr.)+ $800 + (800 x $0.08) = $1,5949
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-45
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 15-10
Feedback A: While this statement is true, there is a better answer choice.
Feedback B: This statement is incorrect.
Feedback C: While this statement is true, there is a better answer choice.
Feedback D: Correct! Both statements I and III are true.
Feedback E: One of these statements is incorrect.
89. If a company has excess capacity, which of the following is a sensible bidding strategy?
A. Set a price to cover all costs.
B. Base the bid on the incremental costs incurred because the job will contribute toward the
company's profit.
C. Base the bid solely on direct labor hours.
D. Downplay the potential impact of competitors.
E. Allocate common fixed costs to individual jobs before preparing the bid.
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-10
Feedback A: This bidding strategy is incorrect.
Feedback B: Correct! This is the correct bidding strategy.
Feedback C: This bidding strategy is incorrect.
Feedback D: This bidding strategy is incorrect.
Feedback E: This bidding strategy is incorrect.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
90. If a firm has no excess capacity, which of the following is a sensible bidding strategy?
A. Set a price to cover all costs.
B. Base the bid on the incremental costs incurred because the job will contribute toward the
company's profit.
C. Base the bid solely on direct labor hours.
D. Downplay the potential impact of competitors.
E. Try to minimize the company's tax liability.
AACSB: Reflective Thinking
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-10
Feedback A: Correct! This is the correct bidding strategy.
Feedback B: This bidding strategy is incorrect.
Feedback C: This bidding strategy is incorrect.
Feedback D: This bidding strategy is incorrect.
Feedback E: This bidding strategy is incorrect.
91. Harlen Company is involved in a competitive bidding situation. The following costs are
anticipated for a project to be bid with the City of Crimson:
Which of the following cost figures should be used in setting a minimum bid price if Harlen
has excess capacity?
A. $530,000.
B. $950,000.
C. $1,370,000.
D. $1,480,000.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-10
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! Since there is excess capacity, all variable costs are included: $340,000 + $610,000 + $420,000 = $1,370,000.
Feedback D: This amount is incorrect.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-47
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
92. Gypsum Park Recreation is exploring a competitive bidding situation. The firm, which
currently has no excess capacity, estimates the following costs for a project to be performed
for the Talent School District:
Which of the following cost figures would be used in determining a minimum price if
Gypsum Park decides to bid on the Talent project?
A. $131,000.
B. $350,000.
C. $441,000.
D. $481,000.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-10
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! All the costs would be used for determining the minimum price where there is no excess capacity, or $220,000 +
$130,000 + $91,000 + $40,000 = $481,000.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-48
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
Which of these costs would be treated differently if Polson had either excess capacity or no
excess capacity?
A. Direct materials used, $680,000.
B. Direct labor, $2,450,000.
C. Allocated variable overhead, $570,000.
D. Allocated fixed cost, $230,000.
E. None of these, as all four costs are considered in both situations.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-10
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! The allocated fixed cost of $230,000 would be treated differentially.
Feedback E: This answer is wrong, because there is a correct answer choice listed.
15-49
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-10
Feedback A: This answer combination is incorrect.
Feedback B: This answer combination is incorrect.
Feedback C: Correct! Excess capacity = $520,000; No excess capacity = $520,000 + 95,000 = $615,000
Feedback D: This answer combination is incorrect.
Feedback E: This answer combination is incorrect.
95. Consider the following statements about pricing and the law:
I. American antitrust laws restrict certain types of pricing behavior.
II. The term "price discrimination" involves charging different prices to different customers
for the same goods and services.
III. Charging different prices to different customers for the same goods is permissible if price
differences are based on cost differences of producing and/or selling the good.
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 15-11
Feedback A: While this statement is true, there is a better answer choice.
Feedback B: While this statement is true, there is a better answer choice.
Feedback C: While these statements are true, there is a better answer choice.
Feedback D: While these statements are true, there is a better answer choice.
Feedback E: Correct! All of these statements are true.
15-50
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 15-11
Feedback A: This pricing practice is not illegal.
Feedback B: This pricing practice is not illegal.
Feedback C: Correct! This pricing practice is illegal.
Feedback D: This pricing practice is not illegal.
Feedback E: This pricing practice is not illegal.
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
Essay Questions
Required:
For each of the following cost bases, determine the appropriate percentage markup that will
result in a price of $980 for the snow thrower. (Round percentages to nearest one-hundredth
of a percent.)
A. Variable manufacturing cost.
B. Absorption manufacturing cost.
C. Total cost.
D. Total variable cost.
Solution:
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
To achieve a target price of $450 per humidifier, the markup percentage on total unit cost is
12%.
Required:
A. Calculate the fixed selling and administrative cost allocated to each humidifier.
B. For each of the following bases, determine the appropriate percentage markup on cost that
will result in a target price of $450 per humidifier: (1) variable manufacturing cost, (2)
absorption manufacturing cost, and (3) total variable cost. (Round percentages to the nearest
one-hundredth of a percent.)
Solution:
B.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
99. Alpine, Inc. sells a single product. The following information relates to the year just
ended:
Number of units sold: 40,000
Variable cost per unit: $200
Total fixed cost: $2,400,000
Operating income: $3,800,000
Required:
Solution:
A. The company's total cost is $10,400,000 [(40,000 units $200) + $2,400,000], resulting in
sales revenue of $14,200,000 ($10,400,000 + $3,800,000). The selling price is therefore $355
($14,200,000 40,000 units).
B. The total cost per unit is $260 [$200 + ($2,400,000 40,000 units)], resulting in a $95
markup ($355 - $260). Each unit is thus marked up by 36.54% of total cost ($95 $260).
C. Because the base for computing the markup is smaller, the percentage markup must
increase to produce the same sales price. The markup on variable cost must equal $155 to
derive a $355 selling price ($355 - $200), or 77.5% ($155 $200). The net result is a hike of
40.96% (77.50% - 36.54%).
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
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100. Astro, Inc. uses target costing and will soon enter a very competitive marketplace in
which it will have limited influence over the prices that are charged. Management and
consultants are working to fine-tune the company's sole service, which hopefully will
generate a 12% return (profit) on the firm's $24,000,000 asset investment. The following
information is available:
Hours of service to be provided: 34,000
Anticipated variable cost per service hour: $30
Anticipated fixed cost: $2,560,000 per year
Required:
Solution:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-05
Learning Objective: 15-08
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101. Rollins and Associates develops hotels in resort locations. The company is exploring the
construction of a new facility that would have significant meeting and banquet space for
conventions and conferences, and sleeping rooms that average 850 square feet. The
accounting department estimates that land and building costs will amount to $60 and $120 per
square foot of floor area, respectively. Other expenditures during construction for interest, real
estate taxes, and general overhead are expected to total 35% of land and construction cost.
Once basic construction is completed, Rollins anticipates per-room initial expenditures for:
The accounting department suggests that 10% be added to the total of all preceding costs to
allow for estimation errors. Construction is anticipated to take two years.
Rollins’ pricing policy is consistent with that of industry leaders, namely, to set a room rate
equal to .1% (.001) of cost. Upon completion, comparable facilities are expected to charge
$240 per day.
Required:
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Solution:
A.
B. The rate may or may not be competitive, depending on whether the estimation errors
materialize. The going market rate is $240 per day, while Rollins’ rate will range between
$229.95 and $252.95.
C. With target costing, a firm first determines a competitive market price to charge for its
good or service and then subtracts an appropriate profit margin. The result is a targeted cost
figure, which may require that a process be redesigned through an approach known as value
engineering. In contrast, cost-plus pricing begins with a company's costs and adds a markup to
arrive at the selling price.
D. The facility is being designed to accommodate conferences and conventions, meaning that
significant added revenues and income may result. For example, audio-visual rentals and
large-scale dining and liquor sales commonly arise from such events. Furthermore, many
things can change during the two-year construction period (e.g., economic downturns and new
competitors) that could alter the company's analysis and construction decisions.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Learning Objective: 15-05
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102. Trailrider Corporation manufactures part no. 67, which is used in the production of
mountain bikes. Per-unit information about part no. 67 follows.
Trailrider has traditionally used a 20% markup on total cost to arrive at a reasonable selling
price. The company, though, has noticed a sizable drop in sales volume during the last few
quarters, which it attributes to new entrants in the marketplace.
Required:
Solution:
A. The current selling price is $36: ($14 + $6 + $7 + $3 = $30; $30 120% = $36).
B. The company's markup is $6 ($36 - $30), which is 16.67% of the current $36 selling price
($6 $36). To achieve a 16.67% markup on a $33 selling price, Morrow must reduce its costs
by $2.50.
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103. For many years, Oxmoor Corporation has used a straightforward cost-plus pricing
system, marking its goods up approximately 20% of total cost. The company has been
profitable; however, it has recently lost considerable business to foreign competitors that have
become very aggressive in the marketplace. These firms appear to be using target costing.
An example of Oxmoor’s woes is typified by item no. 710, which has the following unit-cost
characteristics: direct materials, $50; direct labor, $90; manufacturing overhead, $40; and
selling and administrative expenses, $20. The going market price for an identical product of
identical quality is $210, which is below what Oxmoor is charging.
Required:
Solution:
A. Cost-plus pricing begins by computing an item's cost and then adds a markup. The result is
the item's selling price. In contrast, target costing begins by determining an appropriate selling
price. A target profit is next subtracted from that price to yield the cost (i.e., the "target cost")
that must be achieved.
B. The current selling price is $240: ($50 + $90 + $40 + $20 = $200; $200 120% = $240).
C. Oxmoor’s markup is $40 ($240 - $200), which is 16.67% of the current $240 selling price
($40 $240). To achieve a 16.67% markup on a $210 selling price, the company must reduce
its costs by $25.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Learning Objective: 15-05
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104. Buffington, Inc. produces a number of components that are used in home theater
systems. Mike Boston, head of the company's market research department, has identified the
need for a new component that will most likely sell for $75. Projected volume levels are
anticipated to reach 28,000 units in the first year, as several firmly entrenched competitors
will be introducing a similar product in the not-too-distant future.
Conversations with Buffington’s engineers and reviews of cost accounting data related to
similar products that the company manufactures resulted in the following cost estimates for
the new component:
Buffington currently uses cost-plus pricing and adds a 20% markup on total production cost to
arrive at what is normally a competitive selling price.
Required:
A. What is the anticipated selling price of the new component if Buffington uses its current
pricing policy? What difficulties, if any, might the company face in the marketplace?
B. Assume that Buffington decides to switch to target costing. What price would the company
charge for the new component?
C. With the switch to target costing, what would Buffington have to do to the component's
manufacturing cost to achieve the normal profit margin on sales? Be specific and show
calculations.
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Solution:
A. The total production cost is $70 ($18 + $36 + $16), and the addition of a 20% markup
yields an $84 selling price ($70 120%). Unless the new component has some extra features
that consumers find attractive, overall sales might suffer because $84 exceeds the expected
competitive price of $75.
B. $75 (the expected competitive selling price)
C. Buffington’s markup is $14 ($84 - $70), which is 16.67% of the current $84 selling price
($14 $84). To achieve a 16.67% markup on a $75 selling price, the company must reduce its
production costs by $7.50.
D. Buffington can use value engineering, which focuses on cost reduction and process
improvement. Information is collected about a product's design and manufacturing processes,
and attempts are made to identify areas of change and where general improvements in
efficiency are possible.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Learning Objective: 15-05
Learning Objective: 15-08
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105. Allred Furniture manufactures easy-to-assemble wooden furniture for home and office.
The firm is considering modification of a bookcase, and the company's marketing department
surveyed potential buyers regarding five proposed changes (A-E). The buyers' responses, in
order of preference, along with Allred’s related unit costs for the modifications, follow.
The bookcase currently costs $81 to produce and distribute, and Allred’s selling price for
this unit averages $108. An analysis of competitive products in the marketplace revealed a
variety of features, with some models having all of the changes that Allred is considering
and other models having only a few. The current manufacturers' selling prices on these
bookcases average $120.
Required:
A. Why is there a need in target costing to (a) focus on the customer and (b) have a
marketing team become involved with product design?
B. Management desires to earn approximately the same rate of profit on sales that is being
earned with the current design.
1. If Allred uses target costing and desires to meet the current competitive selling price,
what is the maximum cost of the modified bookcase?
2. Which of the modifications should Allred consider?
C. Assume that Allred wanted to add a modification or two that you excluded in your
answer to requirement "B2." What process might management adopt to allow the company
to make its target profit for the bookcase? Briefly explain.
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Solution:
A. Target costing is market driven, beginning with a determination of the selling price that
customers are willing to pay. That price is dependent on the product they purchase and the
product's associated features. It is only natural that a marketing team becomes heavily
involved in this process, as much of what is done here is based on customer feedback.
B. 1. Allred currently earns a $27 profit on each bookcase sold ($108 - $81), which translates
into a 25% markup on sales ($27 $108). The current competitive market price is $120,
which means that if Allred maintains the 25% markup, it will earn $30 per unit. The
maximum allowable cost is therefore $90 ($120 - $30).
2. Allred can add $9 of modifications ($90 - $81), giving rise to several options. Customers
feel most strongly about change A, which can be adopted either by itself or in conjunction
with change C ($7.50 + $1.50 = $9.00). Alternatively, changes D and B can be selected, also
adding $9 to total cost ($5.00 + $4.00 = $9.00).
C. Allred might use value engineering to study the design and production process of both the
bookcase as currently manufactured as well as the proposed new features. The goal is to
identify improvements and associated reductions in cost that may allow the company to add
previously rejected options.
AACSB: Analytic
AICPA BB: Marketing
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-05
Learning Objective: 15-08
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106. The controller for Rich Photographic Supply has established the following cost pools and
cost drivers:
An order for 1,200 boxes of film-development chemicals has the following production
requirements:
Machine setups 8
Pounds of raw materials 16,000
Pounds of hazardous chemicals None
Inspections 4
Machine hours 400
Direct materials and labor cost $24,000
Rich established a target price by adding a 40% markup to total manufacturing cost.
Required:
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Solution:
C. The activity-based approach ("A") makes more specific use of the order's characteristics
(and cost drivers). While this order would represent 32% of the expected direct materials
usage, the order would require only 8% of the setups, 0% of the hazardous waste, 0.4% of the
inspections, and 2% of the machine hours. No overhead application method based on any
single variable can reflect all this diversity in resource consumption.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-03
Learning Objective: 15-06
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Shocker Electrical adds a markup of $15 per hour on its time charges, but there is no profit
markup on material costs.
Required:
Solution:
Time charges: $34 + ($360,000 30,000 hours) + $15 = $61 per hour
Material handling: $40,000 $500,000 = 8% of material cost
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-09
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108. Exquisite Exteriors installs stucco on high-priced custom homes, using the time-and-
materials method to price jobs for individual builders. Exquisite anticipates using $250,000 of
materials during the year and will incur $15,000 for material handling and storage. Other
overhead costs, which are driven by the company's 18,000 direct labor hours, will total
$360,000. Exquisite pays construction crews $17 per labor hour and adds a markup of $19 per
hour on its time charges. There is no profit markup on material cost.
During the first quarter of the year, Exquisite performed 24 jobs for Don Henderson Builders,
using 3,100 labor hours and $72,000 of materials.
Required:
Calculate the amount that Exquisite would bill Don Henderson Builders for work performed.
Solution:
Time charges: $17 + ($360,000 18,000 hours) + $19 = $56 per hour
Material handling: $15,000 $250,000 = 6% of material cost
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-09
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109. Aerial Roofing performs roofing services for commercial clients. The company recently
submitted a bid of $371,000 to the Ponca School System, computed as follows:
Aerial adds a 20% profit margin to all jobs, computed on the basis of total direct cost. In
Ponca’s case the profit margin amounted to $50,000 ($250,000 20%), producing a bid price
of $371,000. Assume that 60% of construction overhead is fixed.
Required:
A. If Aerial had excess capacity, what would be the lowest cost total that the company should
use when figuring its bid for the district? How can High justify this amount?
B. If Aerial had no excess capacity, what would be the lowest price that the company should
charge?
C. What is the primary benefit and problem of approaching a competitive bid situation with a
low-bid philosophy?
Solution:
A. The cost total would be the incremental cost associated with the job, or $270,400 [($80,000
+ $170,000 + ($51,000 40%)]. The company has excess capacity; thus, any amount it can
receive in excess of $270,400 will provide a positive contribution toward covering the fixed
costs and boosting profit. Note: The fixed construction overhead and allocated administrative
overhead are ignored here, as these costs will be incurred regardless of whether Aerial gets
the job.
B. No excess capacity indicates a very strong market, with Aerial likely having a steady
backlog of work. The company should cover all of its costs, producing a bid of $371,000.
C. A low-bid philosophy will likely translate into additional business, as a company will often
be successful in its bidding efforts. Unfortunately, if the bids are too low, the firm might not
be able to cover its costs.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-10
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110. Frontage Corporation, which has a maximum labor capacity of 30,000 hours per month,
has considerable flexibility with its customers when it comes to project completion dates.
Management is considering the submission of a bid for a job to be performed for the city of
Carthage. Costs for the job are as follows:
Required:
A. Compute the lowest total cost that the company would use when figuring its bid,
assuming that Frontage has excess capacity.
B. Compute Frontage’s bid if the company has no excess capacity.
C. Assume that Frontage is currently working at 85% of capacity. Does the firm have
sufficient time to complete the job? If not, what could the company do if it desires to do
business with Carthage?
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Solution:
A. The lowest total cost is the variable cost associated with the job, or $536,000 ($140,000 +
$330,000 + $66,000).
B. No excess capacity indicates a very strong market, meaning that Frontage should submit a
bid that reflects all of its costs. The markup is $160,800, which is based on raw materials,
labor, and variable overhead ($140,000 + $330,000 + $66,000 = $536,000; $536,000 30% =
$160,800). Thus, the bid should be $893,300 ($732,500 + $160,800).
C. Frontage has a maximum labor capacity of 90,000 hours (30,000 3) during the three
months needed for completion of Carthage’s work. However, only 15% of this total, or
13,500 hours, is available.
Carthage’s job will require 15,000 hours ($330,000 $22), so the firm lacks sufficient time
but not by much. Given that Frontage has significant flexibility with existing customers when
it comes to project completion, management might possibly delay an existing job's finish date,
freeing hours that could be allocated to Carthage. Another possibility might involve overtime
or perhaps hiring some temporary workers.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-10
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The special device will be purchased for this job and once the job is completed, the device
will be discarded.
Riverview applies total manufacturing overhead of $5 to each unit (0.5 machine hours at $10
per hour). This figure is based, in part, on budgeted yearly fixed overhead of $1,440,000 and
an anticipated volume of 480,000 machine hours (40,000 per month). Riverview is presently
working at 85% of capacity, and the client needs the order in two months.
Required:
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Solution:
A. Riverview currently has excess capacity, as it is working at 34,000 machine hours per
month (40,000 hours 85%).
B. Riverview should cover the incremental costs associated with the order, which are
computed as follows:
*Fixed manufacturing overhead is $3 per machine hour ($1,440,000 480,000 hours). Thus,
variable overhead is $7 per hour ($10 - $3), giving rise to $105,000 (30,000 units 0.5 hours
$7).
C. No, there is insufficient machine time. Riverview has a 40,000-hour capacity each month
and has two months to complete the order. Available machine hours total 12,000 (40,000 2
15%), and the order requires 15,000 hours (30,000 units 0.5).
D. A low-bid philosophy will likely translate into additional business, as a firm will probably
be successful in its bidding efforts. Unfortunately, if the bids are too low, the firm might not
be able to cover its costs. In contrast, a high-bid philosophy will assist a company in covering
more of its costs if the company wins the bid. Obviously, there is a greater chance for lost
business with this approach. In either case, the marginal financial health of the organization
may or may not improve.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 15-10
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112. The following questions explore the relationships between total and marginal functions
in the economic profit-maximizing (EPM) model:
Required:
A. The total revenue function rises over the range of operating activity portrayed in the text.
Why does the marginal revenue function decrease?
B. What is the behavior of the marginal cost curve?
C. In the EPM model, where is the profit-maximizing volume level? Explain.
Solution:
A. The total revenue function is increasing at a decreasing rate; consequently, the rate of
change in marginal revenue is negative.
B. The marginal cost curve decreases initially, reflecting economies of scale achieved at
relatively low levels of activity. However, at relatively high levels of activity, the marginal
cost curve increases because of diseconomies of scale (law of diminishing returns).
C. The profit-maximizing volume level is at the intersection of the marginal cost and marginal
revenue curves.
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113. When pricing products, many companies use target costing and/or cost-plus pricing
methods.
Required:
Solution:
A. Target costing begins with the likely market price for the new product and subtracts an
acceptable profit margin to arrive at the manufacturing cost necessary to achieve the target
margin. Then, to achieve the target cost, the product may need to be redesigned and/or re-
engineered.
B. In cost-plus pricing, cost is the starting point. An acceptable profit margin is then added to
arrive at the desired selling price. In target costing, the manufacturing cost is the target,
determined by starting with market price and subtracting a profit margin.
C. Yes. Activity-based costing helps to focus on the various activities required to manufacture
a product and the costs of those activities. Hence, it is more useful than traditional volume-
based costing systems that spread overhead rather than base overhead assignment on the
utilization of specific activities. Generally speaking, the end result is improved costing of
goods and/or services.
Activity-based costing can also help focus attention on non-value-added activities that
consume resources and increase a product's cost. Reduction or elimination of these activities
can help achieve the product's target cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 15-03
Learning Objective: 15-05
Learning Objective: 15-06
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114. When introducing new products, some companies use price skimming whereas others
use penetration pricing.
Required:
Solution:
A. Price skimming is designed to obtain a high price per unit at relatively low levels of sales.
As the product becomes known and interest in it grows, the price is lowered, thus stimulating
sales volume. Penetration pricing, on the other hand, seeks to generate a relatively high level
of sales initially in order to achieve a high market share. Such penetration is accomplished
through an initial price that is relatively low.
B. Price skimming is probably not viable for most products. The skimming strategy requires a
small core of customers for whom price is unimportant compared to other characteristics of
the product—which might be the case with wealthy buyers and/or luxury goods. These
customers are willing to pay just about any price to secure the product.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 15-04
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Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
115. Austin Company, which experiences considerable seasonal variation in its activity and
has a high level of fixed costs, is preparing a bid for a project. This particular project will be
done during a slack period of the year.
Required:
A. How should the fixed costs be handled in the bidding approach to this project?
B. Assume that the company wins the bid and performs the job on a profitable basis,
consistent with the results as projected in the bid. Several months later, the customer contacts
Austin and requests a bid to do another job. This project, however, must be done during a
peak season. How should Austin’s management respond? How do you think the customer will
respond?
Solution:
A. Fixed costs should not receive the same emphasis that would be given if the project were
to be done during a peak time. Any contribution that this project can make in excess of the
direct incremental costs will boost the profit of the company.
B. The bid for the second project cannot be prepared on the same basis as the bid for the first
project because of timing. The requirement to perform the job during a peak season means
that the job must provide a sufficient return to make it more attractive than other jobs. In other
words, fixed costs should be considered, and the bid price would be higher.
The customer is likely to be unhappy about the considerable change in bid from the first
project. However, if the customer understands the seasonal nature of Austin’s business, then
perhaps the customer will change its schedule and better "time" its purchases to occur in
Austin’s slow season.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 15-10
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116. A number of antitrust laws have been enacted that affect product pricing.
Required:
Solution:
A. Price discrimination involves charging different prices to different customers for the same
goods and services when the price differences are not based on variations in production,
selling, and/or distribution cost. Predatory pricing, on the other hand, is the practice of
reducing a price for a short time in order to enhance demand and then raising the price
sharply, often with restricted supply.
B. Such information can be used to show differences in costs of providing a product or service
to customers. For example, a customer that places a few large orders having low quality
requirements can be served less expensively than another customer that places many small
orders with tight delivery times and exacting quality specifications.
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 15-11
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