Practice Question 1

The leastdifficult part of determining the profit maximizing price is determining the relationship between price and the quantity demanded.

True

False

Practice Question 2

Precision Industries recently developed a new calculator for which it wants to determine its profit maximizing price. The companys accountant prepared a demand schedule as follows:

Price	Quantity Demanded
$22	2,000
$23	1,900
$24	1,700

Variable costs are $7 per unit with fixed costs of $15,000. In order to maximize profit, what is the selling price of each calculator?

All of the three options create the same profit

$22

$23

$24

Practice Question 3

Environment Friendly provides doorstep garbage pickup services for apartment dwellers. The company is considering four monthly price levels for weekly pickup based on the following estimates:

Price	Anticipated Demanded
$8.50	340 dwellings
$10.50	280 dwellings
$11.00	250 dwellings
$11.50	220 dwellings

Monthly costs of providing the pickup service include $800 of fixed costs and variable costs of $1.75 per month for pickup. Which price will yield the largest monthly profit?

$8.50

$10.50

$11.00

$11.50

Practice Question 4

Reefer Madness Sandals is determining the profit maximizing price for its mens Sandbar sandals. The following has been determined from the demand schedule: sales of 1,000 units at $20 per unit, sales of 750 units at $25 per units. Variable costs are $10 per unit with fixed costs of $6,000. How much is the maximizing profit?

$5,250

$11,250

$4,000

$10,000

Practice Question 5

Which of the following should be considered in a pricing strategy?

Price, demand, and total costs.

Variable costs, fixed costs, and demand.

Demand, pricing, and variable costs.

Price and demand.

Practice Question 6

Night Vision sells 5,000 pairs of driving glasses per month at $40 each with a desired profit margin of 25%. Fixed costs are $20,000. What is the variable cost per unit?

$26

$30

$10

$11.25

Practice Question 7

If a company has available capacity, fixed costs will be affected by special orders.

True

False

Practice Question 8

Harmon Inc. budgeted 5,000 candles for production during the year. The candles are unique in that they weigh 25 pounds and are ideal for parties and other occasions. Fixed factory overhead is allocated to products using activity-based costing. The following estimated costs were provided:

Direct material ($80 per unit)	$400,000
Direct labor ($22 per hour 2 hours per unit)	220,000
Variable manufacturing overhead ($8 per unit)	40,000
Fixed factory overhead costs ($30 per unit)	150,000
Total costs	$810,000
Cost per unit =$162.

Harmon received an order for 500 candles from a new customer with whom Harmon really wants to gain as a customer. This customer would like to spend $140 per candle even though the normal selling price is $200. Harmon has the capacity to produce 5,600 candles in total. What will be the effect on profit if Harmon accepts the order?

Decrease by $11,000

Increase by $4,000

Increase by $30,000

Increase by $70,000

Practice Question 9

Foresight Company received an order for 600 pair of sunglasses from a new customer whom the company has been trying to acquire for some time. The following costs were incurred for the production of 1,000 units during the month:

Direct material ($23 each)	$23,000
Direct labor ($12 per hour 2 hours each)	24,000
Variable manufacturing overhead ($25 per unit)	25,000
Fixed factory overhead costs ($10 per unit)	10,000
Total costs	$82,000

This customer would like to spend $80 per pair of sunglasses. Foresight has enough capacity to produce 900 pair of sunglasses. Should Foresight accept the order?

Yes. Profits will increase by $4,800.

Yes. Profits increase by $48,000.

Yes. Profits will increase by $12,000.

No. Profits will decline by $600.

Practice Question 10

Walton Sailing has received several special requests and is considering manufacturing kayaks that would sell for $260. Direct materials are $60, direct labor is $40, variable overhead is $55, fixed overhead is $15. Walton has additional capacity for fulfilling these special requests. What is the net benefit of the special order per unit?

$160

$200

$105

$90

Practice Question 11

Sensuous Company makes and sells 11,000 necklaces each year. The cost of making one necklace follows:

Direct material	$ 11
Variable manufacturing overhead	5
Direct labor	2
Fixed manufacturing overhead	7

The fixed overhead costs are unavoidable. Sensuous allocates fixed overhead costs based on its annual manufacturing capacity of 15,000 necklaces. An overseas company recently offered to buy 4,000 necklaces at $21 each. Regular customers buy necklaces from Sensuous at $30 each. How much is the net benefit (loss) of accepting the special order?

$12,000

($48,000)

($16,000)

$36,000

Practice Question 12

When deciding to accept a special order from a new customer that wishes to pay a designated price, which one of the following is necessary by management?

Determine the markup percentage desired.

Consider total fixed costs.

Determine the cost at which to maximize profit.

Determine variable product costs.

Practice Question 13

Cost-plus pricing is inherently circular for manufacturing companies because the higher the demand, the lower the selling price.

True

False

Practice Question 14

Why is cost-plus pricing considered inherently circular?

Fixed costs per unit change at each different level of activity, and the price chosen impacts the demand activity level.

Customers always want the lowest price.

Companies must charge more for services and products which have a higher cost, and less for those with a lower cost.

A company can choose any markup it wants which creates different prices depending on the markup percentage.

Practice Question 15

Which statement is true concerning cost-plus pricing?

The inherently circular nature causes the company to continually change prices based on the activity level achieved.

Products must be designed to meet a particular price level.

Profitability depends on not only what a customer purchases, but the services that go along with the purchase.

The full cost is determined and then a percentage of expected profit is subtracted in order to determine the selling price.

Practice Question 16

Razor Tools is using a cost-plus pricing strategy. Fixed costs are $40,000, direct materials are $20, direct labor is $25, and variable overhead is $15 per unit. The company estimates it will sell 10,000 socket sets. It desires a 30% markup. How much is the selling price of each socket set?

$64.00

$83.20

$70.00

$44.80

Practice Question 17

Soprano Eyeware sells 5,000 pairs of sunglasses per month at $75 each with a desired markup of 25%. How much is the cost per unit if cost-plus pricing is used?

$60

$18.75

$56.25

$75

Practice Question 18

Cross-functional product development teams are not used in companies employing target costing, but are used in activity-based pricing systems.

True

False

Practice Question 19

Sparkle Inc. sells 25,000 bottles of nail polish per month at $4 each. Management has demanded a profit margin of 45%. Variable costs are $1 per bottle and the company's fixed costs total $12,500. How much is the target profit?

$45,000

$37,500

$25,000

$12,500

Practice Question 20

Island Brew Inc. is developing a new mango-flavored beer. Management has determined that a 24 ounce mug of beer that has a variable cost of $1.25 should sell for $3.00. A target profit of 35% is desired. A total of 3,000 mugs of beer are expected to be sold per month. Fixed costs are $3,000 per month. How much is the monthly target profit?

$3,750

$150

$5,250

$3,150

Practice Question 21

Which of the following isnota pricing method?

Activity-based pricing

Target costing

Demand function pricing

Cost-plus approach

Practice Question 22

Ranger Coffee sells 2,500 latts at $3.50 a piece with a desired profit margin of 30%. What pricing approach does this example represent?

Activity-based pricing.

Cost-plus pricing.

Incremental costing.

Target costing.

Practice Question 23

Night Vision sells 5,000 pairs of driving glasses per month at $40 each with a desired profit margin of 25%. Fixed costs are $20,000. How much is the target profit?

$40,000

$45,000

$56,000

$50,000

Practice Question 24

Two customers that purchase exactly the same products may result in differing profits depending on what additional services were provided.

True

False

Practice Question 25

Swenson Industries tracked the following for its largest customer, Garland Supplies, for the month of August:

Sales revenue	$25,000
Number of standard orders	7
Number of shelf display setups	3
Number of rush orders	1

The company has determined the following costs which relate to all customers:

Standard order processing	$140	per order
Shelf display setups	$300	per setup
Extra handling costs for rush orders	$60	per rush order

Variable product costs are 40% of sales price. How much is the profit of the Garland Supplies account?

$12,600

$12,100

$10,340

$13,060

Practice Question 26

RX Medical Supplies, Inc. has analyzed its customer and order handling data for the past quarter and has determined the following costs:

Order processing cost	$30	per order
Additional costs for rush orders	$40	per rush order
Support calls	$25	per call
Relationship management costs per customer	$800	per quarter

Variable product costs amount to 60% of sales. During the current quarter, the company incurred the following activity with Mercy Hospital, one of its customers:

Quarterly sales revenue	$21,000
Number of orders	46
Number of rush orders	7
Number of support calls	5

How much is the profitability of the Mercy Hospital account for the quarter?

$5,815

$15,185

$8,400

$7,020

Practice Question 27

In utilizing CPM, which of the following is not a likely outcome of analyzing customer profitability?

Encourage customers to make fewer and larger purchases.

Limit the services that customers may utilize.

Encourage customers to move to less costly services.

Provide price increases for the most valued customers.

Practice Question 28

Crimson Hardware has determined the following costs:

Product costs	70%	of sales price
Order processing	$8