Pricing Ch08 Test Bank

CHAPTER 8
PRICING
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
True-False Statements
a
1. 1 C 6. 2 C 11. 3 K 16. 4 K 21. 5 C
2. 1 K 7. 2 C 12. 4 K 17. 4 C a 5 K
22.
3. 1 K 8. 3 K 13. 4 K 18. 4 K a 5 K
23.
4. 2 K 9. 3 K 14. 4 C a 5 K a 6 K
19. 24.
5. 2 C 10. 3 K 15. 4 C a 5 C a 6 C
20. 25.
Multiple Choice Questions
26. 1 K 50. 2 AP 74. 3 AP 98. 4 AP 122. 4 AP
27. 1 K 51. 2 AP 75. 3 AP 99. 4 AP 123. 4 AP
28. 1 K 52. 2 AP 76. 3 AP 100. 4 AP 124. 4 AP
29. 1 C 53. 2 AP 77. 3 AP 101. 4 AP a 5 C
125.
30. 1 C 54. 2 C 78. 3 AP 102. 4 AP a 5 K
126.
31. 1 K 55. 2 C 79. 3 AP 103. 4 AP a 5 K
127.
32. 1 K 56. 2 K 80. 3 AP 104. 4 AP a 5 K
128.
33. 1 K 57. 2 K 81. 3 K 105. 4 AP a 5 K
129.
34. 1 K 58. 2 C 82. 3 K 106. 4 AP a 5 K
130.
35. 1 C 59. 2 AP 83. 3 K 107. 4 C a 5 K
131.
36. 1 AP 60. 2 AP 84. 3 AP 108. 4 K a 5 C
132.
37. 1 AP 61. 2 C 85. 3 AP 109. 4 K a 5 K
133.
38. 1 AP 62. 2 K 86. 3 AP 110. 4 C a 5 K
134.
39. 1 AP 63. 2 AP 87. 4 K 111. 4 K a 5 K
135.
40. 1 AP 64. 2 AP 88. 4 K 112. 4 C a 5 C
136.
41. 2 K 65. 3 K 89. 4 K 113. 4 K a 5 AP
137.
42. 2 K 66. 3 K 90. 4 C 114. 4 C a 5 AP
138.
43. 2 AP 67. 3 C 91. 4 AP 115. 4 K a 5 AP
139.
44. 2 AP 68. 3 C 92. 4 K 116. 4 C a 5 AP
140.
45. 2 AP 69. 3 K 93. 4 K 117. 4 C a 5 AP
141.
46. 2 AP 70. 3 AP 94. 4 K 118. 4 K a 5 AP
142.
47. 2 AP 71. 3 AP 95. 4 K 119. 4 C a 5 AP
143.
48. 2 AP 72. 3 AP 96. 4 K 120. 4 K a 6 AP
144.
49. 2 AP 73. 3 K 97. 4 C 121. 4 AP a 6 AP
145.
Brief Exercises
146. 1 AP 149. 2 AP 152. 3 AP 155. 4 AP a 5 AP
158.
a
147. 2 AP 150. 2 AP 153. 3 AP 156. 4 AP 159. 5 AP
148. 2 AP 151. 2 AP 154. 3 AP 157. 4 AP
Exercises
a
160. 1 AP 164. 2 AP 168. 3 AP 172. 4 AN 176. 5 AP
a
161. 1 AP 165. 2 AP 169. 3 AP 173. 4 AN 177. 5 AP
162. 1 AP 166. 2 AP 170. 4 AN 174. 4 AN
163. 2 AP 167. 3 AP 171. 4 AN 175. 4 AN
a
This question covers a topic in an Appendix to the chapter.
8-2 Test Bank for Managerial Accounting, Seventh Edition
Completion Statements
a
178. 1 K 180. 2 K 182. 4 K 184. 4 K 186. 5 K
a
179. 2 K 181. 3 K 183. 4 K 185. 4 K 187. 6 K
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Typ Item Type Item Type Item Type Item Type
e
Learning Objective 1
1. TF 27. MC 31. MC 35. MC 39. MC 161. Ex
2. TF 28. MC 32. MC 36. MC 40. MC 162. Ex
3. TF 29. MC 33. MC 37. MC 146. BE 178. C
26. MC 30. MC 34. MC 38. MC 160. Ex
4. TF 43. MC 49. MC 55. MC 61. MC 149. BE 166. Ex
5. TF 44. MC 50. MC 56. MC 62. MC 150. BE 179. C
6. TF 45. MC 51. MC 57. MC 63. MC 151. BE 180. C
7. TF 46. MC 52. MC 58. MC 64. MC 163. Ex
41. MC 47. MC 53. MC 59. MC 147. BE 164. Ex
42. MC 48. MC 54. MC 60. MC 148. BE 165. Ex
8. TF 66. MC 71. MC 76. MC 81. MC 86. MC 168. Ex
9. TF 67. MC 72. MC 77. MC 82. MC 152. BE 169. Ex
10. TF 68. MC 73. MC 78. MC 83. MC 153. BE 181. C
11. TF 69. MC 74. MC 79. MC 84. MC 154. BE
65. MC 70. MC 75. MC 80. MC 85. MC 167. BE
12. TF 89. MC 98. MC 107. MC 116. MC 155. BE 182. C
13. TF 90. MC 99. MC 108. MC 117. MC 156. BE 183. C
14. TF 91. MC 100. MC 109. MC 118. MC 157. BE 184. C
15. TF 92. MC 101. MC 110. MC 119. MC 170. Ex 185. C
16. TF 93. MC 102. MC 111. MC 120. MC 171. Ex
17. TF 94. MC 103. MC 112. MC 121. MC 172. Ex
18. TF 95. MC 104. MC 113. MC 122. MC 173. Ex
87. MC 96. MC 105. MC 114. MC 123. MC 174. Ex
88. MC 97. MC 106. MC 115. MC 124. MC 175. Ex
Learning Objective 5a
19. TF 125. MC 130. MC 135. MC 140. MC 159. BE
20. TF 126. MC 131. MC 136. MC 141. MC 176. Ex
21. TF 127. MC 132. MC 137. MC 142. MC 177. Ex
22. TF 128. MC 133. MC 138. MC 143. MC 186. C
23. TF 129. MC 134. MC 139. MC 158. BE
Learning Objective 6a
24. TF 25. TF 144. MC 145. MC 187. C
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise
Pricing 8-3
The chapter also contains one set of eight Matching questions and two Short-Answer Essay
questions.
CHAPTER LEARNING OBJECTIVES
1. Compute a target cost when the market determines a product price. To compute a
target cost, the company determines its target selling price. Once the target selling price is
set, it determines its target cost by setting a desired profit. The difference between the target
price and desired profit is the target cost of the product.
2. Compute a target selling price using cost-plus pricing. Cost-plus pricing involves
establishing a cost base and adding to this cost base a markup to determine a target selling
price. The cost-plus pricing formula is expressed as follows: Target selling price = Cost +
(Markup percentage × Cost).
3. Use time-and-material pricing to determine the cost of services provided. Under time-
and-material pricing, two pricing rates are set—one for labor used on a job and another for
the material. The labor rate includes direct labor time and other employee costs. The
material charge is based on the cost of direct parts and materials used and a material
loading charge for related overhead cost.
4. Determine a transfer price using the negotiated, cost-based, and market-based

approaches. The negotiated price is determined through agreement of division managers.
Under a cost-based approach, the transfer price may be based on variable cost alone or on
variable cost plus fixed costs. Companies may add a markup to these numbers. The cost-
based approach often leads to poor performance evaluations and purchasing decisions. A
market-based transfer price is based on existing competing market prices and services. A
market-based system is often considered the best approach because it is objective and
generally provides the proper economic incentives.
*5. Determine prices using absorption-cost pricing and variable-cost pricing. Absorption-
cost pricing uses total manufacturing cost as the cost base and provides for selling and
administrative costs plus the target ROI through the markup. The target selling price is
computed as: Manufacturing cost per unit + (Markup percentage × Manufacturing cost per
unit). Variable-cost pricing uses all of the variable costs, including selling and administrative
costs, as the cost base and provides for fixed costs and target ROI through the markup. The
target selling price is computed as: Variable cost per unit + (Markup percentage × Variable
cost per unit).
*6. Explain issues involved in transferring goods between divisions in different countries.
Companies must pay income tax in the country where they generate the income. In order to
maximize income and minimize income tax, many companies prefer to report more income in
countries with low tax rates, and less income in countries with high tax rates. This is
accomplished by adjusting the transfer prices they use on internal transfers between
divisions located in different countries.
TRUE-FALSE STATEMENTS
1. In most cases, a company sets the price instead of it being set by the competitive market.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
PC: Project Management, IMA: Business Economics
2. In a competitive market, a company is forced to act as a price taker and must emphasize
minimizing and controlling costs.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
3. The difference between the target price and the desired profit is the target cost of the
product.
4. In a competitive environment, the company must set a target cost and a target selling
price.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
5. The cost-plus pricing approach establishes a cost base and adds a markup to this base to
determine a target selling price.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
PC: Project Management, IMA: Cost Management
6. The cost-plus pricing model gives consideration to the demand side —whether customers
will pay the target selling price.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
7. Sales volume plays a large role in determining per unit costs in the cost-plus pricing
approach.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
8. In time-and-material pricing, the material charge is based on the cost of direct materials
used and a material loading charge for related overhead costs.
9. The first step for time-and-material pricing is to calculate the material loading charge.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
10. The material loading charge is expressed as a percentage of the total estimated cost of
materials for the year.
11. Divisions within vertically integrated companies normally sell goods only to other divisions
within the same company.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision M odeling,
AICPA PC: Project Management, IMA: Business Economics
Pricing 8-5
12. Using the negotiated transfer pricing approach, a minimum transfer price is established by
the selling division.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling,
13. There are two approaches for determining a transfer price: cost-based and market-based.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling,
14. If a cost-based transfer price is used, the transfer price must be based on variable cost.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling,
15. A problem with a cost-based transfer price is that it does not provide adequate incentive
for the selling division to control costs.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision M odeling,
16. In the formula for a minimum transfer price, opportunity cost is the contribution margin of
goods sold externally.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling,
17. The market-based transfer price approach produces a higher total contribution margin to
the company than the cost-based approach.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling,
18. A negotiated transfer price should be used when an outside market for the goods does not
exist.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision M odeling,
a
19. The markup percentage in the variable-cost approach is computed by dividing the desired
ROI/unit plus fixed costs/unit by the variable costs/unit.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Project Management, IMA: Business Economics
a
20. Under the variable-cost approach, the cost base consists of all of the variable costs
associated with a product except variable selling and administrative costs.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
a
21. The absorption-cost approach is consistent with generally accepted accounting principles
because it defines the cost base as the manufacturing cost.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA
PC: Project Management, IMA: FSA
a
22. The first step in the absorption-cost approach is to compute the markup percentage used
in setting the target selling price.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA
a
23. Because absorption cost data already exists in general ledger accounts, it is cost effective
to use it for pricing.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement,
AICPA PC: Project Management, IMA: FSA
a
24. The number of transfers between divisions that are located in different countries has
decreased as companies rely more on outsourcing.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling,
AICPA PC: Project Management, IMA: Global Business
a
25. Differences in tax rates between countries can complicate the determination of the
appropriate transfer price.
Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision M odeling,
AICPA PC: Project Management, IMA: Global Business
Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a
1. F 6. F 11. F 16. T 21. T
2. T 7. T 12. T 17. F a F
22.
a
3. T 8. T 13. F 18. T 23. T
a a
4. F 9. F 14. F 19. T 24. F
5. T 10. T 15. T a F a T
20. 25.
MULTIPLE CHOICE QUESTIONS

26. Factors that can affect pricing decisions include all of the following except
a. cost considerations.
b. environment.
c. pricing objectives.
d. All of these are factors.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
27. In most cases, prices are set by the

a. customers.
b. competitive market.
c. largest competitor.
d. selling company.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
28. A company must price its product to cover its costs and earn a reasonable profit in
a. all cases.
b. its early years.
c. the long run.
d. the short run.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeli ng, AICPA
29. Prices are set by the competitive market when

a. the product is specially made for a customer.
b. there are no other producers capable of manufacturing a similar item.
c. a company can effectively differentiate its product from others.
d. a product is not easily distinguished from competing products.
Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
Pricing 8-7
30. All of the following are factors that can affect pricing decisions except
a. cost considerations.
b. demand.
c. environment.
d. All of these are factors.
Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
31. Companies that sell products whose prices are set by market forces are called
a. price givers.
b. price leaders.
c. price takers.
d. price setters.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
32. In which of the following situations would a company not set the prices of its products?
a. When the product is not easily differentiated from competing products
b. When the product is specially made for a customer
c. When there are few or no other producers capable of making a similar product
d. When the product can be effectively differentiated from others
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
33. The calculation to determine target cost is

a. variable manufacturing costs + fixed manufacturing costs.
b. sales price – (variable manufacturing costs + fixed manufacturing costs).
c. variable manufacturing costs + selling and administrative variable costs.
d. sales price – desired profit.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project
Management, IMA: Cost Management
34. Target cost is comprised of

a. variable and fixed manufacturing costs only.
b. variable manufacturing and selling and administrative costs only.
c. total manufacturing and selling and administrative costs.
d. fixed manufacturing and selling and administrative costs only.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Project Management, IMA: Cost Management
35. A company that is a price taker would most likely use which of the following methods?
a. Time-and-material pricing
b. Target costing
c. Cost plus pricing, contribution approach
d. Cost plus pricing, absorption approach
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
36. Bond Co. is using the target cost approach on a new product. Information gathered so far
reveals:
Expected annual sales 400,000 units
Desired profit per unit $0.35
Target cost $168,000
What is the target selling price per unit?
a. $0.42
b. $0.70
c. $0.35
d. $0.77
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Business Economics
37. Well Water Inc. wants to produce and sell a new flavored water. In order to penetrate the
market, the product will have to sell at $2.00 per 12 oz. bottle. The following data has
been collected:
Annual sales 50,000 bottles
Projected selling and administrative costs $8,000
Desired profit $70,000
The target cost per bottle is
a. $0.44.
b. $0.60.
c. $0.16.
d. $0.40.
Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
38. Larry Cable Inc. plans to introduce a new product and is using the target cost approach.
Projected sales revenue is $810,000 ($4.05 per unit) and target costs are $730,000. What
is the desired profit per unit?
a. $0.40
b. $2.03
c. $3.65
d. None of the above
Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
39. Wasson Widget Company is contemplating the production and sale of a new widget.
Projected sales are $300,000 (or 75,000 units) and desired profit is $36,000. What is the
target cost per unit?
a. $4.00
b. $3.52
c. $4.48
d. $4.80
Problem Solving/Decision Making, IMA: Cost Management
Pricing 8-9
40. Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit
per unit is $1.84. The expected unit sales price is $ 22 based on 10,000 units. What is the
total target cost?
a. $201,600
b. $220,000
c. $18,400
d. $238,400
41. In cost-plus pricing, the markup consists of

a. manufacturing costs.
b. desired ROI.
c. selling and administrative costs.
d. total cost and desired ROI.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
42. The desired ROI per unit is calculated by

a. multiplying the ROI by the investment and dividing by the estimated volume.
b. multiplying the unit selling price by the ROI.
c. dividing the total cost by the estimated volume and multiplying by the ROI.
d. dividing the ROI by the estimated volume and subtracting the result from the unit cost.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Project Management, IMA: Performance Measurement
43. Bellingham Suit Co. has received a shipment of suits that cost $200 each. If the company
uses cost-plus pricing and applies a markup percentage of 60%, what is the sales price
per suit?
a. $333
b. $320
c. $280
d. $500
Use the following information for questions 44–47.
Custom Shoes Co. has gathered the following information concerning one model of shoe:
Variable manufacturing costs $40,000
Variable selling and administrative costs $20,000
Fixed manufacturing costs $160,000
Fixed selling and administrative costs $120,000
Investment $1,700,000
ROI 30%
Planned production and sales 5,000 pairs
44. What is the total cost per pair of shoes?
a. $40
b. $68
c. $168
d. $96
8 - 10 Test Bank for Managerial Accounting, Seventh Edition
45. What is the desired ROI per pair of shoes?

a. $68
b. $168
c. $102
d. $170
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Performance Measurement
46. What is the target selling price per pair of shoes?

a. $142
b. $170
c. $114
d. $158
47. What is the markup percentage?

a. 150%
b. 255%
c. 850%
d. 182%
Use the following information for questions 48 and 49.

Lock Inc. has collected the following data concerning one of its products:
Unit sales price $145
Total sales 15,000 units
Unit cost $115
Total investment $1,800,000
48. The ROI percentage is
a. 20%.
b. 25%.
c. 30%.
d. 35%.
49. The markup percentage is

a. 20.69%.
b. 22.59%.
c. 25%.
d. 26.09%.
50. A company using cost-plus pricing has an ROI of 24%, total sales of 20,000 units and a
desired ROI per unit of $30. What was the amount of investment?
a. $144,000
b. $2,500,000
c. $456,000
d. $789,475
Pricing 8 - 11
Brislin Products has a new product going on the market next year. The following data are
projections for production and sales:
Variable costs $250,000
Fixed costs $450,000
ROI 14%
Investment $2,000,000
Sales 200,000 units
51. What is the target selling price per unit?

a. $4.90
b. $3.50
c. $2.65
d. $3.65
52. What is the markup percentage?

a. 112%
b. 20%
c. 62%
d. 40%
53. What would the markup percentage be if only 150,000 units were sold and Brislin still
wanted to earn the desired ROI?
a. 32.95%
b. 53.33%
c. 35.0%
d. 44.00%
54. When using cost-plus pricing, which amount per unit does not change when the expected
volume differs from the budgeted volume?
a. Variable cost
b. Fixed cost
c. Desired ROI
d. Target selling price
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
55. Why does the unit selling price increase when expected volume is lower than budgeted
volume?
a. Variable costs and fixed costs have to be spread over fewer units.
b. Fixed costs and desired ROI have to be spread over fewer units.
c. Variable costs and desired ROI have to be spread over fewer units.
d. Fixed costs only have to be spread over fewer units.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
56. In cost-plus pricing, the target selling price is computed as

a. variable cost per unit + desired ROI per unit.
b. fixed cost per unit + desired ROI per unit.
c. total unit cost + desired ROI per unit.
d. variable cost per unit + fixed manufacturing cost per unit + desired ROI per unit.
57. In cost-plus pricing, the markup percentage is computed by dividing the desired ROI per
unit by the
a. fixed cost per unit.
b. total cost per unit.
c. total manufacturing cost per unit.
d. variable cost per unit.
Project Management, IMA: Performance Measurement
58. The cost-plus pricing approach’s major advantage is

a. it considers customer demand.
b. that sales volume has no effect on per unit costs.
c. it is simple to compute.
d. it can be used to determine a product’s target cost.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
59. The following per unit information is available for a new product of Red Ribbon Company:
Desired ROI $ 20
Fixed cost 40
Variable cost 60
Total cost 100
Selling price 120
Red Ribbon Company’s markup percentage would be
a. 17%.
b. 20%.
c. 33%.
d. 50%.
60. Bryson Company has just developed a new product. The following data is available for
this product:
Desired ROI per unit $ 30
Fixed cost per unit 50
Variable cost per unit 75
Total cost per unit 125
The target selling price for this product is
a. $155.
b. $125.
c. $105.
d. $80.
Pricing 8 - 13
61. All of the following are correct statements about the cost-plus pricing approach except
that it
a. is simple to compute.
b. considers customer demand.
c. includes only variable costs in the cost base.
d. will only work when the company sells the quantity it budgeted.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
62. In the cost-plus pricing approach, the desired ROI per unit is computed by multiplying the
ROI percentage by
a. fixed costs.
b. total assets.
c. total costs.
d. variable costs.
Red Grass Company produces high definition television sets. The following information is
available for this product:
Fixed cost per unit $250
Variable cost per unit 750
Total cost per unit 1,000
Desired ROI per unit 300
63. Red Grass Company’s markup percentage would be
a. 30%.
b. 40%.
c. 60%.
d. 120%.
64. The target selling price for this television is

a. $550.
b. $1,000.
c. $1,050.
d. $1,300.
65. In time-and-material pricing, a material loading charge covers all of the following except
a. purchasing costs.
b. related overhead.
c. desired profit margin.
d. All of these are covered.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
66. The first step for time-and-material pricing is to calculate the

a. charge for obtaining materials.
b. charge for holding materials.
c. labor charge per hour.
d. charges for a particular job.
67. The labor charge per hour in time-and-material pricing includes all of the following except
a. an allowance for a desired profit.
b. charges for labor loading.
c. selling and administrative costs.
d. overhead costs.
Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
68. The last step in determining the material loading charge percentage is to
a. estimate annual costs for purchasing, receiving, and storing materials.
b. estimate the total cost of parts and materials.
c. divide material charges by the total estimated costs of parts and materials.
d. add a desired profit margin on the materials themselves.
Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
69. In time-and-material pricing, the charge for a particular job is the sum of the labor charge
and the
a. materials charge.
b. material loading charge.
c. materials charge + desired profit.
d. materials charge + the material loading charge.
Use the following information for questions 70-72.

The following data is available for Wheels ‘N Spokes Repair Shop for 2016:
Repair technicians’ wages $360,000
Fringe benefits 80,000
Overhead 60,000
Total $500,000
The desired profit margin is $40 per labor hour. The material loading charge is 40% of invoice
cost. It is estimated that 5,000 labor hours will be worked in 2016.
70. Wheels ‘N Spokes’ labor charge per hour in 2016 would be

a. $100.
b. $112.
c. $128.
d. $140.
Pricing 8 - 15
71. In January 2016, Wheels ‘N Spokes repairs a bicycle that uses parts of $180. Its material
loading charge on this repair would be
a. $72.
b. $108.
c. $180.
d. $252.
72. In March 2016, Wheels ‘N Spokes repairs a bicycle that takes two hours to repair and
uses parts of $240. The bill for this repair would be
a. $520.
b. $560.
c. $592.
d. $616.
73. Which of the following organizations would most likely not use time-and-material pricing?
a. Automobile repair company
b. Engineering firm
c. Custom furniture manufacturer
d. Public accounting firm
Carlos Consulting Inc. provides financial consulting and has collected the following data for the
next year’s budgeted activity for a lead consultant.
Consultants’ wages $90,000
Fringe benefits $22,500
Related overhead $17,500
Supply clerk’s wages $18,000
Fringe benefits $4,000
Related overhead $20,000
Profit margin per hour $20
Profit margin on materials 15%
Total estimated consulting hours 5,000
Total estimated material costs $168,000
74. The labor rate per hour is
a. $42.50.
b. $26.00.
c. $41.50.
d. $46.00.
75. The material loading charge is

a. 15%.
b. 25%.
c. 40%.
d. 55%.
76. A consulting job takes 20 hours of consulting time and $180 of materials. The client’s bill
would be
a. $1,172.
b. $772.
c. $952.
d. $1,100.
Lonely Guy Repair Service recently performed repair services for a customer that totaled $400.
Somehow the bill was lost and the company accountant was trying to recreate the bill from
memory. This is what was remembered:
Total bill $600
Labor profit margin $10
Materials profit margin 20%
Total labor charges $390
Cost of materials used $120
Total hourly cost $22.50
77. What was the material loading charge?

a. 37.5%
b. 43.8%
c. 61.3%
d. 75%
78. How many hours were billed on the job?

a. 19.5
b. 18.5
c. 17.3
d. 12.0
79. Lawrence Legal Services recently billed a customer $690. Labor hours were 6 and the
cost of the materials used was $150. If the company’s hourly labor rate was $75, what
material loading charge was used?
a. 30%
b. 50%
c. 60%
d. 100%
Pricing 8 - 17
80. Dudly Drafting Services uses a 45% material loading charge and a labor rate of $20 per
hour. How much will be charged on a job that requires 3.5 hours of work and $40 of
materials?
a. $128
b. $110
c. $88
d. $133
81. The time component under time-and-material pricing includes a

a. loading charge.
b. charge for receiving, handling, and storing materials.
c. portion of the materials clerk’s wages.
d. profit margin.
82. Using time-and-material pricing involves how many steps?

a. 4
b. 3
c. 2
d. 1
83. The last step in calculating the hourly rate to be charged in time-and-material pricing is to
a. estimate the total labor costs plus fringe benefits.
b. estimate the total labor hours.
c. add a profit margin.
d. add a charge for overhead costs.
Jaycee Auto Repair has the following budgeted costs for the next year:
Time Charges Material Charges
Shop employees’ wages and benefits $120,000 $ -
Parts manager’s salary and benefits - 45,000
Office employee’s salary and benefits 30,000 15,000
Other overhead 15,000 40,000
Invoice cost of parts and materials - 400,000
Total budgeted costs $165,000 $500,000
84. The labor rate to be used next year assuming 7,500 hours of repair time and a profit
margin of $25 per labor hour is
a. $22.
b. $41.
c. $43.
d. $47.
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem
Solving/Decision Making, IMA: Reporting
85. The material loading charge to be used next year assuming a 40% markup on material
cost is
a. 20%.
b. 40%.
c. 65%.
d. 80%.
86. Jaycee estimates that the repairs to a Cadillac Escalade damaged in an accident will take
45 hours of labor and $3,500 in parts and materials. The total cost of the repairs is
a. $5,890.
b. $7,890.
c. $5,775.
d. $7,015.
87. The price used to record a sale between divisions within the same vertically integrated
company is called the
a. sales price.
b. integrated price.
c. transfer price.
d. bargain price.
Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling,
88. The overall objective in the determination of a transfer price is to

a. maximize the return of the selling division.
b. minimize the cost to the purchasing division.
c. minimize the return of the selling division.
d. maximize the return to the whole company.
Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling,
89. Which two methods are used most often when establishing a transfer price?
a. Negotiated transfer pricing and cost-based transfer pricing
b. Cost-based transfer pricing and market-based transfer pricing
c. Negotiated transfer pricing and market-based transfer pricing
d. Cost-based transfer pricing and standard-based pricing
Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling,
Use the following information for questions 90 and 91.

The Selling Division’s unit sales price is $25 and its unit variable cost is $15. Its capacity is
10,000 units. Fixed costs per unit are $6. Current outside sales are 8,000 units.
90. What is the Selling Division’s opportunity cost per unit from selling 2,000 units to the
Purchasing Division?
a. $10
b. $25
c. $4
d. $0
Ans: d, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC:
Pricing 8 - 19
91. What is the Selling Division’s opportunity cost per unit from selling 3,000 units to the
Purchasing Division?
a. $10
b. $25
c. $4
d. $0
Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC:
92. In the minimum transfer price formula, variable cost is defined as the variable cost of
a. all units sold, both internally and externally.
b. units sold externally.
c. units not sold.
d. units sold internally.
93. Under the negotiated transfer pricing approach, the minimum transfer price is established
by the
a. purchasing division.
b. corporate headquarters management.
c. selling division.
d. corporate negotiator.
94. Under the negotiated transfer pricing approach, the maximum transfer price is established
by the
a. purchasing division.
b. corporate headquarters management.
c. selling division.
d. corporate negotiator.
Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
95. Assume the Thread Division has excess capacity. The Garment Division wants the
Thread Division to furnish them additional spools of thread that could be made using the
excess capacity. In a negotiated transfer price, the Thread Division should accept as a
minimum any transfer price that exceeds the
a. total cost of producing spools for outside sales.
b. variable costs of producing the additional spools for the Garment Division.
c. contribution margin and outside spool sales.
d. foregone contribution margin on outside spool sales.
Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA
96. The most common method used to establish transfer prices is

a. negotiated transfer pricing.
b. market-based transfer pricing.
c. cost-plus transfer pricing.
d. cost-based transfer pricing.
Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA

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CHAPTER 8

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

CHAPTER LEARNING OBJECTIVES

4. Determine a transfer price using the negotiated, cost-based, and market-based

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

27. In most cases, prices are set by the

29. Prices are set by the competitive market when

33. The calculation to determine target cost is

34. Target cost is comprised of

41. In cost-plus pricing, the markup consists of

42. The desired ROI per unit is calculated by

Use the following information for questions 44–47.

45. What is the desired ROI per pair of shoes?

46. What is the target selling price per pair of shoes?

47. What is the markup percentage?

Use the following information for questions 48 and 49.

49. The markup percentage is

Use the following information for questions 51–53.

51. What is the target selling price per unit?

52. What is the markup percentage?

56. In cost-plus pricing, the target selling price is computed as

58. The cost-plus pricing approach’s major advantage is

Use the following information for questions 63–64.

64. The target selling price for this television is

66. The first step for time-and-material pricing is to calculate the

Use the following information for questions 70-72.

70. Wheels ‘N Spokes’ labor charge per hour in 2016 would be

Use the following information for questions 74–76.

75. The material loading charge is

Use the following information for questions 77–78.

77. What was the material loading charge?

78. How many hours were billed on the job?

81. The time component under time-and-material pricing includes a

82. Using time-and-material pricing involves how many steps?

Use the following information for questions 84–86.

88. The overall objective in the determination of a transfer price is to

Use the following information for questions 90 and 91.

96. The most common method used to establish transfer prices is

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