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problems, reference materials, practice exams, textbook help and tutor support. 19Pricing Chapter and Profitability Analysis MULTIPLE CHOICE 1. Which of the following is NOT an example of a market structure? a. oligopoly b. monopoly c. barrier market d. perfectly competitive ANS: C PTS: 1 OBJ: 19-1 2. Which type of expenses does a monopoly usually incur that are different from the other types of mar ket structures? a. marketing costs such as advertising, positioning, discounting and coupons b. costs of differentiation such as advertising, rebates, coupons c. no special expenses d. legal and lobbying expenditures ANS: D PTS: 1 OBJ: 19-1 3. Which of the following is true regarding expenses related to specific market structure types? a. Monopolistic competition and oligopolies are the only structures where costs of differenti ation have an impact. b. Both monopolies and monopolistic competition structures normally must expend legal and lobbying costs. c. In perfect competition and monopolistic competition, differentiation costs have an impact. d. In perfect competition and oligopolies, there are no special expenses related to the struc ture of the organization. ANS: A PTS: 1 OBJ: 19-1 4. Market Structure Type # of firms in industry Many (b) Barriers to entry Perfect Competition (a) Monopolistic Competition Oligopoly Few (c) Monopoly Very High Fill in the correct responses for the blanks with letters: a. (a)very low, (b)many, (c)high, (d)very unique b. (a)very low, (b)few, (c)high, (d)not unique c. (a)very high, (b)few, (c)low, (d)fairly unique d. (a)low, (b)one, (c)high, (d)very unique ANS: A PTS: 1 Uniqueness of product Not unique Some unique features (d) OBJ: 19-1 5. Monopolistic competition is best defined as: a. a structure that has many buyers and sellers, but the products are differentiated on some basis. b. a structure where customers are willing to pay a little more for the unique feature that ap This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. peals to them. c. a structure that combines perfect competition and monopoly, but is closer to a competitive situation. d. all of the above are true ANS: D PTS: 1 OBJ: 19-1 6. Which of the following markets is characterized by the following: many buyers and sellers, a homo geneous product, easy entry into and exit from the industry, and all firms are price takers? a. perfectly competitive market b. monopolistic competition c. monopoly d. oligopoly ANS: A PTS: 1 OBJ: 19-1 7. Which of the following markets is characterized by the following: only a few firms in the industry, a fairly unique product, difficult entry into the industry, and spending for differentiation of the product? a. perfectly competitive market b. monopolistic competition c. monopoly d. oligopoly ANS: D PTS: 1 OBJ: 19-1 8. Which of the following markets is characterized by the following: many firms in the industry, a some what unique product, fairly easy entry into the industry, and spending for differentiation of the product? a. perfectly competitive market b. monopolistic competition c. monopoly d. oligopoly ANS: B PTS: 1 OBJ: 19-1 9. Which of the following markets is characterized by the following: a single firm in the industry, a unique product, and difficult entry into the industry? a. perfectly competitive market b. monopolistic competition c. monopoly d. oligopoly ANS: C PTS: 1 OBJ: 19-1 Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2010 when 30,000 were projec ted. Sales for 2011 look no better. At $100 per game, it is not a hot seller. Direct costs of the board game are $56 variable cost and $100,000 fixed. John is considering several options. Option One: Cut the price to $70 and perhaps sell 15,000 units. Option Two: Cut the price to $60, reduce material costs by $10, and cut advertising by $60,000. Anticipated volume for this option is 10,000 units.

Option Three: Cut the price to $80 and include a $10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 percent of the rebate coupons would be redeemed. 10. What is the profit (loss) from Option One? This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. a. b. c. d. $1,050,000 $210,000 $950,000 $110,000 ANS: D SUPPORTING CALCULATIONS: Revenues ($70 15,000) Less: Variable costs ($56 15,000) Fixed costs Profit PTS: 1 $1,050,000 $840,000 100,000 940,000 $ 110,000 OBJ: 19-2 11. What is the profit (loss) from Option Two? a. $600,000 b. $100,000 c. $40,000 d. ($100,000) ANS: B SUPPORTING CALCULATIONS: Revenues ($60 10,000) Less: Variable costs ($46 10,000) Fixed costs ($100,000 - $60,000) Profit PTS: 1 $600,000 $460,000 40,000 500,000 $100,000 OBJ: 19-2 12. What is the profit (loss) from Option Three? a. $215,000 b. $1,200,000 c. $110,000 d. ($60,000) ANS: A SUPPORTING CALCULATIONS: Revenues ($80 15,000) Less: Variable costs Rebate costs [($10 15,000) .30] Fixed costs Profit PTS: 1 $1,200,000 $840,000 45,000 100,000 985,000 $ 215,000 OBJ: 19-2 13. Which option is preferred? a. Option One b. Option Two c. Option Three This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. d. Options One and Three are equally preferred. ANS: C SUPPORTING CALCULATIONS: Option Three has the highest profit. PTS: 1 OBJ: 19-2 14. Which of the following statements is FALSE? a. The markup is a percentage applied to base cost. b. The markup is an absolute rule. c. A major advantage of markup pricing is that standard markups are easy to apply. d. The markup can be calculated using a variety of bases. ANS: B PTS: 1 OBJ: 19-2 Farr Company had the following information: Revenues Cost of goods sold: Direct materials Direct labor Overhead Gross profit Selling and administrative expenses Operating income $400,000 $100,000 50,000 50,000 200,000 $200,000 75,000 $125,000 15. What is the markup based on cost of goods sold? a. 50.0% b. 100.0% c. 37.5% d. 62.5% ANS: B SUPPORTING CALCULATIONS: ($75,000 + $125,000)/$200,000 = 100% PTS: 1 OBJ: 19-2 16. What is the markup based on prime costs? a. 300.0% b. 133.3% c. 50.0% d. 166.7% ANS: D SUPPORTING CALCULATIONS: ($75,000 + $125,000 + $50,000)/$150,000 = 166.7% PTS: 1 OBJ: 19-2 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. Jamie Corporation had the following information: Revenues Cost of goods sold: Direct materials Direct labor Overhead Gross profit Selling and administrative expenses Operating income $250,000 $50,000 37,500 62,500 150,000 $100,000 37,500 $ 62,500 17. What is the markup based on materials? a. 400.0% b. 185.7% c. 42.9% d. 71.4% ANS: A SUPPORTING CALCULATIONS: ($62,500 + $37,500 + $62,500 + $37,500)/$50,000 = 400% PTS: 1 OBJ: 192

18. What would be the price for a product that has a cost of $500, assuming that the markup is based on cost of goods sold? a. $833 b. $625 c. $708 d. $2,000 ANS: A SUPPORTING CALCULATIONS: $500 + (66.7% $500) = $833 PTS: 1 OBJ: 19-2 19. Which of the following is a FALSE statement about target costing? a. Target costing is a method of determining the cost of a product or service based on the price that customers are willing to pay. b. The cost is calculated by subtracting the desired profit from the target price. c. Target costing is an interactive process. d. Target costing is cost driven. ANS: D PTS: 1 OBJ: 19-2 20. Price skimming occurs in which of the following life-cycle stages? a. Introduction b. Growth c. Maturity d. Decline ANS: A PTS: 1 OBJ: 19-2 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. 21. _______________ is the pricing of a new product at a low initial price to build market share quickly. a. Penetration pricing b. Predatory pricing c. Price skimming d. Target costing ANS: A PTS: 1 OBJ: 19-2 22. _______________ is where a higher price is charged at the beginning of a product's life cycle. a. Penetration pricing b. Predatory pricing c. Price skimming d. Target costing ANS: C PTS: 1 OBJ: 19-2 23. Gage Company had the following information: Revenues Cost of Goods Sold Selling and administrative expenses What is the markup on Cost of Goods sold? a. .1833 b. .6667 c. .3611 d. none of the above $600,000 60% $130,000 ANS: B Support: Cost of Goods Sold = .60 * 600,000 = 360,000 Operating Income = $600,000 360,000 130,000 = $110,000 Markup on COGS = (selling and administrative expenses + operating income) / COGS .6667 = ($130,000 + $110,000) / $360,000 PTS: 1 OBJ: 19-2 24. Perry Products is thinking of expanding their product line. Their current income statement is as fol lows: Revenues $600,000 Cost of Goods Sold: Direct Materials $250,000 Direct Labor $100,000 Overhead $ 80,000 $430,000 Gross Profit $170,000 Selling and Administrative $ 70,000 Operating Income $100,000 The cost of the new product is $95 per unit made up of $50 of direct materials, $35 of direct labor and $10 of overhead per unit. What is the bid price assuming Perry utilizes a mark-up on direct materials? a. $70 b. $133 c. $119 d. $19.77 ANS: A This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. Support: Markup on direct materials = Direct Labor + Overhead + Selling and Administrative + Operating In come / Direct Materials ($100,000 + $80,000 + $70,000 + $100,000) / $250,000 = 1.4 1.4 * $50 = $70 PTS: 1 OBJ: 19-2 25. _______________ refers to charging different prices to different customers for essentially the same product. a. Gouging. b. Price discrimination. c. Skimming. d. Penetration pricing. ANS: B PTS: 1 OBJ: 19-3

26. The Robinson-Patman Act allows price discrimination under which of the following circumstances? a. if revenues justify it b. if the competitive situation demands it c. if the costs remain the same for all customers d. The Robinson-Patman Act does not allow price discrimination under any situation ANS: B PTS: 1 OBJ: 19-3

27. _______________ on the international market is called dumping. a. Price discrimination b. Predatory pricing c. Price skimming d. Penetration pricing ANS: B PTS: 1 OBJ: 19-3 28. Steele Corporation has the following information for January, February, and March 2009: January February March 10,000 10,000 10,000 Units produced 7,000 8,500 10,500 Units sold Production costs per unit (based on 10,000 units) are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Variable selling and admin. expenses Fixed selling and admin. expenses $12 8 6 4 10 4 There were no beginning inventories for January 2009, and all units were sold for $50. Costs are stable over the three months. What is the February ending inventory for Steele Corporation using the absorption costing method? a. $39,000 b. $45,000 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. c. $135,000 d. $300,000 ANS: C SUPPORTING CALCULATIONS: 4,500 ($12 + $8 + $6 + $4) = $135,000 PTS: 1 OBJ: 19-4 The following information pertains to Mayberry Corporation: Beginning inventory Ending inventory Direct labor per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling and admin. costs per unit Fixed selling and admin. costs per unit 1,000 units 6,000 units $40 20 10 30 6 14 29. What is the value of the ending inventory using the absorption costing method? a. $240,000 b. $360,000 c. $600,000 d. $420,000 ANS: C SUPPORTING CALCULATIONS: ($40 + $20 + $10 + $30) 6,000 = $600,000 PTS: 1 OBJ: 19-4 30. Absorption costing net income would be _______________ variable costing net income. a. $150,000 greater than b. $150,000 less than c. $240,000 less than d. $240,000 greater than ANS: A SUPPORTING CALCULATIONS: Fixed overhead in beginning inventory Fixed overhead in ending inventory Difference $ 30,000 180,000 $150,000 Since production exceeds sales, absorption costing net income is larger by $150,000. PTS: 1 OBJ: 19-4 31. Eastwood Company has the following information for 2011: Selling price Variable production costs Variable selling and admin. expenses $150 per unit $40 per unit produced $16 per unit sold This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. Fixed production costs Fixed selling and admin. expenses Units produced Units sold $200,000 $140,000 10,000 units 8,000 units There were no beginning inventories. What is the ending inventory for Eastwood using the absorption costing method? a. $300,000 b. $180,000 c. $120,000 d. $80,000 ANS: C SUPPORTING CALCULATIONS: ($40 + $200,000/10,000) 2,000 = $120,000 PTS: 1 OBJ: 19-4 32. Toshi Company incurred the following costs in manufacturing desk calculators: Direct materials Indirect materials (variable) Direct labor Indirect labor (variable) Other variable factory overhead Fixed factory overhead Variable selling expenses Fixed selling expenses $14 4 8 6 10 28 20 14 During the period, the company produced and sold 1,000 units. What is the inventory

cost per unit using absorption costing? a. $104 b. $70 c. $84 d. $32 ANS: B SUPPORTING CALCULATIONS: $42 + $28 = $70 PTS: 1 OBJ: 19-4 33. Eastwood Company has the following information for 2010: Selling price Variable production costs Variable selling and admin. expenses Fixed production costs Fixed selling and admin. expenses Units produced Units sold $150 per unit $40 per unit produced $16 per unit sold $200,000 $140,000 10,000 units 8,000 units This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. There were no beginning inventories. What is the net income for Eastwood using the absorption costing method? a. $452,000 b. $480,000 c. $1,200,000 d. $600,000 ANS: A SUPPORTING CALCULATIONS: [($150 - $60) 8,000] - $140,000 - (8,000 $16) = $452,000 PTS: 1 OBJ: 19-4 34. Ramon Company reported the following units of production and sales for June and July 2010: Units Month Produced Sold 100,000 90,000 June 2006 100,000 105,000 July 2006 Net income under absorption costing for June was $40,000; net income under variable costing for July was $50,000. Fixed manufacturing costs were $600,000 for each month. How much was net income for July using absorption costing? a. $50,000 b. $20,000 c. $80,000 d. $40,000 ANS: B SUPPORTING CALCULATIONS: ($600,000/100,000) 5,000 = $30,000 Absorption costing is lower by $30,000. Therefore, $50,000 less $30,000 equals a profit of $20,000. PTS: 1 OBJ: 19-4 35. Steele Corporation has the following information for January, February, and March 2009: January February March 10,000 10,000 10,000 Units produced 7,000 8,500 10,500 Units sold Production costs per unit (based on 10,000 units) are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Variable selling and admin. expenses Fixed selling and admin. expenses $12 8 6 4 10 4 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. There were no beginning inventories for January 2009, and all units were sold for $50. Costs are stable over the three months. What is the January ending inventory for Steele Corporation using the variable costing method? a. $260,000 b. $78,000 c. $108,000 d. $90,000 ANS: B SUPPORTING CALCULATIONS: 3,000 ($12 + $8 + $6) = $78,000 PTS: 1 OBJ: 19-4 36. A DISADVANTAGE of absorption costing is. a. that it is not a useful format for decision making. b. that it might encourage inventory build up. c. both a and b. d. neither a, b, or c. ANS: C PTS: 1 OBJ: 19-4 37. The following information pertains to Stark Corporation: Beginning inventory Ending inventory Direct labor per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling costs per unit Fixed selling costs per unit 0 units 5,000 units $20 16 4 10 12 16 What is the value of ending inventory using the variable costing method? a. $310,000 b. $250,000 c. $200,000 d. $390,000 ANS: C SUPPORTING CALCULATIONS: ($20 + $16 + $4) 5,000 = $200,000 PTS: 1 OBJ: 19-4 38. Toshi Company incurred the following costs in manufacturing desk calculators: Direct materials Indirect materials (variable) Direct labor Indirect labor (variable Other variable factory overhead $14 4 8 6 10 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. Fixed factory overhead Variable selling expenses Fixed selling expenses 28 20 14 During the period, the company produced and sold 1,000 units. What is the inventory cost per unit using variable costing? a. $52 b. $62 c. $42 d. $70 ANS: C SUPPORTING CALCULATIONS: $14 + $4 + $8 + $6 + $10 = $42 PTS: 1 OBJ: 19-4 39. The following information pertains to Mayberry Corporation: Beginning inventory Ending inventory Direct labor per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling and admin. costs per

unit Fixed selling and admin. costs per unit 1,000 units 6,000 units $40 20 10 30 6 14 What is the value of the ending inventory using the variable costing method? a. $240,000 b. $360,000 c. $350,000 d. $420,000 ANS: D SUPPORTING CALCULATIONS: ($40 + $20 + $10) 6,000 = $420,000 PTS: 1 OBJ: 19-4 Steele Corporation has the following information for January, February, and March 2009: January February March 10,000 10,000 10,000 Units produced 7,000 8,500 10,500 Units sold Production costs per unit (based on 10,000 units) are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead $12 8 6 4 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. Variable selling and admin. expenses Fixed selling and admin. expenses 10 4 There were no beginning inventories for January 2009, and all units were sold for $50. Costs are stable over the three months. 40. What is the March ending inventory for Steele Corporation using the variable costing method? a. $120,000 b. $104,000 c. $260,000 d. $15,000 ANS: B SUPPORTING CALCULATIONS: January February 0 10,000 7,000 3,000 Units of beginning inventory Units produced Units sold Unit of ending inventory 3,000 10,000 10,000 8,500 4,500 March 4,500 10,500 4,000 4,000 $26 = $104,000 PTS: 1 OBJ: 19-4 41. What is the February contribution margin for Steele Corporation using the variable costing method? a. $240,000 b. $170,000 c. $119,000 d. $204,000 ANS: C SUPPORTING CALCULATIONS: 8,500 ($50 - $36) = $119,000 PTS: 1 OBJ: 19-4 42. Ramon Company reported the following units of production and sales for June and July 2010: Units Month June 2006 July 2006 Produced 100,000 100,000 Sold 90,000 105,000 Net income under absorption costing for June was $40,000; net income under variable costing for July was $50,000. Fixed manufacturing costs were $600,000 for each month. How much was net income for June using variable costing? a. $40,000 b. $20,000 c. $(40,000) d. $(20,000) ANS: D This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. SUPPORTING CALCULATIONS: ($600,000/100,000) 10,000 = $60,000 Absorption costing is higher by $60,000. Therefore, $40,000 less $60,000 equals a loss of $20,000. PTS: 1 OBJ: 19-4 Eastwood Company has the following information for 2011: Selling price Variable production costs Variable selling and admin. expenses Fixed production costs Fixed selling and admin. expenses Units produced Units sold $150 per unit $40 per unit produced $16 per unit sold $200,000 $140,000 10,000 units 8,000 units There were no beginning inventories. 43. What is the cost of ending inventory for Eastwood using the variable costing method? a. $300,000 b. $180,000 c. $120,000 d. $80,000 ANS: D SUPPORTING CALCULATIONS: $40 2,000 = $80,000 PTS: 1 OBJ: 19-4 44. What is the net income for Eastwood using the variable costing method? a. $412,000 b. $480,000 c. $1,200,000 d. $600,000 ANS: A SUPPORTING CALCULATIONS: [($150 - $40 - $16) 8,000] - $340,000 = $412,000 PTS: 1 OBJ: 19-4 45. Gross margin is to absorption costing as _______________ is to variable costing. a. gross profit b. contribution margin c. net income d. territory margin ANS: B PTS: 1 OBJ: 19-4 46. When monthly production volume is constant and sales volume is less than production, net income de termined with variable costing procedures will This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. a. b. c. d. always be greater than net income determined using absorption costing. always be less than net income determined using absorption costing. be equal to net income determined using absorption costing. be equal to contribution margin per unit times units sold. ANS: B PTS: 1 OBJ: 19-4 47. When production is less than sales volume, net income under absorption costing will be

_______________ profits using variable costing procedures. a. greater than b. less than c. equal to d. randomly different than ANS: B PTS: 1 OBJ: 19-4 48. Inventory values calculated using variable costing as opposed to absorption costing will generally be a. equal. b. less. c. greater. d. twice as much. ANS: B PTS: 1 OBJ: 19-4 49. Which of the following statements is true? a. Absorption costing net income exceeds variable costing net income when units produced and sold are equal. b. Variable costing net income exceeds absorption costing net income when units produced exceed units sold. c. Absorption costing net income exceeds variable costing net income when units produced are less than units sold. d. Absorption costing net income exceeds variable costing net income when units produced are greater than units sold. ANS: D PTS: 1 OBJ: 19-4 50. All of the following costs are included in inventory under absorption costing EXCEPT a. direct materials. b. direct labor. c. fixed selling expenses. d. fixed factory overhead. ANS: C PTS: 1 OBJ: 19-4 51. What is the primary difference between variable and absorption costing? a. inclusion of fixed selling expenses in product costs b. inclusion of variable factory overhead in period costs c. inclusion of fixed selling expenses in period costs d. inclusion of fixed factory overhead in product costs ANS: D PTS: 1 OBJ: 19-4 52. Which of the following could be considered a segment? a. division b. product-line c. sales territory d. all of the above ANS: D PTS: 1 OBJ: 19-5 Nauman Company has the following information pertaining to its two divisions for 2011: Division X Division Y $ 70,000 $ 90,000 Variable selling and admin. expenses 35,000 100,000 Direct fixed manufacturing expenses 200,000 400,000 Sales 30,000 70,000 Direct fixed selling and admin. expenses 40,000 100,000 Variable manufacturing expenses Common expenses are $24,000 for 2011. 53. What is the segment margin for Division Y? a. $310,000 b. $210,000 c. $240,000 d. $40,000 ANS: D SUPPORTING CALCULATIONS: $400,000 - $90,000 $100,000 - $70,000 - $100,000 = $40,000 PTS: 1 OBJ: 19-5 54. What is the net income for Nauman Company? a. $65,000 b. $325,000 c. $300,000 d. $41,000 ANS: D SUPPORTING CALCULATIONS: $25,000 + $40,000 - $24,000 = $41,000 PTS: 1 OBJ: 19-5 Barmore Company has the following information pertaining to its two divisions for 2010: Division A Division B $ 35,000 $ 45,000 Variable selling and admin. expenses 17,500 50,000 Direct fixed manufacturing expenses 100,000 200,000 Sales 15,000 35,000 Direct fixed selling and admin. expenses 20,000 50,000 Variable manufacturing expenses Common expenses are $12,000 for 2010. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. 55. What is the segment margin for Division B? a. $155,000 b. $105,000 c. $55,000 d. $20,000 ANS: D SUPPORTING CALCULATIONS: $200,000 - $45,000 - $50,000 $35,000 - $50,000 = $20,000 PTS: 1 OBJ: 19-5 56. is What the net income for Barmore Company? a. $300,000 b. $20,500 c. $150,000 d. $32,500 ANS: B SUPPORTING CALCULATIONS: $12,500 + $20,000 - $12,000 = $20,500 PTS: 1 OBJ: 19-5 57. Consider the following portion of a segmented income statement for the year just ended. Assume that the fixed expenses of Division X include $30,000 of direct expenses and that the discontinuance of the department will not affect the sales of the other departments nor reduce the common expenses. Division X Sales Variable manufacturing costs Gross profit Fixed expenses (direct and allocated) Operating income (loss) $ 100,000 60,000 $ 40,000 50,000 $ (10,000) What is X's divisional segment margin? a. ($10,000) b. $40,000 c. $10,000 d. $100,000 ANS: C SUPPORTING CALCULATIONS: $40,000 - $30,000 = $10,000 PTS: 1 OBJ: 19-5 58. Grass

Valley Mining mines three products. Gold ore sells for $1,000 per ton, variable costs are $600 per ton, and fixed mining costs are $250,000. The segment margin for 2009 was $(100,000). The man agement of Grass Valley Mining was considering dropping the mining of gold ore. Only one-half of the fixed expenses are direct and would be eliminated if the segment was dropped. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. What were the sales (in tons) for 2009? a. 375 tons b. 1,000 tons c. 250 tons d. 200 tons ANS: A SUPPORTING CALCULATIONS: Segment margin plus direct fixed costs equals contribution margin. Therefore, ($100,000) + $250,000 = $150,000 $150,000/$400 = 375 tons PTS: 1 OBJ: 19-5 Assume the following information for a product line: Sales Variable manufacturing expenses Direct fixed manufacturing expenses Variable selling and administrative expenses Direct fixed selling and admin. expenses $500,000 100,000 75,000 50,000 60,000 59. What is the contribution margin of the product line? a. $400,000 b. $325,000 c. $350,000 d. $215,000 ANS: C SUPPORTING CALCULATIONS: $500,000 - $100,000 - $50,000 = $350,000 PTS: 1 OBJ: 19-5 60. What is the segment margin of the product line? a. $400,000 b. $325,000 c. $350,000 d. $215,000 ANS: D SUPPORTING CALCULATIONS: $350,000 $135,000 = $215,000 PTS: 1 OBJ: 19-5 61. Division B earns a contribution margin of $200,000 and has a divisional margin of $70,000. If Divi sion B is closed, all of the direct divisional expenses and $110,000 of common expenses can be elimin ated. These facts indicate that closing the division will cause the firm's operating income to a. increase by $90,000. b. decrease by $90,000. c. increase by $40,000. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. d. decrease by $40,000. ANS: C SUPPORTING CALCULATIONS: $110,000 - $70,000 = $40,000 increase PTS: 1 OBJ: 19-5 62. Common segment costs, when contrasted with direct segment costs, are a. costs of all segments such as direct labor. b. costs related to more than one segment and not directly traceable to a particular segment. c. incurred at one level for the benefit of two or more segments. d. both b and c. ANS: D PTS: 1 OBJ: 19-5 63. Consider the following portion of a segmented income statement for the year just ended. Assume that the fixed expenses of Division X include $30,000 of direct expenses and that the discontinuance of the department will not affect the sales of the other departments nor reduce the common expenses. Division X Sales Variable manufacturing costs Gross profit Fixed expenses (direct and allocated) Operating income (loss) $ 100,000 60,000 $ 40,000 50,000 $ (10,000) What would be the effect on the firm's operating income if Division X were discontinued? a. increase $10,000 b. decrease $40,000 c. decrease $100,000 d. decrease $10,000 ANS: D SUPPORTING CALCULATIONS: $40,000 - $30,000 = $10,000 PTS: 1 OBJ: 19-5 64. The following information pertains to Stark Corporation: Beginning inventory Ending inventory Direct labor per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling costs per unit Fixed selling costs per unit 0 units 5,000 units $20 16 4 10 12 16 Absorption costing net income would be _______________ the variable costing net income. a. $50,000 greater than b. $70,000 greater than This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. c. $70,000 less than d. $50,000 less than ANS: A SUPPORTING CALCULATIONS: There is $50,000 more in fixed cost in ending inventory relative to beginning inventory. In addition, production exceeds sales. Therefore, absorption costing net income is larger by $50,000. PTS: 1 OBJ: 19-4 65. Redding Company has two divisions with the

following segment margins for the current year: North ern, $200,000; Southern, $400,000. Common expenses of the company are $50,000. What is Redding Company's net income? a. $150,000 b. $550,000 c. $600,000 d. $650,000 ANS: B SUPPORTING CALCULATIONS: $200,000 + $400,000 - $50,000 = $550,000 PTS: 1 OBJ: 19-5 66. The following information pertains to Stark Corporation: Beginning inventory Ending inventory Direct labor per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling costs per unit Fixed selling costs per unit 0 units 5,000 units $20 16 4 10 12 16 What is the value of ending inventory using the absorption costing method? a. $310,000 b. $250,000 c. $200,000 d. $390,000 ANS: B SUPPORTING CALCULATIONS: ($20 + $16 + $4 + $10) 5,000 = $250,000 PTS: 1 OBJ: 19-4 Taylor Company's budgeted sales were 10,000 units at $200 per unit. Actual sales were 9,200 units at $210 per unit. 67. Taylor's sales price variance is a. $68,000 (U). b. $100,000 (U). This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. c. $8,000 (U). d. $92,000 (F). ANS: D SUPPORTING CALCULATIONS: ($210 $200) 9,200 = $92,000 (F) PTS: 1 OBJ: 19-6 68. Taylor's price volume variance is a. $68,000 (U). b. $160,000 (U). c. $8,000 (U). d. $168,000 (U). ANS: B SUPPORTING CALCULATIONS: (9,200 - 10,000) $200 = $160,000 (U) PTS: 1 OBJ: 19-6 69. Franklin Company expected sales were 2,000 units at $100 per unit. During 2006, it had actual sales of 1,800 units at $110 per unit. Budgeted variable costs were $60 per unit. What is Franklin's total sales variance? a. $8,000 (U) b. $20,000 (U) c. $18,000 (F) d. $2,000 (U) ANS: D SUPPORTING CALCULATIONS: (1,800 $110) - (2,000 $100) = $2,000 (U) PTS: 1 OBJ: 19-6 70. The sales price variance is created by a difference between a. actual and standard contribution margin. b. actual and expected sales price. c. expected and standard net income. d. actual and expected sales volume. ANS: B PTS: 1 OBJ: 19-6 71. Franklin Company expected sales were 2,000 units at $100 per unit. During 2006, it had actual sales of 1,800 units at $110 per unit. Budgeted variable costs were $60 per unit. What is Franklin's sales price variance? a. $8,000 (U) b. $20,000 (U) c. $18,000 (F) d. $2,000 (U) This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. ANS: C SUPPORTING CALCULATIONS: ($110 - $100) 1,800 = $18,000 (F) PTS: 1 OBJ: 19-6 72. Taylor Company's budgeted sales were 10,000 units at $200 per unit. Actual sales were 9,200 units at $210 per unit. Taylor's total sales variance is a. $68,000 (U). b. $100,000 (U). c. $4,000 (U). d. $92,000 (U). ANS: A SUPPORTING CALCULATIONS: (9,200 $210) - (10,000 $200) = $68,000 (U) PTS: 1 OBJ: 19-6 Given the following amounts: Budgeted amounts: Sales Variable costs Contribution margin Actual amounts Sales Variable costs Contribution margin Regular Model 1,500 units $15,000 9,000 6,000 1,250 units $12,500 7,500 $5,000 Deluxe Model 500 units $25,000 17,500 7,500 625 units $31,250 21,875 $ 9,375 Total 2,000 units $40,000 26,500 13,500 1,875 units $33,750 29,375 $14,375 73. What is the contribution margin volume variance? a. $875 favorable b. $899 unfavorable c. $843.75 unfavorable d. $10,268 favorable ANS: C Budgeted average contribution margin = 13,500/2,000 = 6.75 per unit Contribution margin volume variance = (1,875 - 2,000) 6.75 = $843.75. PTS: 1 OBJ: 19-6 74. What is the sales mix variance? a. $6,250 unfavorable b. $191.50 favorable c. $843.75 unfavorable d. $1,718.50 favorable This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. ANS: D Budgeted average contribution margin = 13,500/2,000 = 6.75 per unit Sales mix variance = (1,250 - 1,500) ($4 - $6.75) = (625 - 500) ($15 -$ 6.75) = PTS: 1 $687.50 $1,031.25

$1,718.75 favorable OBJ: 19-6 Given the following amounts: Budgeted amounts: Sales Variable costs Contribution margin Actual amounts Sales Variable costs Contribution margin Other data: Actual industry sales Budgeted industry sales Regular Model 1,500 units $15,000 9,000 6,000 1,250 units $12,500 7,500 $5,000 Deluxe Model 500 units $25,000 17,500 7,500 625 units $31,250 21,875 $ 9,375 Total 2,000 units $40,000 26,500 13,500 1,875 units $33,750 29,375 $14,375 23,000 units 20,000 units 75. What is the market size variance? a. $2,869 unfavorable b. $2,025 favorable c. $843.75 favorable d. $1,718.50 unfavorable ANS: B Budgeted average contribution margin = $13,500/2,000 = $6.75 per unit Budgeted market share = 2,000/20,000 = 10% Actual market share = 1,875/23,000 = 8.152% Market size variance = [(23,000 - 20,000) 0.10] $6.75 = $2,025 favorable PTS: 1 OBJ: 19-6 76. What is the market share variance? a. $2,869 unfavorable b. $2,025 unfavorable c. $843.75 favorable d. $1,718.50 unfavorable ANS: A Budgeted average contribution margin = $13,500/2,000 = $6.75 per unit Budgeted market share = 2,000/20,000 = 10% Actual market share = 1,875/23,000 = 8.152% Market share variance = (0.08152 - 0.10) 23,000 $6.75 = $2,869 unfavorable PTS: 1 OBJ: 19-6 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. 77. The market share variance is calculated by: a. [(Actual industry sales in units Budgeted industry sales in units) * (Budgeted market share percentage)] * (Budgeted average unit contribution margin) b. [(Actual market share percentage Budgeted market share percentage) * (Actual industry sales in units)] * (Budgeted average unit contribution margin) c. (Actual quantity sold Budgeted quantity sold) * Budgeted average unit contribution mar gin d. (Actual quantity sold Budgeted quantity sold) * Actual average unit contribution margin ANS: B PTS: 1 OBJ: 19-6 78. Which of the following is NOT a limitation of profit management? a. the emphasis on quantifiable measures b. emphasis on volume variances c. the focus on past performance d. a higher emphasis on short-run optimization ANS: B PTS: 1 OBJ: 19-7 79. An alternative to the limitation of focusing on profits would be: a. communicate other measures are important but continue to base rewards on profits b. overstate the value of ending inventory in order to reduce cost of goods sold and improve operating income performance c. focus on longterm objectives and appropriate emphasis on profit d. analyze the product mix ANS: C PTS: 1 OBJ: 19-7 80. What are the ways employee behavior changes in relation to a profit emphasis? a. desire to avoid losses may result in short-run decisions b. unethical behavior may take place if rewards or bonuses are based on profits c. ignoring the less measurable outcomes that may benefit the company d. all of the above are potential changes ANS: D PTS: 1 OBJ: 19-7 81. A successful firm: a. places appropriate emphasis on profit, is aware of economic and environmental trends out side the company, and measures impact on the community and employees. b. values numeric profit and encourage employees to do what is in their power to increase profits. c. ensures there are always monthly, quarterly, and annual profit and lost statements as the sole measure of success so that all employees are aware of the success or failure of a peri od. d. none of the above ANS: A PTS: 1 OBJ: 19-7 PROBLEM 1. Answer the following: a. Discuss each of the following economic market structures (i.e., number of firms in industry, barriers to entry, uniqueness of product): 1. Perfectly competitive market 2. Monopolistic competition 3. Oligopoly 4. Monopoly

b. Match the following industries with the appropriate economic market: Local cable television company Restaurants United States Post Office Cereal Wheat farmer Automotive ANS: a. Number of Firms in Industry Barriers to Entry Uniqueness of Product Perfect competition Many Very low Not unique No special expense Monopolistic competition Many Low Some unique features Advertising, coupons, costs of differentiation Oligopoly Few High Fairly Unique Costs of differentiation advertising, rebates coupons Monopoly b. Market Structure Type Expenses Related to Structure Type One Very High Very Unique Legal and lobbying expenditures Perfectly competitive market: Wheat farmer Monopoly: Local cable television company United States Post Office Monopolistic competition: Restaurants Oligopoly: Cereal Automobile PTS: 1 OBJ: 19-1. 2. Compare and contrast the various pricing policies used by companies. ANS: Cost is an important determinant of supply and, since so much of a companys resources are focused on identifying, quantifying, and reporting costs, many companies base price on cost. Prices must cover not only costs, but also profits, so often a company will start with cost and either apply a markup on cost of goods sold or a markup on direct materials. The markup is a percentage applied to a base cost; it includes any desired profit and any costs not included in the base. When using a markup of COGS, the formula is (Selling and administrative expenses + Operating income) / COGS When using markup is based on direct materials, the formula changes to: (Direct labor + Overhead + Selling and administrative expenses + Operating Income) / Direct Materi als Another pricing policy is the use of target costing. Target costing starts at a target price based on what a customer is willing to pay and works backwards to determine if the product can be made at a cost that would still ensure a profit for the firm. There are also policies of penetration pricing (pricing a new product at a low initial price) and price skimming (a higher price being charged when a product is first introduced). PTS: 1 OBJ: 19-2 3.

Nordholm Construction Company builds houses. Each job requires a bid. Nordholm's bidding policy is to estimate the costs of materials, direct labor, and subcontractor's costs. These are totaled and a markup is applied to cover overhead and profit. In the coming year, Nordholm believes it will be the successful bidder on ten jobs with the following total revenues and costs: Revenues Materials Direct labor Subcontractors Residual $648,000 $200,000 250,000 150,000 600,000 $ 48,000 The residual will cover overhead and profits. Required: a. What is the markup percentage on total direct costs? b. Suppose Nordholm is asked to bid on a job with estimated direct costs of $55,000. What is the bid? If the customer complains that the profit seems pretty high, how might Nordholm counter that? ANS: a. Markup percentage = $48,000/$600,000 = 8% b. Bid = $55,000 1.08 = $59,400 Nordholm should remind the customer that the 8 percent markup on direct costs is not pure profit. It includes overhead as well as profit. In construction, an 8 percent overhead plus profit rate may be a little low. PTS: 1 OBJ: 19-2. 4. Vicki Johns operates a catering company. Vicki provides food and servers for parties. She also rents tables, chairs, dinnerware, glassware, and linens. Alan and Debbie Holms contacted Vicki about cater ing for their daughter's wedding. They have requested an open bar, hors d'oeuvres (enough for 300 people), a large wedding cake, and forty tables with linens, dinnerware, and glassware. Vicki put to gether the following bid: Food (300 $7.50) Wedding cake ($150) Beverages (300 $5) Servers (12 4 hours $10) Bartender (1 3 hours $12) Rental of: Linens Tables Dinnerware Glassware Total $2,250 150 1,500 480 36 80 200 80 80 $4,856 Required: Suppose that the Holmses blanch when they see the bid. Mr. Holmes suggests that they had hoped to spend no more than $3,750 or so on the party. How could Vicki work with the Holmses to achieve a target cost of that amount? ANS: Vicki will need to sit down with the Holmses and determine which features of the reception are most important to them and which are less important. For example, perhaps the large wedding cake could be replaced with a small wedding cake, along with several sheet cakes. The party time could be reduced from three hours to two. The Holms could provide their own tables and linens. In addition, less ex pensive food and appetizers could be offered. PTS: 1 OBJ: 19-2 5. What are some of the pricing practices regulated by law? ANS: Laws have been passed regulating the level and manner of firm pricing. Predatory pricing sets prices below cost in order to drive out competition. Many states have differing laws on predatory pricing. Price discrimination is outlawed by federal law. Price discrimination occurs when different prices are charged to different customers. This law does not apply to service firms. PTS: 1 OBJ: 19-3 6. Baker Company produced 30,000 units and sold 28,000 units in 2010. Beginning inventory was zero. During the period, the following costs were incurred: Indirect labor Indirect materials Other $ 60,000 30,000 90,000 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed

without the prior consent of the publisher. Fixed manufacturing overhead Fixed administrative expenses Fixed selling expenses Variable selling expenses, per unit Direct labor, per unit Direct materials, per unit 180,000 150,000 120,000 40 80 20 Required: Compute the dollar amount of ending inventory using: a. b. Absorption costing Variable costing ANS: a. Variable costs: Direct materials Direct labor Indirect labor Indirect materials Other variable overhead Variable product costs per unit Fixed manufacturing overhead Total product costs per unit Inventory units Inventory value b. $ 20.00 80.00 2.00 1.00 3.00 $ 106.00 6.00 $ 112.00 1,000 $112,000 Variable product costs per unit Inventory units Inventory value PTS: 1 $ 106.00 1,000 $106,000 OBJ: 194 7. The variable costing income statement for Jackson Company for 2010 is as follows: Sales (5,000 units) Variable expenses: Cost of goods sold Selling (10% of sales) Contribution margin Fixed expenses: Manufacturing overhead Administrative Net income $100,000 $30,000 10,000 $24,000 14,400 40,000 $ 60,000 38,400 $ 21,600 Selected data for 2010 concerning the operations of the company are as follows: Beginning inventory Units produced -0- units 8,000 units Manufacturing costs: This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. Direct labor Direct materials Variable overhead $3.00 per unit 1.60 per unit 1.40 per unit Required: Prepare an absorption costing income statement for 2010. ANS: Sales Less cost of goods sold: {5,000 [$3.00 + $1.60 + $1.40 + ($24,000/8,000)]} Gross profit Less operating expenses: Selling expenses Administrative expenses Net income PTS: 1 $100,000 45,000 $ 55,000 $ 10,000 14,400 24,400 $ 30,600 OBJ: 19-4 8. Ellie Manufacturing Company produces three products: A, B, and C. The income statement for 2011 is as follows: Sales Less: Variable expenses Contribution margin Less fixed expenses: Manufacturing Selling and administrative Net income $200,000 127,000 $ 73,000 $20,000 14,000 34,000 $ 39,000 The sales, contribution margin ratios, and direct fixed expenses for the three types of products are as follows: A Sales Contribution margin ratio Direct fixed expenses of products B C $60,000 35% $8,000 $40,000 30% $5,000 $100,000 40% $4,000 Required: Prepare income statements segmented by products. Include a column for the entire firm in the state ment. ANS: Ellie Manufacturing Company Income Statement For the Year 2011 A Sales Less: Variable expenses Contribution margin Less: Direct fixed exp. Product margin Less: Common expenses PTS: 1 $60,000 39,000 $21,000 8,000 $13,000 B $40,000 28,000 $12,000 5,000 $ 7,000 C $100,000 60,000 $ 40,000 4,000 $ 36,000 Total $200,000 127,000 $ 73,000 17,000 $ 56,000 17,000 $ 39,000 OBJ: 19-5 9. The table division operates as a revenue center with the following relevant information for 2010: Sales price variance Sales volume variance Budgeted unit contribution margin per unit $2,000 unfavorable $4,000 favorable $12 The actual selling price was $2 less than the expected selling price and the actual number of units sold is 200 more than expected. Required: a. Calculate the expected sales price. b. Calculate the actual sales price. c. Calculate actual unit sales. d. Calculate expected unit sales. ANS: EP = Expected selling price AP = Actual selling price AS = Actual units sold ES = Expected units sold a. Price volume variance = (AS - ES) EP 200(EP) = 4,000 EP = $20 b. $20 - $2 = $18 c. (AP - EP)AS = -$2,000 Sales price variance ($18 - 20)AS = -$2,000 AS = 1,000 units d. (AS - ES) = 200 1,000 - ES = 200 ES = 800 units PTS: 1 OBJ: 19-6 This edition is intended for use outside of the U.S. only, with content that may be

different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. 10. Nanerty Inc. produces two types of backpacks: basic and deluxe. The basic backpack sells for $25 and the deluxe sells for $100. Nanerty is budgeting sales for 2010 of 1,000 basic backpacks and 650 de luxe. Variable costs associated with the basic backpack amount to $10 and $40 for the deluxe. Actual units sold were 1,200 basic and 550 deluxe. Required: a. Calculate the contribution margin variance b. Calculate the sales mix variance ANS: a. Actual Qty Sold 1,750 - Budgeted Qty sold * 1,650 * Budgeted Average Contribution margin 32.73 = 3,272.73 ** Budgeted Average Contribution margin: Basic Deluxe Sales ($25 * 1,000 ) = 25,000 ($100 * 650) = 65,000 Variable Costs: ($10 *1,000) = 10,000 ($40 * 650) = 26,000 Contribution margin 15,000 39,000 total units budgeted Average CM per unit Total 90,000 36,000 54,000 1,650 32.73 b. Sales mix variance = (Basic actual units Basic budgeted units) * (Basic budgeted unit - budgeted average contribution margin contribution margin) 1,200 - + (Deluxe actual units 550 1,000 * Deluxe budgeted units) * - 650 * 15.00 32.73 (3,546.00) - budgeted aver(Deluxe budgeted unit age contribution margin contribution margin) 60.00 - 32.73 (2,727.00) This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. ** Actual Contribution margins: Basic Sales ($25 * 1,200 ) = 30,000 ($100 * 550) = Variable Costs: ($10 *1,200) = 12,000 ($40 * 550) = Actual CM Budgeted CM Total 55,000 18,000 15,000 Check Figure PTS: 1 Deluxe : 22,000 33,000 39,000 Contribution margin var 3,272.73 - 3,546 2,727= 85,000 34,000 51,000 54,000 (3,000.00) (3,000.27) OBJ: 19-6 11. Discuss the limitation of profit measurement. ANS: Profit is an important measure. It is limited because of its focus on past results, rather than future per formance. It is a quantifiable measure, but there are qualitative aspects to performance that are not re flected. It is a single measure and cannot capture the multiple dimensions of performance. Profits are used for evaluating performance and have an impact on people's behavior. PTS: 1 OBJ: 19-8 This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.