Chapt

er15:
Tar
getCost
ingandCostAnal
ysi
sforPr
ici
ngDeci
sions

MULTI
PLECHOI
CEQUESTI
ONS

1.Whi
choft hefol
lowingcaninf
luenceacompany
'spr
ici
ngdeci
sions?
A. Manufact
uringcosts.
B. Competit
ors.
C. Customerdemand.
D. Pri
cingl
aws.
E. Al
loftheabov e.

Answer
:E LO:
1 Ty
pe:
RC

2.Whichofthefollowi
ngchoicescor r
ectl
ydenot
esf act
orst
hatcani
nfl
uencea
company'spri
cingpract
icesforgoodsandservices?
Market Cust ome
Condit
ion Costs r
s Demand
A. No Yes Yes
B. No Yes No
C. Yes Yes Yes
D. Yes Yes No
E. Yes No Yes

Answer
:C LO:
1 Ty
pe:
RC

3.Whi
choft hefol
lowingisnotamaj orinf
luenceonpr
ici
ngdeci
sions?
A. Pl
anningandcont r
olpoli
ciesofthefir
m.
B. Cust
omerdemand.
C. Cost
s.
D. Competit
ors.
E. Pol
it
ical
,l
egal,andimage-rel
atedissues.

Answer
:A LO:
1 Ty
pe:
RC

442 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 4.Consi
dert
hef
oll
owi
ngst
atement
saboutpr
ici
ng:

I
. Pri
cesareoftendet erminedbythemar ket
,subjectt
ot heconstr
aintthatcosts
mustbecov eredint helongrun.
I
I. Pri
cesareoftenbasedoncost s,subj
ecttotheconstraintt
hatcustomersand
competit
orswi l
lexertaninfl
uence.
I
II
. Abalanceofmar ketf or
cesandcostisimportantwhenmaki ngprici
ngdecisions.

Whi
choft heabov
est
atement
sis(
are)t
rue?
A. Ionly.
B. IIonly.
C. IandI II
.
D. IIandI I
I.
E. I,I
I,andIII
.

Answer
:E LO:
1 Ty
pe:
RC

5.Thecurvet hatshowstherel
ati
onshi
pbet
weent
hesal
espr
iceandquant
it
ysol
dis
cal
ledthe:
A. mar ginalrev
enuecurv
e.
B. averagecostcur v
e.
C. profitcurve.
D. demandcur ve.
E. revenuecur ve.

Answer
:D LO:
2 Ty
pe:
RC

6.Onagr aphwher ethehor i

zontalaxisrepr
esent
squanti
tysol
dandthev er
ti
calaxi
s
representssell
ingprice,t
hebasi cdemandcur veinacompet
iti
vemarketcanbe
graphed:
A. asahor i
zontalline.
B. asav ert
icalli
ne.
C. asadownwar dsl opi
nglinetot heri
ght.
D. asanupwar dslopingli
net otheright
.
E. i nthesamemannerast het otalr
evenuecurv
e.

Answer
:C LO:
2 Ty
pe:
N

7.Thecurvet hatshowst hechangei

ntot
alr
evenuet
hataccompani
esachangei
n
quanti
tysoldiscalledthe:
A. mar ginalrev
enuecur v
e.
B. averagecostcur ve.
C. profitcurve.
D. demandcur ve.
E. revenuecur ve.

Answer
:A LO:
2 Ty
pe:
RC

443 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 8.Fr
omaneconomi cper specti
v e,acompany '
spr ofi
t-
maxi mizi
ngquantit
yisf
oundwher
e:
A. t
het
otalcostcur veint
ersect swiththemar ginalcostcurve.
B. t
het
otalrevenuecur veintersectswiththeav eragerevenuecurve.
C. t
hemarginalrevenuecur veintersect
swi ththedemandcur ve.
D. t
hemarginalrev
enuecur veintersect
swi ththemar ginalcostcur
ve.
E. t
hemarginalcostcur v
ei ntersectswit
ht hedemandcur ve.

Answer
:D LO:
2 Ty
pe:
RC

9.I
fthevol
umesol dreactsstr
ongl
ytochangesi
npr
ice,
demand:
A. hasnoelasti
cit
y.
B. hasnegati
veelasti
cit
y.
C. i
sinel
asti
c.
D. i
selast
ic.
E. i
sunreali
sti
c.

Answer
:D LO:
2 Ty
pe:
RC

10.Underwhi chofthefoll
owi ngcondit
ion(
s)arepr
icessai
dtobeel
ast
ic?
Pri
ce Changein
Change Sal
esVolume
A. Increase Si
zablei
ncrease
B. Increase Si
zabledecrease
C. Decr ease Si zablei
ncrease
D. Decr ease Si zabledecrease
E. Choi ces"B"and"C"arechar acter
ist
icofel
asti
cpri
ces.

Answer
:E LO:
2 Ty
pe:
RC

11.Whi
chofthefoll
owingst atement sregardi
ngpri
ceelasti
cityi
sfal
se?
A. Theconceptofpriceel asti
cit
yisanextensi
onoft heeconomicprici
ngmodel.
B. Demandiselasti
ci fapr i
cechangehasal argenegativei
mpactonsal esvol
ume.
C. Demandiselasti
ci fpricechangeshav enoimpactonsalesvolume.
D. Measuri
ngpriceelasticit
yisanimpor t
antobject
iveofmarketresearch.
E. Demandisrelat
ivelyinelasti
cifpri
cechangeshav eli
tt
lei
mpactonsal esquant
it
y.

Answer
:C LO:
2 Ty
pe:
RC

12.Pr icesaresaidtobeinelasti
cunderwhi
chofthefol
lowi
ngcondi
ti
ons?
Pri
ce Changei n
Change SalesVolume
A. Increase Sizabledecrease
B. Increase Litt
leimpact
C. Decr ease Si zablei
ncrease
D. Decr ease Li tt
leimpact
E. Choi ces"B"and"D"arechar act
eri
sti
cofi
nel
ast
icpri
ces.

Answer
:E LO:
2 Ty
pe:
RC

Chapt
er15 444
 13.Consi
dert
hef
oll
owi
ngst
atement
sregar
dingt
heeconomi
cpr
ici
ngmodel
:

I
. Theeconomi cmodelisl
imit
edinusebecauseaf i
rm'
sdemandcur v
ei sdi
ffi
cul
t
todetermine.
I
I. Themar gi
nalrev
enueandmar gi
nalcostmodelisval
i
dforall
formsofmar ket
organizati
on(perf
ectcompeti
ti
on,oli
gopoly,
andsofort
h).
I
II
. Costaccount i
ngsystemsarenotdesignedtomeasurethemargi
nalchangesin
costincurredasproduct
ionandsalesincr
ease.

Whi
choft heabov
est
atement
sis(
are)t
rue?
A. Ionly.
B. IIIonl
y.
C. IandI II
.
D. IIandI I
I.
E. I,II
,andIII
.

Answer
:C LO:
2 Ty
pe:
RC

14.I
nat ypicalbusi
ness,thefi
rm'sov eral
ldemandwoul
dbei
nfl
uencedbyi
nter
act
ionsof
pr
ici
ngpol ici
esand:
A. thecompany '
sreputat
ion.
B. thequal i
tyofgoodsandser vi
cesoffer
ed.
C. compet i
nggoodsandser vices.
D. adv ert
isi
ngandpr omotionalcampaigns.
E. alloftheabov efact
ors.

Answer
:E LO:
2 Ty
pe:
RC

15.Consi
dert
hef
oll
owi
ngst
atement
saboutwhypr
icesar
eof
tenbasedonpr
oductcost
s:

I
. Companiessel
lmanyproductsandservi
ces,andcost-
basedapproachesprov
ide
asimpleanddir
ectpri
cingmethod.
I
I. Thecostofaproductorserv
iceprov
idesalowerli
mitorfl
oor,
belowwhi chpri
ce
shoul
dnotbesetinthelongrun.
I
II
. Deter
miningacompany'sdemandandmar ginal
revenuecur
vesisdiff
icul
t,
costl
y,
andti
meconsumi ng.

Whi
choft heabov
est
atement
sis(
are)t
rue?
A. Ionly.
B. IIIonl
y.
C. IandI II
.
D. IIandI I
I.
E. I,II
,andIII
.

Answer
:E LO:
2 Ty
pe:
RC

445 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 16.Whi
chofthefol
lowi
ngr epr
esent sthecost
-pl
uspr
ici
ngf
ormul
a?
A. Pr
ice=cost+(markupper centagexcost
).
B. Pr
ice=cost+markupper centage.
C. Pr
ice=markuppercentagexcost .
D. Pr
ice=cost÷markupper centage.
E. Pr
ice=cost+(markupper centage+cost)
.

Answer
:A LO:
3 Ty
pe:
RC

17.I
facompanyusesacost -plusapproachtoprici
ng,itwillf
ind:
A. ther
ear eseveraldi
fferentdef
init
ionsofcostandt hehigherthecost,t
hehighert
he
markupper centage.
B. ther
ear eseveraldif
ferentdef
init
ionsofcostandt hehi gherthecost,
thelowert
he
markupper centage.
C. ther
eisonedef i
nit
ionofcost,andt her
eisnor elati
onshipbet weencostandthe
markupper centageused.
D. ther
eisonedef i
nit
ionofcost,andt her
eisnomar kupper centagewit
hthe
cost-
plusapproach.
E. i
tisinv i
olat
ionofgener all
yacceptedaccounti
ngpr i
nciples(GAAP).

Answer
:B LO:
3 Ty
pe:
RC

18.PattersonandCl ayCompani esbothusecost-

pluspri
cingfor
mul asandar r
ivedata
sell
ingpriceof$1, 000f orthesamepr oduct
.Patter
sonusesabsor pti
onmanuf act
uring
costast hebasi sforcomput ingit
sdoll
armarkupwhereasClayusest ot
alcost.Whi ch
ofthef ol
lowingchoi cescorrectl
ydenotest
hecompanyt hatwoul dhave(1)thehigher
costbasisf order i
vingitsdollarmarkupand(2)thehi
ghermar kuppercentage?
CostBasis Mar kupPer centage
A. Pat t
erson Patterson
B. Pat t
erson Clay
C. Clay Patterson
D. Clay Clay
E. Mor einformat i
oni sneededt ojudge.

Answer
:C LO:
3 Ty
pe:
N

Chapt
er15 446
 19.Consi
dert
hef
oll
owi
ngst
atement
saboutabsor
pti
on-
costpr
ici
ngf
ormul
as:

I
. Absorption-
costformulasconsideracompany '
sfixedmanufacturi
ngcost
swhen
est
ablishingasell
ingprice.
I
I. Absorption-
costformulasareof t
enjust
if
iedonthegroundsthatacompanymust
coverallofit
scost sinthelongrun.
I
II
. Absorption-
costdat aar
et hetypethatmanagersneedwhenf acingcer
tai
n
pri
cingdecisions,suchaswhet herornottoacceptaspecialor
der.

Whi
choft heabov
est
atement
sis(
are)t
rue?
A. IIonly.
B. IandI I.
C. IandI II
.
D. IIandI I
I.
E. I,I
I,andIII
.

Answer
:B LO:
3 Ty
pe:
RC

20.Thedi f
fer encebet weenabsor pti
onmanuf actur
ingcostandt
otal
costwi
thr
espectt
o
productpr i
cingi scausedby :
A. v ari
abl emanuf acturingcost.
B. appl iedf ixedmanuf actur
ingcost.
C. v ari
abl esel li
ngandadmi nist
rat
ivecost.
D. al l
ocat edf ixedselli
ngandadmi ni
str
ativ
ecost .
E. choi ces" C"and" D"abov e.

Answer
:E LO:
3 Ty
pe:
RC

21.Aussi
eCompanyusescost -plusprici
ngandhascal culat
edtot
alvar
iabl
e
manufacturi
ngcost,tot
alabsor pt
ionmanuf act
uringcost,
andtot
alcostforoneofi
ts
pr
oducts.Whi chofthesecost swouldbet hesmal l
est?
A. Totalvari
ablemanufacturingcost.
B. Totalabsorpti
onmanuf acturi
ngcost .
C. Totalcost.
D. Thereisnodi f
fer
encebet weenchoi ces"B"and"C."
E. Mor einf
ormationisneededt ocorrectl
yanswerthequesti
on.

Answer
:A LO:
3 Ty
pe:
N

22.Whi
choft hefol
lowi
ngformulasrepresentsthemar kupper
cent
ageont
otal
cost
?
A. Targetprofi
t÷annualvolume.
B. Targetprofi
t÷(annualvolumext otal
costperuni t
).
C. (Annual v
olumextotalcostperunit)÷targetprofi
t.
D. Targetprofi
t÷vari
ablecost.
E. (Targetprofi
txt
otalcostperunit)÷annual vol
ume.

Answer
:B LO:
3 Ty
pe:
RC

447 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 23.Whendet er
mi ni
ngthemar kupt
obeusedi
nacost
-pl
uspr
ici
ngf
ormul
a,manyf
ir
ms
basethemar kuponat ar
get:
A. retur
noni nvest
ment.
B. salesmar gi
n.
C. capit
alturnover
.
D. earni
ngspershar e.
E. debt-t
o-equit
yrati
o.

Answer
:A LO:
3 Ty
pe:
RC

24.Thefoll
owingcost srelat
et oRileyCompany :Vari
ablemanuf acturi
ngcost,$42;
var
iabl
eselli
ngandadmi nistrat
ivecost,$10;appl
iedfi
xedmanuf acturi
ngoverhead,
$37;andall
ocatedf i
xedsel l
ingandadmi ni
str
ati
vecost,$12.I fRil
eyusesabsor pt
ion
manufactur
ing-costprici
ngf ormulas,t
hecompany '
smar kupper centagewoul
dbe
computedont hebasi sof:
A. $42.
B. $52.
C. $79.
D. $101.
E. someot heramount .

Answer
:C LO:
3 Ty
pe:
A

25.Thef
oll
owi
ngdat
aper
tai
ntoQui
gleyEnt
erpr
ises:

Vari
ablemanuf act
uringcost $60
Vari
ableselli
ngandadmi nist
rat
ivecost 10
Appli
edfixedmanuf actur
ingcost 30
Al
locatedfixedsel
li
ngandadmi nistr
ati
vecost 5

Whatpricewil
lthecompanychargei
fthef
ir
m usescost
-pl
uspr
ici
ngbasedont
otal
costandamar kuppercent
ageof60%?
A. $63.
B. $168.
C. $175.
D. $280.
E. Someot heramount.

Answer
:B LO:
3 Ty
pe:
A

Chapt
er15 448
 26.Thef
oll
owi
ngdat
aper
tai
ntoLopezEnt
erpr
ises:

Vari
ablemanuf act
uringcost $70
Vari
ableselli
ngandadmi nist
rat
ivecost 20
Appli
edfixedmanuf actur
ingcost 40
Al
locatedfixedsel
li
ngandadmi nistr
ati
vecost 15

Whatpri
cewil
lthecompanychargei
fthefi
rm usescost
-pl
uspri
cingbasedon
absor
pti
onmanufactur
ingcostandamarkuppercent
ageof110%?
A. $84.
B. $147.
C. $210.
D. $231.
E. Someotheramount.

Answer
:D LO:
3 Ty
pe:
A

Uset
hef
oll
owi
ngt
oanswerquest
ions27-
30:

TheRazooksCompany,
whichmanufactur
esoff
iceequi
pment,
isr
eadyt
oint
roduceanewl
i
ne
ofpor
tabl
ecopier
s.Thefol
lowi
ngcopierdat
aareavail
abl
e:

Vari
ablemanuf act
uringcost $180
Appli
edfixedmanuf actur
ingcost 90
Vari
ableselli
ngandadmi nist
rat
ivecost 60
Al
locatedfixedsel
li
ngandadmi nistr
ati
vecost 75

27.Whatpricewil
lthecompanychargeifthef
ir
m usescost
-pl
uspr
ici
ngbasedonv
ari
abl
e
manufactur
ingcostandamar kuppercent
ageof220%?
A. $396.00
B. $495.00
C. $576.00
D. $643.50
E. Someot heramount.

Answer
:C LO:
3 Ty
pe:
A

28.Whatpricewil
lthecompanychargei
fthef
ir
m usescost
-pl
uspr
ici
ngbasedont
otal
var
iabl
ecostandamar kuppercent
ageof160%?
A. $150.
B. $384.
C. $390.
D. $624.
E. Someot heramount.

Answer
:D LO:
3 Ty
pe:
A

449 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 29.Whatpri
cewil
lthecompanychargeifthef
ir
m usescost
-pl
uspr
ici
ngbasedon
absor
pti
oncostandamar kuppercent
ageof120%?
A. $420.
B. $459.
C. $594.
D. $672.
E. Someotheramount.

Answer
:C LO:
3 Ty
pe:
A

30.Whatpricewil
lthecompanychargei
fthef
ir
m usescost
-pl
uspr
ici
ngbasedont
otal
costandamar kuppercent
ageof40%?
A. $462.
B. $513.
C. $567.
D. $594.
E. Someot heramount.

Answer
:C LO:
3 Ty
pe:
A

31.Montroseusesa140%mar kupont
otal
costandrecent
lycomputedasel
li
ngpri
ceof
$1,
560f orapar t
icul
arpr
oduct
.Ont
hebasi
softhi
sinfor
mat i
on,
thepr
oduct'
stot
alcost
i
s:
A. $650.00.
B. $910.00.
C. $1,114.29.
D. $2,184.00.
E. someot heramount.

Answer
:A LO:
3 Ty
pe:
A,N

32.AlbanyCompanyhasav erageinvest
edcapit
alof$800,
000andatar
getret
urnon
i
nv estmentof15%.Thetotalcostperuni
tis$20basedonavol
umel ev
elof25,
000
units.Albany'
smarkuppercentageontot
alcosti
s:
A. 9. 375%.
B. 24. 0%.
C. 47. 5%.
D. 62. 5%.
E. someot heramount
.

Answer
:B LO:
3 Ty
pe:
A

Chapt
er15 450
 33.I
fthetargetprof
iti
s$60,000foravol
umeof480uni
ts,fi
xedcost
sare$168,000,
and
thevar
iablecostperuni
tis$450,t
henthemar
kuppercent
ageonv ar
iabl
ecostwoul
d
be:
A. 104.56%.
B. 105.56%.
C. 106.00%.
D. 106.45%.
E. someot heramount.

Answer
:B LO:
3 Ty
pe:
A

Uset
hef
oll
owi
ngt
oanswerquest
ions34-
36:

Dext
er,
Inc.
,whi
chmanufacturesvari
ousli
nesofcomputerequi
pment
,i
splanni
ngtointr
oduce
anewli
neoflapt
ops.Currentplanscal
lfort
heproduct
ionandsal
eof1,000uni
ts,
wi t
h
est
imat
edproduct
ioncost
sasf ollows:

Var
iablecosts:
Manuf act
uri
ng $450,
000
Sell
ingandadmini
str
ati
ve 100,
000
Totalvari
abl
ecost
s $ 550,
000
Fi
xedcost s:
Manuf act
uri
ng $300,
000
Sell
ingandadmini
str
ati
ve 180,
000
Totalfi
xedcost
s 480,
000
Tot
al costs $1,
030,
000

Theaverageamountofcapi
tal
inv
est
edi
nthel
apt
oppr
oductl
i
nei
s$900,
000andDext
er'
s
tar
getret
urnoni
nvestmenti
s18%.

34.Whatpri
cemustDexterchar
gei
fthecompanyusescost
-pl
uspr
ici
ngbasedont
otal
cost
?
A. $868.
B. $900.
C. $1,
000.
D. $1,
192.
E. Someotheramount.

Answer
:D LO:
3 Ty
pe:
A

35.IfDext
erusescost-
pluspri
cingbasedonabsor
pti
oncost
,themar
kupper
cent
aget
he
companymustusewoul dbe:
A. 15.72%.
B. 21.64%.
C. 29.56%.
D. 58.93%.
E. someot heramount.

Answer
:D LO:
3 Ty
pe:
A

451 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 36.WhatpricemustDexterchar
gei
fthecompanyusescost
-pl
uspr
ici
ngbasedont
otal
var
iabl
ecost?
A. $712.
B. $900.
C. $1,
030.
D. $1,
192.
E. Someot heramount.

Answer
:D LO:
3 Ty
pe:
A

37.Whichoft hef ol
l
owi ngtermsdescri
besapri
cingst
rat
egyinwhi
chanewproduct
's
i
niti
alpri
cei ssethighandt henevent
ual
l
yloweredtoappeal
toabr
oaderr
angeof
customer s?
A. Penet rati
onpricing.
B. Priceski mming.
C. Cust omerpr i
cing.
D. Designedpr ici
ng.
E. Mar ket-shar
epr ici
ng.

Answer
:B LO:
4 Ty
pe:
RC

38.Whatispri
ceski
mming?
A. Theini
ti
alpr
icei
ssetl
owandkeptconst ant.
B. Theini
ti
alpr
icei
ssetl
owandthenraised.
C. Theini
ti
alpr
icei
ssethi
ghandl
aterlower ed.
D. Theini
ti
alpr
icei
ssethi
ghandkeptconst ant
.
E. Theini
ti
alpr
icei
ssethi
ghandthenraised.

Answer
:C LO:
4 Ty
pe:
RC

39.Whichoft hefol
l
owi ngtermsdescr
ibesapr
icingst
rat
egyi
nwhi chanewpr
oduct
's
i
nit
ialpri
ceissetrelati
vel
ylowinordert
ogainalar
gemarketshare?
A. Penet r
ati
onpricing.
B. Priceskimming.
C. Cust omerpri
cing.
D. Designedprici
ng.
E. Mar ket-
shar
epr ici
ng.

Answer
:A LO:
4 Ty
pe:
RC

Chapt
er15 452
 40.CompanyAusesapr ici
ngappr
oachwher
etheinit
ialpri
ceforaproducti
ssethi
ghand
thenl owered,
andCompanyBusesanappr oachwher eini
ti
alpr
icesaresetl
owinan
efforttogainmar ketshare.Whatt
ermsbestdescri
bethesepracti
ces?
CompanyA CompanyB
A. Pr edator y Skimmi ng
B. Penet ration Predatory
C. Ski mmi ng Penetrati
on
D. Ski mmi ng Predatory
E. Pr edator y Penetrati
on

Answer
:C LO:
4 Ty
pe:
RC

41.BeehlerCompany,whi
chdesi
rest
oent
ert
hemar
ketwi
thanewpr
oduct
,wi
l
lper
for
m
thefoll
owingt
asks:

1—Designandengi
neertheproduct.
2—Determi
netheproduct'
scost.
3—Determi
nethedesir
edpr of
itmargi
n.
4—Determi
nethesuggestedsell
ingpri
ce.

I
fBeehl
erusestar
getcost
ing,
whi
cht
askwoul
dthecompanyper
for
mfi
rst
?
A. 1.
B. 2.
C. 3.
D. 4.
E. Noneoftheabove.

Answer
:D LO:
5 Ty
pe:
RC

42.Thef
ourt
askst
hatf
oll
owt
akepl
acei
ntheconceptknownast
argetcost
ing:

1—Val
ueengi
neeri
ng.
2—Est
abl
i
shat ar
getsell
i
ngpri
ce.
3—Est
abl
i
shat ar
getcost.
4—Est
abl
i
shat ar
getprofi
t.

Whi
choft hefoll
owingchoi
cesdepict
sthecor
rectsequenceoft
heset
asks?
A. 1,3,
4, 2.
B. 3,1,
4, 2.
C. 2,4,
3, 1.
D. 2,3,
1, 4.
E. Someot hersequencenotl
i
stedabove.

Answer
:C LO:
5 Ty
pe:
RC

453 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 43.MohawkCor por
ationmanuf acturesasi ngl
epr oductthathasacostof$350.The
companyusesa70%mar kuponcostt oarri
veatasel li
ngpriceof$595,whi
chresul
ts
i
napr i
cethatv i
rt
uallyalwaysexceedst hatoft hemar ketl
eaders.IfMohawkchanges
tot
heappr oachknownast argetcosting,thecompanywi l
lfi
rst:
A. reduceits70%mar kuprate.
B. tri
mi t
s$350cost .
C. attemptt or
e-engineerit
spr oduct.
D. undertakeathor oughstudyofcompet it
ors'prices.
E. changet hemar kupsot hatitisbasedonsal esratherthanbasedoncost.

Answer
:D LO:
5 Ty
pe:
N

44.Whi
choft hefol
l
owi ngfeaturesi
stypi
cal
l
yabsenti
ntar
getcosti
ng?
A. Anapproachthatbeginswi t
hthedet
ermi
nati
onofaproductorser
vice'
star
get
cost
.
B. Anapproachthatbeginswi t
hthedet
ermi
nati
onofaproductorser
vice'
star
get
sel
li
ngpri
ce.
C. Afocusonthecust omer .
D. Afocusonpr oductdesign.
E. Afocusonpr ocessdesign.

Answer
:A LO:
5 Ty
pe:
RC

45.Whi
choft hef
oll
owingis(are)akeyfeat
ureoft
argetcost
ing?
A. Theuseofcross-
functi
onalteams.
B. Afocusonthecustomer .
C. Afocusonproductdesign.
D. Afocusonprocessdesign.
E. All
oftheabove.

Answer
:E LO:
5 Ty
pe:
RC

46.Frankl
i
nElectroni
cscurrentl
ysellsacameraf or$240.Anaggr essivecompet i
torhas
announcedplansforasimi l
arproductt
hatwillbesoldfor$205.Fr ankli
n'
smar keti
ng
depart
mentbel i
evesthatifthepri
ceisdroppedtomeetcompet i
tion,uni
tsaleswi l
l
i
ncreaseby10%.Thecur rentcosttomanufactureanddistr
ibutethecamer ais$175,
andFrankl
inhasapr ofi
tgoal of20%ofsales.IfFrankl
i
nmeet scompet i
tiv
esel l
i
ng
pri
ces,whati
st hecompany 'star
getcost?
A. $41.
B. $48.
C. $164.
D. $175.
E. $192

Answer
:C LO:
5 Ty
pe:
A

Chapt
er15 454
 47.Hughescur rentlysell
sami xerf or$850t hatmar ketleaderssell
for$815.Thecur rent
coststomanuf actureanddistri
but ethemixertotal $530,andthecompanyhasapr ofi
t
goalof40%ofsal es.Hughesusest argetcost
ingi ni t
seffort
stobeal eaderinthe
market pl
ace.Ont hebasisoft hisinfor
mat i
on,(1)whatshoul dHughesconsi dertobe
theinit
ialdri
veroft hetar
get-costingprocessand( 2)whatamountofcostr eductionis
neededf orthecompanyt oachi eveitsgoals?
I
niti
alDriv
er CostReduct i
on
A. Cur
rentpr i
ceof$850 $20
B. Cur
rentpr i
ceof$850 $41
C. Marketleaders'pri
ceof$815 $20
D. Marketleaders'pri
ceof$815 $41
E. Marketleaders'pri
ceof$815 Someot her
amount

Answer
:D LO:
5 Ty
pe:
RC,
A

48.Quantum Enterpri
sescurr
entlysell
sapi eceofluggagef or$200.Anaggr essiv
e
competi
torhasannouncedpl ansforasimilarproductthatwillbesol
df or$170.
Quantum'smar keti
ngdepartmentbelievesthatifthepr i
ceisdroppedtomeet
competi
tion,unitsal
eswill
increaseby10%.Thecur rentcosttomanuf actureand
di
str
ibutetheluggageis$130, andQuant um hasapr of
itgoalof30%ofsal es.If
Quantum meet scompetit
ivesell
ingprices,whatmusthappent othecompany '
s
manufacturi
nganddi st
ri
butioncost?
A. Nothing,becausethecost sarewithi
ndef i
nedr angesandcanact uall
yi ncr
easeby
$10.
B. Nothing,becausethecost sarewithi
ndef i
nedr angesandcanact uall
yi ncr
easeby
$23.
C. Costsmustdecr easeby$11.
D. Costsmustdecr easeby$39.
E. Noneoft heabov e.

Answer
:C LO:
5 Ty
pe:
A

49.Mont anapr oducesbi cy cl

esinahi ghl ycompet iti
vemar ket.Dur i
ngthepasty ear,t
he
companyhasaddeda30%mar kupont he$250manuf acturi
ngcostf oroneofi t
smost
popularmodels.Anewcompet i
tormanuf acturesasi mil
armodel ,
hasestablisheda
$300selli
ngprice,andi sser i
ouslyer odingMont ana'
smar ketshare.Managementnow
desi
restouseat arget-costi
ngappr oacht or emai ncompet i
tiveandiswi l
li
ngtoaccept
a20%r etur
nonsal es.Iftargetcostingi sused, whichofthef ol
lowingchoicescor r
ect
ly
denotes(1)thepr i
cet hatMont anawi ll
char geand( 2)company '
stargetcost
?
Sel
li
ngPr i
ce TargetCost
A. $300 $240
B. $300 $250
C. $325 $240
D. $325 $250
E. Someot hercombi nati
onofsel l
ingpriceandt argetcost.

Answer
:A LO:
5 Ty
pe:
A,N

455 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 50.Consi
dert
hef
oll
owi
ngst
atement
saboutact
ivi
ty-
basedcost
ingandi
tsusei
npr
ici
ng:

I
. Acompanyt hatusestar
getcosti
nggenerall
ywouldhaveli
tt
leneedfor
act
ivi
ty-
basedcosti
ng.
I
I. Companiesthatusecost-
pluspri
cingmethodswouldhaveli
ttl
eneedfor
act
ivi
ty-
basedcosti
ng.
I
II
. Theuseofactivi
ty-
basedcosti
ngwi l
lof
tenleadt
obetterpr
ici
ngdecisi
onsby
managers.

Whi
choft heabov
est
atement
sis(
are)t
rue?
A. Ionly.
B. IIonly.
C. IIIonl
y.
D. IandI II
.
E. I,II
,andIII
.

Answer
:C LO:
6,7 Ty
pe:
N

51.Whi
choft hefoll
owingmanagementtool
sisakeycomponentoft
argetcost
ing?
A. Managementsi mulati
on.
B. Li
nearprogrammi ng.
C. Val
ueengineering.
D. Goalprogrammi ng.
E. Per
formancer eport
ingsy
stems.

Answer
:C LO:
8 Ty
pe:
RC

52.Whichofthef oll
owingcost -
reduct
ionandpr
ocess-
impr
ovementt
echni
quesi
sof
ten
usedinconjunct i
onwi t
htargetcosti
ng?
A. Linearprogrammi ng.
B. Deterministi
csimul at
ions.
C. Costallocation.
D. Budgetarypaddi ng.
E. Valueengi neeri
ng.

Answer
:E LO:
8 Ty
pe:
RC

Chapt
er15 456
 53.Consi
dert
hefol
lowingstatementsaboutti
meandmat erialpri
cing:
I
. Thet i
mechar gei
ncludesthedir
ectcostofanempl oy
ee'st i
me.
I
I. Thet i
mechar gei
ncludesanamountt ocoverv
ariousov er
headcost
s.
I
II
. Themat er
ialchar
gei ncl
udesahandli
ngchargeformat eri
al.

Whi
choft heabov
est
atement
sis(
are)t
rue?
A. Ionly.
B. IandI I.
C. IandI II
.
D. IIandI I
I.
E. I,I
I,andIII
.

Answer
:E LO:
9 Ty
pe:
RC

54.Undert
hetimeandmat er
ialpri
cingmethod,acust
omerwouldbechar
gedf
or:
A. mater
ialcosts.
B. mater
ialandlaborcosts.
C. mater
ial
,labor,
andov erheadcost
s.
D. mater
ialandlaborcosts,plusapr
ofitmargi
n.
E. mater
ial
,labor,
andov erheadcost
s,plusaprof
itmar
gin.

Answer
:E LO:
9 Ty
pe:
RC

55.Withtheti
meandmat eri
alpr
ici
ngmet hod,t
hehour lyt
imechargeisty
pical
lysetequal
to:
A. thehourl
ylaborcost.
B. thehourl
ylaborcost+annual
overhead.
C. thehourl
ylaborcost+anhourl
yov er
headchar ge+anhour l
ychargetocoverthe
profi
tmargin.
D. annualoverhead+anhourl
ychargetocoverthepr of
itmargi
n.
E. thehourl
ylaborcost+anhourl
ychargetocov ertheprof
itmargi
n.

Answer
:C LO:
9 Ty
pe:
RC

56.Glendal
eCorporat
ionusesti
meandmat eri
alpri
cing.Therepairdepar
tmentexpect
s
20,000di
rectl
aborhoursofact
ivi
tyandhasthefoll
owingselecteddat
a:

Laborandfri
ngebenefi
tcost
s $800,
000
Overheadcosts(
excl
udesmater
ial
handl
ingandstor
age) 480,
000
Targetpr
ofit 220,
000

Thecompany
'st
imechar
geperhouri
s:
A. $11.
B. $24.
C. $40.
D. $64.
E. $75.

Answer
:E LO:
9 Ty
pe:
A

457 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
Uset
hef
oll
owi
ngt
oanswerquest
ions57-
58:

St
.PaulAutoRepai
rusesti
meandmateri
alpri
cing.Thebodyshop,
whi
chant
ici
pat
es10,
000
di
rectl
aborhour
sofacti
vi
ty,hast
hef
oll
owingdata:

Annualoverheadcosts:
Materialhandl
i
ngandst or
age $15,
000
Otheroverheadcosts 75,
000
Annualcostofmat er
ial
sused 187,
500
Laborrateperhour,i
ncludi
ngfri
ngebenef
it
s 18
Hourl
ychar getoachiev
epr of
itmar
gin 11

57.Theti
mechargeperhouris:
A. $19.
50.
B. $27.
00.
C. $29.
00.
D. $36.
50.
E. someotheramount.

Answer
:D LO:
9 Ty
pe:
A

58.Theamounttobeaddedtoeachdol
l
arofmat
eri
alcostt
oobt
aint
het
otal
mat
eri
al
char
geis:
A. $0.
06.
B. $0.
08.
C. $0.
10.
D. $0.
13.
E. someotheramount
.

Answer
:B LO:
9 Ty
pe:
A

59.I
faparti
cul
arjobt
akes20hour
sofl
aborand$800ofmat
eri
als,
thepr
icechar
gedf
or
thej
obis:
A. $1,
380.
B. $1,
444.
C. $1,
530.
D. $1,
594.
E. someotheramount
.

Answer
:D LO:
9 Ty
pe:
A

Chapt
er15 458
 60.Consi
dert
hef
oll
owi
ngst
atement
saboutcompet
it
ivebi
ddi
ng:

I
. Thehighert
hepr i
cethatacompanybids,thegreat
ert
hepr of
iti
fthefir
mgetst
he
contr
act.
I
I. Biddi
ngahigherpr i
ceincr
easestheprobabi
li
tyofobt
ainingacontract
.
I
II
. Acompanyt hatbidslowtoensur
eacceptanceofacontractmayactuall
ywi
ndup
bi
ddingtoolowt omakeanaccept abl
eprofi
t.

Whi
choft heabov
est
atement
sis(
are)t
rue?
A. Ionly.
B. IIonly.
C. IIIonl
y.
D. IandI II
.
E. I,II
,andIII
.

Answer
:D LO:
10 Ty
pe:
RC

61.I
fafirm hasexcesscapaci ty,whi
choft hefoll
owingisasensibl
ebiddingstr
ategy
?
A. Setapr icetocoveral lcosts.
B. Baset hebidont hei ncrement alcostsincurr
edbecausethejobwillcont
ri
bute
towardt hecompany '
spr ofi
t.
C. Baset hebidsolelyondi r
ectlaborhour s.
D. Downpl aythepot entiali
mpactofcompet i
tors.
E. All
ocat ecommonf ixedcost st oindiv
idualj
obsbeforeprepar
ingthebid.

Answer
:B LO:
10 Ty
pe:
RC

62.I
fafirm hasnoexcesscapaci ty
,whichofthefol
lowingi
sasensi
blebi
ddi
ngstr
ategy
?
A. Setapr icetocoverallcosts.
B. Baset hebidont heincrement al
costsi
ncurr
edbecauset
hejobwil
lcont
ri
bute
towardt hecompany '
spr ofi
t.
C. Baset hebidsolelyondi r
ectlaborhour
s.
D. Downpl aythepot ent
iali
mpactofcompet it
ors.
E. Trytomi ni
mizethecompany '
staxli
abi
li
ty.

Answer
:A LO:
10 Ty
pe:
RC

459 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 63.Superi
orCompanyi
sinvol
vedinacompet
it
ivebi
ddi
ngsit
uati
on.Thef
oll
owi
ngcost
s
areanti
cipat
edf
oraproj
ectt
obebidwit
htheCit
yofSouthl
ake:

Di
rectmateri
al $340,
000
Di
rectl
abor 610,
000
Al
l
ocatedv ari
abl
eover
head 420,
000
Al
l
ocatedfixedcost 110,
000

Whichofthefoll
owi
ngcostfigur
esshoul
dbeusedi
nset
ti
ngami
nimum bi
dpr
icei
f
Super
iorhasexcesscapaci
ty?
A. $530,000.
B. $950,000.
C. $1,370,
000.
D. $1,480,
000.
E. Someot heramount.

Answer
:C LO:
10 Ty
pe:
A

64.Par
ksideRecreat
ioni
sexpl
ori
ngacompetit
ivebiddingsi
tuat
ion.Thefi
rm, whi
ch
cur
rentl
yhasnoexcesscapaci
ty,
est
imat
est hefoll
owingcostsforapr
ojecttobe
per
formedfortheMorni
ngsi
deSchoolDi
str
ict:

Di
rectmateri
al $220,
000
Di
rectl
abor 130,
000
Al
l
ocatedv ari
abl
eover
head 91,
000
Al
l
ocatedfixedcost 40,
000

Whichofthefoll
owingcostfi
gur
eswouldbeusedi
ndet
ermi
ningami
nimum pr
icei
f
Par
ksidedecidestobidontheMorni
ngsi
deproj
ect
?
A. $131,
000.
B. $350,
000.
C. $441,
000.
D. $481,
000.
E. Someot heramount.

Answer
:D LO:
10 Ty
pe:
A

65.Ov erl
andCompanyi si
nv ol
vedinacompetit
ivebi
ddi
ngsituati
on.Var
iabl
ecostsrelat
ed
tot heproj
ecttotal$520,000,andal
l
ocatedfi
xedoverheadis$95,
000.Whi chofthe
foll
owi ngcostfi
guresshouldbeusedinsett
ingamini
mumbi dpri
cei
fOv er
landhas(1)
excesscapaci t
yand( 2)noexcesscapacit
y?
Excess NoExcess
Capaci t
y Capacity
A. $0 $0
B. $520,000 $520,000
C. $520,000 $615,000
D. $615,000 $520,000
E. $615,000 $615,000

Answer
:C LO:
10 Ty
pe:
A

Chapt
er15 460
461 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 66.Consi
dert
hef
oll
owi
ngst
atement
saboutpr
ici
ngandt
hel
aw:

I
. Amer icanant it
rustlawsr estr
ictcert
aintypesofpri
cingbehavior
.
I
I. Thet erm" pricediscri
mi nati
on"invol
veschargingdif
ferentpr
icestodi
fferent
customer sf orthesamegoodsandser v
ices.
I
II
. Chargi ngdifferentpri
cest odiff
erentcustomersforthesamegoodsi s
permi ssi
blei fpri
cedifferencesarebasedoncostdi ffer
encesofproducing
and/orsellingt hegood.

Whi
choft heabov
est
atement
sis(
are)t
rue?
A. Ionly.
B. IIonly.
C. IandI I.
D. IIandI I
I.
E. I,I
I,andIII
.

Answer
:E LO:
11 Ty
pe:
RC

67.Whi
choft hefol
l
owi ngprici
ngpr
act
icesi
sil
l
egal
?
A. Penetrati
onpricing.
B. Pri
ceski mming.
C. Predatorypri
cing.
D. Cost-basedpri
cing.
E. Market -
shar
epr ici
ng.

Answer
:C LO:
11 Ty
pe:
RC

Chapt
er15 462
EXERCI
SES

Cost
-Pl
usPr
ici
ngFor
mul
as

68.Thef
oll
owi
ngdat
aper
tai
ntoPol
arCompany
'scommer
cial
snowt
hrower
:

Vari
ablemanuf act
uringcost $400
Appli
edfixedmanuf actur
ingcost 160
Vari
ableselli
ngandadmi nist
rat
ivecost 60
Al
locatedfixedsel
li
ngandadmi nistr
ati
vecost 25

Required:
Foreachoft hef ol
lowingcostbases, det
ermi
netheappropr
iat
epercentagemar
kup
thatwillr
esul tinapriceof$980f orthesnowthr
ower.(Roundpercentagest
onear
est
one-hundr edthofaper cent.
)
A.Var i
ablemanuf acturingcost
.
B.Absor ptionmanuf act uri
ngcost
.
C.Tot alcost .
D.Tot alvariablecost.

LO:
3 Ty
pe:
A

Answer:
A. Vari
abl
emanufactur
ingcostperuni
t $400
Markup($400x145%) 580
Pri
ce $980

B. Absorpt
ionmanuf
act
uri
ngcost(
$400+$160) $560
Markup($560x75%) 420
Pri
ce $980

C. Total
cost($400+$160+$60+$25) $645
Markup($645x51.
94%) 335
Pri
ce $980

D. Total
var
iabl
ecost(
$400+$60) $460
Markup(
$460x113.04%) 520
Pri
ce $980

463 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
Cost
-Pl
usPr
ici
ngFor
mul
as;
Missi
ngDat
a

69.Thef
oll
owi
ngdat
aper
tai
ntoBr
ist
olCor
por
ati
on'
sresi
dent
ial
humi
dif
ier
:

Vari
ablemanuf act
uringcost $240
Appli
edfixedmanuf actur
ingcost 80
Vari
ableselli
ngandadmi nist
rat
ivecost 60
All
ocatedfixedsel
li
ngandadmi nistr
ati
ve ?
cost

Toachiev
eatar
getpr
iceof$450perhumi
dif
ier
,themar
kupper
cent
ageont
otal
uni
t
costi
s12%.

Requir
ed:
A.Cal cul
atethefixedsell
ingandadmi nist
rat
ivecostall
ocatedtoeachhumi di
fi
er.
B.Foreachoft hef ol
lowingbases, det
erminetheappropri
atepercent
agemar kupon
costthatwil
lresulti
nat argetpri
ceof$450perhumi dif
ier:(
1)vari
abl
e
manuf act
uri
ngcost ,
(2)absor pt
ionmanufactur
ingcost,and(3)tot
alvar
iablecost
.
(Roundpercentagestot henearestone-
hundredthofaper cent
.)

LO:
3 Ty
pe:
A

Answer
:
A. Pr
ice=tot
alunitcost+(
mar
kupper
cent
agext
otal
uni
tcost
)
$450=X+( 0.
12xX)
$450=1.12X
$401.
79=X

Becausethet
otaluni
tcosti
s$401.
79,t
heall
ocat
edfi
xedsell
i
ngand
admini
str
ati
vecostwouldbe$21.
79($401.
79-$240.
00-$80.00-$60.
00)
.

B. Cost Markup
Method Pr
ice Basi
s Markup Per
cent
1.Vari
ablemanuf act
uri
ngcost $450 $240 $210 87.
50%
2.Absorpti
onmanuf act
uri
ngcost 450 320 130 40.
63%
3.Totalvar
iabl
ecost 450 300 150 50.
00%

Chapt
er15 464
Cost
-Pl
usPr
ici
ng

70.Hir
sh,I
nc.
,sel
l
sasi
ngl
epr
oduct
.Thef
oll
owi
ngi
nfor
mat
ionr
elat
est
othey
earj
ust
ended:

Numberofuni t
ssol d:40,000
Vari
ablecostperuni t
:$200
Tot
al f
ixedcost:$2,400,000
Operat
ingincome: $3,800,000

Requir
ed:
A.Comput ethecompany '
ssell
ingprice.
B.Comput ethepercent
agemar kupont otalcost.Roundyouranswert
ot wodeci
mal
pl
aces.
C.Assumet hatHir
shdesiredtochangei t
spr acti
ceofcomput i
ngamarkupontotal
costt
oamar kuponv ar
iabl
ecost .Ift
hecompanywant stoholdsel
li
ngpri
ce
const
ant,
wouldthemar kuppercentageincreaseordecrease?Byhowmuch?

LO:
3 Ty
pe:
A,N

Answer :
A.Thecompany '
stotalcostis$10,
400,
000[
(40,
000unitsx$200)+$2,400,
000],
result
inginsalesrev
enueof$14,200,
000($10,
400,000+$3,
800,000).Thesel
li
ng
pricei
st her
efore$355( $14,
200,
000÷40,
000units).

B.Thetot
alcostperuni
tis$260[$200+($2,
400,
000÷40,000unit
s)]
,resul
tingi
na
$95markup($355-$260).Eachuni
tist
husmarkedupby36.54%oftotalcost(
$95
÷$260).

C.Becausethebaseforcomputi
ngt hemar
kupi ssmal l
er,thepercent
agemar kup
mustincreaset
oproducethesamesalesprice.Themar kuponv ar
iabl
ecostmust
equal$155toderi
vea$355sell
ingpri
ce($355- $200),or77.5%($155÷$200) .The
netresul
tisahi
keof40.96%(77.50%-36.54%).

465 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
St
rai
ght
for
war
dTar
getCost
ing,
Val
ueEngi
neer
ing

71.Argosy, I
nc.,usestargetcostingandwil
lsoonenteraverycompetit
ivemarketpl
acein
whichitwi ll
hav eli
mitedinfl
uenceoverthepri
cesthatar
echarged.Managementand
consultantsarewor kingtofine-t
unet
hecompany '
ssoleservi
ce,whichhopefull
ywil
l
generatea12%r et
urn(profi
t)onthefi
rm's$24,
000,000asseti
nvestment.The
fol
lowingi nfor
mat i
oni savai
lable:

Hoursofser
vicetobeprovi
ded:34,
000
Ant
ici
patedvari
abl
ecostperservi
cehour:
$30
Ant
ici
patedf
ixedcost:
$2,560,
000peryear

Requir
ed:
A.Howmuchpr ofi
tmustAr gosypr oducet oachievea12%r eturn?
B.Cal culat
ether evenueperhourt hatAr gosymustgener atet oachi
ev ea12%r et
ur n.
C.Assumet hatpr i
ortoenteri
ngt hemar ket
place,managementconduct edaplanning
exerci
setodet erminewhet hera14%r eturncouldbeat t
ainedinyearno.2.Cant he
companyachi evet hi
sreturnif(a)compet i
ti
vepressuresdictateamaxi mum
sell
ingpri
ceof$195perhourand( b)serv
icehours,vari
ablecostperser vi
cehour ,
andf i
xedcost sarethesameast heamount santi
cipat
edi nyearno.1?Show
calcul
ati
ons.
D.I fyouranswert opart"C"is"no,"suggestandbr i
efl
ydescr i
beapr ocedurethat
Argosymi ghtuset oachievedesir edresult
s.

LO:
5,8 Ty
pe:
A,N

Answer
:
A.Argosy
'st
argetpr
ofi
tis$2,
880,
000(
$24,
000,
000x12%)
.

B.Total
rev
enuesmustbesuff
ici
entt
ocovercost
sandproducethet
argetpr
ofi
t.Thus,
rev
enuesequal$6,
460,
000[
(34,
000hoursx$30)+$2,560,
000+$2,880,
000]
.The
rev
enueperhourmustbe$190($6,
460,
000÷34,000hours)
.

C.Argosy'
star
getpr
ofi
tis$3,
360,
000(
$24,
000,
000x14%).Totalrev
enuesmustequal
$6,940,
000[(
34,
000hoursx$30)+$2,
560,
000+$3,
360,000],
andt her
evenueper
hourmustbe$204.12($6,
940,
000÷34,
000hour
s).

No.A14%ret
urnrequi
rest
hatAr
gosypr
oducerev
enueperser
vicehourof$204.
12,
whi
chisi
nexcessofthe$195maxi
mum marketpri
ce.

D.Toachievea14%r et
urnanda$195r evenue-per
-hourfi
gure,thecompanymust
tr
imitscosts.Argosycouldusevalueengineeri
ng, at
echniquet hatut
il
izes
i
nformati
oncol l
ectedaboutaservi
ce'
sdesignandassoci atedprocesses.Thegoal
i
st oexaminethedesignandprocessesandtheni dent
if
yimpr ovementst hatwoul
d
producecostsavings.

Chapt
er15 466
Anal
ysi
sofBusi
nessDeci
sion;
Tar
getCost
ing

72.RatnerandAssoci atesdev el
opshot elsi
nr esortlocati
ons.Thecompanyi sexploring
theconstruct
ionofanewf aci
li
tythatwoul dhav esignif
icantmeetingandbanquet
spaceforconv enti
onsandconf erences,andsl eepi
ngr oomst hataver
age850squar e
feet
.Theaccount ingdepar tmentest i
mat esthatlandandbui l
dingcostswil
lamountt o
$60and$120persquar ef
ootoff loorarea,r
espect i
vel
y .Otherexpendi
tur
esduring
constr
uctionforinterest,r
ealestatetaxes,andgener aloverheadareexpectedt
ot otal
35%ofl andandconst ruct
ioncost.

Oncebasi
cconst
ruct
ioni
scompl
eted,
Rat
nerant
ici
pat
esper
-r
oom i
nit
ial
expendi
tur
es
for
:

Sl
eepingroom f
urni
shi
ngsandaccessor
ies $16,
000
Suppl
ies 1,
900
Marketi
ng 5,
500

Theaccount
ingdepart
mentsuggestst
hat10%beaddedtothetotalofal
lpr
eceding
cost
stoall
owf orest
imat
ioner
rors.Const
ruct
ioni
sant
ici
patedtotaketwoyears.

Ratner
'spri
cingpol
i
cyisconsi
stentwit
hthatofi
ndustr
yleaders,namely,t
osetaroom
rat
eequalto1%of$1,000ofcost.Uponcomplet
ion,
compar ablefaci
l
iti
esareexpect
ed
tocharge$240perday.

Requir
ed:
A.Comput ethet otalcostofasleepingroom att henewf acil
it
y.
B.I sthecompany '
sr oom r
atecompet it
ive?Br i
eflyexplai
n.
C.Rat nerdesirestoent ert
hismar ketbyadher i
ngt otheindustr
ystandar
dand
chargingacompet it
iveroom r
ate.Ifneeded, thefir
m willl
ookforwaystocut
expenditur
es.Br iefl
yexplai
nthedi f
ferencebet weencost-pl
usprici
ngandtarget
costi
ng.
D.Ot herthanoper atingcostsandr oom r
ev enues,whatelseshouldRatnerconsi
der
beforeaf i
naldecisionismadeaboutt hefacil
ity?

LO:
3,5 Ty
pe:
A,N

467 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 Answer :
A. Land:850squaref
eetx$60 $51,
000
Constructi
on:
850squar
efeetx$120 102,
000
Subt ot
al $153,
00
0
I
nter est
, t
axes,
andoverhead:$153,
000x35% 53,
550
Furnishingsandaccessori
es 16,
000
Suppl i
es 1,
900
Mar keti
ng 5,
500
Subt ot
al $229,
95
0
Est
imat
ioner
ror
s:$229,
950x10% 22,
995
Tot
al $252,
94
5

B. Theratemayormaynotbecompeti
ti
v e,
dependingonwhet
hertheest
imati
on
error
smater
ial
i
ze.Thegoi
ngmarketrateis$240perday
,whi
leRatner
'sr
atewi
ll
rangebet
ween$229.
95and$252.
95.

C. Withtargetcosti
ng,afi
rmfirstdeter
mi nesacompet it
ivemar ketpr
icetocharge
fori
tsgoodorser vi
ceandthensubt ractsanappropri
ateprofi
tmar gin.Theresul
t
i
sat argetedcostfi
gur
e,whichmayr equi r
ethataprocessber edesi
gnedt hr
ough
anappr oachknownasv al
ueengi neering.Incontr
ast,cost-
pluspri
cingbegins
withaf i
rm'scostsandaddsamar kupt oarri
veatthesell
ingpr i
ce.

D. Thefacil
i
tyisbeingdesignedt oaccommodat econfer
encesandconv enti
ons,
meaningthatsignifi
cantaddedr evenuesandincomemayr esul
t.Forexample,
audi
o-vi
sualrental
sandl arge-scal
ediningandli
quorsalescommonl yari
sefrom
suchevents.Furthermore,manyt hingscanchangedur i
ngt het
wo-year
const
ructi
onper i
od( e.
g.,economicdownt urnsandnewcompet itor
s)thatcoul
d
al
terthecompany 'sanalysi
sandconst ruct
iondecisi
ons.

Chapt
er15 468
Cost
-Pl
usPr
ici
ngv
s.Tar
getCost
ing

73.Formanyy ears,
OrbitCorpor ati
onhasusedastrai
ght f
orwardcost-
pluspr
ici
ngsy
stem,
mar ki
ngi t
sgoodsupappr oxi matel
y20%oftotalcost.Thecompanyhasbeen
profit
able;however,i
thasr ecentlyl
ostconsi
derablebusinesst
of or
eigncompet
it
ors
thathavebecomev eryaggr essivei
nthemarketplace.Thesefir
msappeartobeusing
targetcosting.

Anexampl eofOr bi
t'
swoesi sty
pif
iedbyitem no.710,whi
chhasthef oll
owing
unit
-costchar act
eri
sti
cs:dir
ectmateri
als,$50;di
rectl
abor,
$90;manuf act
uri
ng
overhead, $40;andsell
ingandadmi ni
str
ativ
eexpenses,$20.Thegoingmar ketpr
ice
forani denti
calproductofi
denti
calquali
tyis$210,whichi
sbelowwhatOr bi
tis
charging.

Requir
ed:
A.Cont r
astcost-pl
uspr i
cingandtargetcosti
ng.
B.Whati sOrbit
'scurrentsell
ingpri
ceforit
em no.710?
C.I fOrbitusedtargetcostingfori
tem no.710,whatmusthappentocost
sifthe
companydesi redtomeetmar ketpri
cesandmai nt
aini
tscurr
entrat
eofprofi
ton
sales?Byhowmuch?

LO:
3,5 Ty
pe:
A,N

Answer :
A. Cost-pl
uspri
cingbeginsbycomput ingani t
em'scostandt henaddsan
appropri
atemar kup.Ther esul
tist
heitem'ssell
i
ngpr ice.Incontrast
,tar
get
costi
ngbeginsbydet ermininganappropri
atesell
i
ngpr i
ce.At ar
getprofi
tis
nextsubtr
actedf r
om thatpricet
oyiel
dt hecost(i
.e.
,the" t
argetcost"
)that
mustbeachi eved.

B. Thecur
rentsel
l
ingpr
icei
s$240:
($50+$90+$40+$20=$200;
$200x120%
=$240)
.

C. Orbi
t'
smarkupis$40(
$240-$200),whi
chi
s16.67%ofthecur
rent$240
sel
li
ngpri
ce($40÷$240)
.Toachievea16.
67%mar kupona$210selli
ng
pri
ce,t
hecompanymustreducei
tscost
sby$25.

Sell
ingprice $210
Less:16.67%mar
kup(
$210x 35
6.67%)
Targetcost $175

Currentcost $200
Less:Targetcost 175
Requiredcostreduct
ion $25

469 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
Cost
-Pl
usPr
ici
ngv
s.Tar
getCost
ing

74.At
hensCorporati
onmanufactur
espar
tno.67,whi
chisusedint
hepr
oduct
ionof
mount
ainbikes.Per
-uni
tinf
ormati
onaboutpar
tno.67fol
lows.

Prevail
ingmar ketprice $33
Directmat er
ial
s 14
Directl
abor 6
Manuf acturi
ngov erhead 7
Selli
ngandadmi nistrat
iveexpenses 3

Athenshastradi
ti
onall
yuseda20%mar kupontot
alcosttoarr
iveatareasonabl
e
sell
i
ngprice.Thecompany ,
though,hasnoti
cedasizabl
edropinsalesvol
umedur i
ng
thelastf
ewquarters,
whichitat
tri
butestonewentr
antsinthemarketpl
ace.

Requir
ed:
A.Comput ethecurrentsell
ingpri
ceofpar tno.67.
B.I fmanagementdesi redtomeett hepr evail
ingmar ketpr
iceandmaintainthe
curr
entrateofprofitonsales,whatmusthappent othecompany'stotal
manufacturi
ngcost s?Byhowmuch?
C.Assumet hatAthenswasconsi deringent ryint
oanewmar ketwhereitwouldhav
e
noinfl
uenceovert hegoingmar ketprice.Woul ditmakemor esensef ort
he
companyt ousecost -pl
usprici
ngort argetcosting?Br i
efl
yexpl
ain.

LO:
3,5 Ty
pe:
A,N

Answer
:
A.Thecur
rentsel
l
ingpr
icei
s$36:
($14+$6+$7+$3=$30;
$30x120%=$36)
.

B.Thecompany '
smarkupis$6($36-$30)
,whichi
s16.
67%ofthecurrent$36sel
l
ing
pri
ce($6÷$36) .Toachiev
ea16.67%markupona$33sel
li
ngprice,Athensmust
reducei
tscostsby$2.50.

Prevai
li
ngmarketpri
ce $33.
00
Less:16.67%markup($33x16.
67%) 5.
50
Targetcost $27.
50

Currentcost $30.
00
Less:Targetcost 27.
50
Requiredcostreduct
ion $2.50

C.Givent hatthecompanycannotcontr
olthemarketpr
ice,itmakesmor esenseto
uset argetcosti
ng,whi
chbeginstheoveral
lpr
ocesswithal ookatprev
ail
ing
mar ketpricesandcondi
ti
ons.Acost-
plusappr
oachmi ghtculminat
einasuggested
pri
cet hatexceedsthatoft
hecompet i
ti
on.

Chapt
er15 470
Tar
getCost
ing,
ProductModi
fi
cat
ion

75.WagnerFur ni
tur
emanuf act
ureseasy-t
o-assemblewoodenfurni
tureforhomeand
off
ice.Thef i
rmisconsi der
ingmodifi
cationofabookcase,andthecompany '
s
marketingdepar
t mentsurveyedpotenti
albuyer
sr egar
dingf
iveproposedchanges
(A-
E).Thebuy ers'r
esponses, i
norderofprefer
ence,al
ongwithWagner '
srel
ateduni
t
costsforthemodi f
icat
ions,fol
l
ow.

Orderof
Prefer
enc Chang Cost
e e
1 A $7.5
0
2 D 5.00
3 B 4.00
4 C 1.50
5 E 5.50

Thebookcasecur rentl
ycosts$81toproduceanddi
str
ibut
e,andWagner '
ssellingprice
forthi
sunitaverages$108.Ananal y
sisofcompeti
ti
veproductsinthemar ketplace
reveal
edav ari
etyoffeatur
es,wit
hsomemodel shavi
ngallofthechangesthatWagner
i
sconsi der
ingandot hermodelshavi
ngonlyafew.Thecur r
entmanufacturers'sell
i
ng
pri
cesont hesebookcasesav er
ages$120.

Requir
ed:
A.Whyi sthereaneedi ntargetcosti
ngt o(a)focusont hecust omerand(b)havea
marketi
ngt eam becomei nv ol
vedwithproductdesign?
B.Managementdesi r
est oear napproxi
mat elythesamer at eofprofi
tonsal
esthatis
bei
ngear nedwi t
ht hecur rentdesi
gn.
1.I fWagnerusest argetcostinganddesi r
est omeett hecur r
entcompeti
ti
ve
sell
i
ngpr ice,whati sthemaxi mum costoft hemodi fiedbookcase?
2.Whi choft hemodi fi
cationsshoul
dWagnerconsi der?
C.Assumet hatWagnerwant edtoaddamodi fi
cationortwot hatyouexcl
udedinyour
answert orequir
ement" B2."Whatpr ocessmi ghtmanagementadoptt oal
lowthe
companyt omakei tstargetprofi
tforthebookcase?Br iefl
yexplai
n.

LO:
5,8 Ty
pe:
A,N

471 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 Answer:
A. Targetcosti
ngi smar
ketdriven,
beginni
ngwi t
hadet er
minati
onoft hesell
ingprice
thatcustomersarewill
i
ngt opay.Thatpriceisdependentonthepr oductthey
purchaseandt hepr
oduct'
sassociatedfeatur
es.Iti
sonlynatural
thatamar ket
ing
team becomesheav i
lyinv
olvedinthi
sprocess,asmuchofwhati sdoneher eis
basedoncust omerfeedback.

B. 1. Wagnercur r
entlyearnsa$27profi
toneachbookcasesold(
$108-$81) ,
whichtr
anslatesintoa25%mar kuponsales($27÷$108).Thecurrent
competi
tivemar ketpri
ceis$120,whichmeansthati
fWagnermaintainsthe
25%mar kup,itwil
learn$30peruni
t.Themaximumallowabl
ecostistherefor
e
$90($120-$30) .

2. Wagnercanadd$9ofmodi fi
cations($90-$81)
,gi
vi
ngrisetoseveral
options.
Customer sf
eelmostst
rongl
yaboutchangeA, whi
chcanbeadopt edeit
herby
i
tselforinconj
unct
ionwit
hchangeC( $7.
50+$1.50=$9.00).Alt
ernati
vely,
changesDandBcanbesel ected,al
soadding$9totot
alcost($5.
00+$4. 00=
$9.00).

C. Wagnermi ghtuseval
ueengi
neeri
ngtostudythedesi
gnandproducti
onprocess
ofboththebookcaseascurr
entl
ymanufacturedaswel
lastheproposednew
featur
es.Thegoalistoi
denti
fyi
mprovementsandassoci
atedreduct
ionsi
ncost
thatmayallowthecompanytoaddprevi
ouslyrej
ect
edopti
ons.

Chapt
er15 472
Pr
ici
ngWi
thAct
ivi
ty-
CostPool
s

76.Thecont
rol
l
erforHal
ifaxPhot
ogr
aphi
cSuppl
yhasest
abl
i
shedt
hef
oll
owi
ngcost
pool
sandcostdri
ver
s:

Budgete
Budget ed dLev el
Ov er
head for
Acti
vit
yCostPool Cost CostDri
ver Dri
ver PoolRat
e
Machinesetups $200,000 Numberofsetups 100 $2,
000persetup
Materi
alhandli
ng 100,000 Poundsofrawmat eri
al 50,
000 $2perpound
Hazardouswaste 50,000 Poundsofhazardous 10,
000 $5perpound
contr
ol chemi
cal
s
Quali
tycontr
ol 75,000 Numberofinspecti
ons 1,
000 $75peri
nspecti
on
Otherover
headcost
s  
200,000 Machinehours 20,
000 $10permachine
hr.
Tot
al $625,
000

Anorderfor1,
200boxesoff
il
m-dev
elopmentchemi
cal
shast
hef
oll
owi
ngpr
oduct
ion
requi
rements:

Machinesetups 8
Poundsofrawmat er
ials 16,
000
Poundsofhazar douschemical
s None
I
nspecti
ons 4
Machinehour s 400
Di
rectmaterial
sandl aborcost $24,
000

Hal
i
faxest
abl
i
shedat
argetpr
icebyaddi
nga40%mar
kupt
otot
almanuf
act
uri
ngcost
.

Requir
ed:
A.Det ermi netheorder'
stargetpricebyusi ngt heacti
vi
ty-
costpools.
B.Assumet hatHalif
axusedasi ngle,combi nedov er
headrat
ebasedonwei ghtofr
aw
mat eri
als.
1.Det erminethepredeterminedov erheadr ate.
2.Det erminetheexpectedcostoft heor der.
3.Det erminethetargetpri
ce.
C.Whi chappr oachabove("A"or"B" )seemst obeamor ereasonablemet
hodt o
establi
sht argetpri
ces?Ex pl
ain.

LO:
3,6 Ty
pe:
A,N

473 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
 Answer :
A. Activit
yCostPool Number Rate Cost
Machi neset ups 8 $2,
000 $16,
000
Poundsofr awmat er
ial
s 16,
000 2 32,
000
Poundsofhazar dous 0 5 --
-
chemi cals
I
nspect i
ons 4 75 300
Machi nehour s 400 10 4,
000
Subtotal $52,300
Dir
ectmat erial
sandlabor 24,
000
Totalcost $76,300
Markupat40% 30,
520
Targetprice $106,
820

B.1. Tot
albudgetedov
erhead÷poundsofr
awmat
eri
al
$625,00050,000=$12.
50perpound

2 Materi
alsandlabor $24,
000
.
Overhead($12.
50x16,000pounds) 200,
000
Expectedcostoftheor
der $224,
000

3 Expectedcostoft
heor
der $224,
000
.
Markupat40% 89,
600
Targetpri
ce $313,
600

C.Theact i
vi
ty-
basedappr oach("A")makesmor especif
icuseoftheor der'
s
character
ist
ics(andcostdr i
vers)
.Whi lethi
sorderwoul drepr
esent32%oft he
expecteddir
ectmat er
ialsusage,t heorderwouldrequi
reonly8%oft hesetups,0%
ofthehazardouswast e,0.4%oft heinspect
ions,and2%oft hemachi nehours.No
overheadapplicat
ionmet hodbasedonanysi nglevari
ablecanref
lectallt
his
div
ersityi
nresourceconsumpt ion.

Chapt
er15 474
Ti
meandMat
eri
alPr
ici
ng

77.Empi
reElectr
ical
,whichinst
all
ssophi
sti
catedelectr
oni
c-cont
rol
syst
emsinnew
homes,
pricesjobsbyusingtheti
me-and-
mat er
ialsmet
hod.Thef ol
l
owi
ngdataappl
y
toaj
obforRui zBui
lder
s:

Laborhours:150
Materi
alscost:$42,
000

Thefol
l
owingpredi
cti
ons,
basedon25,
000di
rectl
aborhour
s,per
tai
ntot
hecompany
's
oper
ati
onsfort
heyear:

Annualoverheadcosts:
Material
handli
ngandstor
age $30,
000
Otheroverheadcost
s 325,
000
Annualcostofmat er
ial
sused 500,
000
Laborrateperhour,i
ncl
udi
ngfri
ngebenef
it
s 31

Empi
reEl
ect
ri
cal
addsamarkupof$14perhouroni
tst
imechar
ges,
butt
her
eisno
pr
ofi
tmar
kuponmater
ial
costs.

Requi
red:
Cal
cul
atethepr
icef
ort
heRui
zBui
l
der
s'j
ob.

LO:
9 Ty
pe:
A

Answer:
Ti
mechar ges:
$31+( $325,
000÷25,000hour
s)+$14=$58perhour
Mater
ialhandl
i
ng:$30,000÷$500,
000=6%ofmat er
ial
cost

Pr
icequotationforRui
zBui
lder
s:
Labor:150hoursx$58 $8,700
Materi
al:$42,
000x106% 44,
520
Total $53,
220

475 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
Ti
meandMat
eri
alPr
ici
ng

78.Qual
ityExteri
orsinstal
lsstuccoonhi gh-pr i
cedcustom homes,usi
ngt he
ti
me-and-mat er
ial
smet hodt opricejobsf orindi
vi
dualbuil
der
s.Qualityant
icipat
es
usi
ng$250, 000ofmat erial
sduringthey earandwi l
li
ncur$15,
000format er
ialhandl
ing
andstorage.Ot heroverheadcost s,
whi char edri
venbythefi
rm's18,000directl
abor
hour
s, wil
ltot
al$360,000.Qual i
typay sconst r
ucti
oncrews$17perlaborhourandadds
amar kupof$19perhouroni t
st i
mechar ges.Thereisnoprofi
tmarkuponmat eri
al
cost
.

Dur
ingthefi
rstquar
teroftheyear,
Quali
typerf
ormed24jobsf
orDonHender
son
Bui
l
ders,usi
ng3,100laborhoursand$72,000ofmater
ial
s.

Requi
red:
Cal
cul
atetheamountt
hatQual
i
tywoul
dbi
l
lDonHender
sonBui
l
der
sforwor
k
per
for
med.

LO:
9 Ty
pe:
A

Answer:
Ti
mechar ges:
$17+( $360,
000÷18,000hour
s)+$19=$56perhour
Mater
ialhandl
i
ng:$15,000÷$250,
000=6%ofmat er
ial
cost

Bi
l
li
ngforDonHender sonBui
l
der
s:
Labor:3,
100hoursx$56 $173,
600
Materi
al:$72,
000x106% 76,
320
Total $249,
920

Chapt
er15 476
Compet
it
iveBi
ddi
ng

79.MissionRoofi
ngper
for
msroofi
ngser
vicesf
orcommercialcl
ient
s.Thecompany
r
ecent l
ysubmit
tedabi
dof$371,
000t
ot heShawneeSchoolSyst
em,comput
edas
f
ollows:

Constructi
onmat er
ial
s $80,000
Laborcosts 170,
000
Totaldir
ectcosts $250,
000
Constructi
onov erhead—30%oflabor 51,
000
All
ocatedadmi nistr
ati
veover
head 20,
000
Totalcost $321,
000

Missi
onaddsa20%profi
tmargi
ntoallj
obs,
computedonthebasisoft
otaldir
ectcost.
I
nShawnee'scaset
heprofi
tmar
ginamountedto$50,
000($250,000x20%),produci
ng
abidpri
ceof$371,
000.Assumethat60%ofconst
ruct
ionoverheadi
sfixed.

Requir
ed:
A.I fMissionhadexcesscapaci
ty,
whatwouldbet helowestcosttot
al t
hatt
he
companyshoul dusewhenf i
gur
ingit
sbidforthedistr
ict
?HowcanMi ssi
onjust
if
y
thi
samount ?
B.I fMissionhadnoexcesscapacit
y,whatwouldbet helowestpr
icethatt
he
companyshoul dcharge?
C.Whati sthepri
marybenefi
tandprobl
emofappr oachi
ngacompet it
ivebi
dsit
uati
on
withal ow-
bidphi
losophy?

LO:
10 Ty
pe:
A,N

Answer:
A.Thecostt otal woul
dbet hei
ncremental
costassociatedwiththejob,or$270,400
[(
$80,
000+$170, 000+( $51,
000x40%) ]
.Thecompanyhasexcesscapaci t
y;thus,
anyamounti tcanreceiveinexcessof$270,400wil
lprovideapositi
vecontri
bution
towar
dcov eringthefixedcostsandboostingprof
it
.Not e:Thefixedconstr
uct i
on
over
headandal l
ocatedadmi ni
str
ati
veoverheadareignoredhere,asthesecost s
wil
lbeincurr
edr egardlessofwhetherMissionget
sthej ob.

B.Noexcesscapaci
tyi
ndi
catesaver
ystr
ongmarket,wi
thMissi
onli
kel
yhavi
nga
st
eadybackl
ogofwork.Thecompanyshoul
dcoveral
lofi
tscost
s,pr
oduci
ngabi
d
of$371,
000.

C.Alow-bidphil
osophywi l
ll
ikel
ytransl
atei
ntoaddit
ional
busi
ness,asafi
rmis
successfuli
nit
sbi ddi
ngeffor
ts.Unfort
unatel
y,i
fthebi
dsaretoolow,
afir
m mi
ght
notbeabl et
ocov erit
scosts.

477 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
Compet
it
iveBi
ddi
ng:
Capaci
tyandPr
ici
ng

80.JesterCorporat
ion,whi
chhasamaxi mum laborcapaci
tyof30,000hour
spermonth,
hasconsiderabl
ef l
exi
bil
it
ywithi
tscustomerswhenitcomest oproj
ectcompl
eti
on
dates.Managementi sconsi
deri
ngthesubmissi
onofabi df
oraj obt
obeperf
ormedfor
thecityofOxfor
d.Cost sfort
hejobareasfoll
ows:

Rawmat er
ial
s $140,
000
Laborcosts 330,
000
Vari
ableov er
head(20%oflabor
) 66,
000
Fi
xedov erhead(45%oflabor
) 148,
500
All
ocatedadmi ni
str
ati
vecost 48,
000
Totalcost $732,
500

Jest
er'sl
aborfor
ceispai
danaver
ageof$22perhourandi
fthecompanywi
nsthebid,
i
twil
lhav ethr
eemonthst
ocompletet
hework.Managementaddsa30%prof
itmargin
toal
ljobs,computedont
hebasi
softotal
var
iabl
ecost.

Requir
ed:
A.Comput ethelowestt otalcostthatt
hecompanywouldusewhenfi
guri
ngit
sbid,
assumingt hatJesterhasexcesscapacity
.
B.Comput eJester'
sbi difthecompanyhasnoexcesscapacity
.
C.Assumet hatJesteriscur rentl
yworki
ngat85%ofcapaci
ty.Doest
hefi
rm have
suff
ici
enttimet ocompl etet hej
ob?Ifnot
,whatcoul
dthecompanydoifi
tdesi
res
todobusinesswi thOxf ord?

LO:
10 Ty
pe:
A,N

Answer
:
A.Thelowestt
otal
costist
hevari
ablecostassoci
atedwi
tht
hej
ob,
or$536,
000
(
$140,
000+$330,000+$66,
000).

B.Noexcesscapacityindi
catesav eryst
rongmar ket,
meaningthatJestershoul
d
submitabidthatref
lect
sallofit
scosts.Themar kupis$160,
800,whichisbasedon
rawmat er
ial
s,l
abor,andvariabl
eov er
head($140,000+$330,000+$66, 000=
$536,
000;$536,000x30%=$160, 800)
.Thus,thebidshouldbe$893,300($732,
500
+$160,800).

C.Jest
erhasamaxi mum l
aborcapaci
tyof90,
000hour
s(30,
000x3)dur
ingt
hethr
ee
monthsneededforcomplet
ionofOxfor
d'swor
k.However
,onl
y15%ofthi
stot
ali
s
avai
l
able,
or13,500hour
s.

Oxfor d'
sjobwi l
lrequir
e15, 000hours($330,000÷$22) ,sot hefir
ml ackssuffi
cient
ti
mebutnotbymuch.Gi venthatJesterhassignifi
cantflexibi
l
itywithexi
sting
cust omerswheni tcomest oproj
ectcompl eti
on,managementmi ghtpossibly
delayanexi st
ingjob'sfi
nishdate,fr
eeinghour st
hatcoul dbeal l
ocatedtoOxf ord.
Anot herpossibi
li
tymi ghtinvol
veov er
timeorper hapshiri
ngsomet empor ary
wor kers.

Chapt
er15 478
479 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
Compet
it
iveBi
ddi
ng:
Capaci
tyandPr
ici
ng

81.Just
inManuf
acturi
ng,whi
chpr
oduceselect
rical
component
s,iscont
emplat
ing
submit
ti
ngabidfor30,
000uni
tsofi
tem no.54.Thebi
d'scostwil
lbefol
l
ows:

Rawmat erials $75,000

Dir
ectlabor 120,
000
Manuf acturingov er
head 150,
000
Addit
ional set-upcosts 3,
000
Speci
al dev i
ce 5,
000
All
ocatedadmi nistr
ati
veov
erhead 12,
000
Totalcost $365,
000

Thespeci
aldev
icewill
bepur
chasedf
ort
hisj
obandoncet
hej
obi
scompl
eted,
the
devi
cewil
lbediscar
ded.

Just
inappli
est ot
almanufactur
ingover
headof$5toeachuni t(
0.5machi nehoursat
$10perhour).Thisfi
gureisbased,i
npart
,onbudgetedyearl
yfixedov erheadof
$1,
440,000andanant i
cipat
edv ol
umeof480,000machinehours( 40,000permont h)
.
Just
inispresentl
yworki
ngat85%ofcapaci t
y,andt
heclientneedst heorderintwo
months.

Required:
A.I sJusti
n'scurrentoperati
ngenv i
ronmentoneofexcesscapaci tyornoexcess
capacity
?Br iefl
yexplain.
B.I fJusti
nhadexcesscapaci t
y,whatwoul dbet helowestcostt
otalt
hatthe
companyshoul dusewhenf iguri
ngitsbidf ortheorder?
C.CanJust i
npr oducethisorderintherequiredt i
mef rameoftwomont hs?Explai
n.
D.Supposet hatJusti
nisi nmarginalfi
nancial heal
th.Explai
nthebenefi
tsand
problemsofappr oachingthebiddingprocedur ewi t
h(1)alowbidor(2)ahighbid.

LO:
10 Ty
pe:
A,N

Chapt
er15 480
 Answer:
A. Just
incur
rentl
yhasexcesscapaci
ty,
asi
tiswor
kingat34,
000machi
nehour
s
permonth(40,
000hoursx85%).

B. Just
inshoul
dcovert
hei
ncr
ement
alcost
sassoci
atedwi
tht
heor
der
,whi
char
e
computedasfol
l
ows:

Rawmat er
ial
s $75,
000
Dir
ectlabor 120,
000
Vari
ablemanuf act
uri
ng 105,
000
ov
erhead*
Addit
ionalset-
upcost 3,
000
Speci
al devi
ce 5,
000
Total $308,
000

*
Fixedmanufact
uri
ngoverheadis$3permachinehour($1,440,
000÷
480,000hours)
.Thus,var
iableov
erheadis$7perhour($10-$3),gi
vi
ng
riseto$105,
000(30,
000unitsx0.5hoursx$7).

C. No,t
hereisinsuf
fi
cientmachinet
ime.Justi
nhasa40,000-
hourcapaci
tyeach
monthandhast womont hstocompl
et et
heorder
.Avai
labl
emachinehourstot
al
12,
000(40,000x2x15%) ,
andtheorderr
equi
res15,
000hours(30,
000unit
sx
0.
5).

D. Alow-bidphilosophywi lll
ikel
ytranslateintoaddit
ionalbusiness,
asaf ir
mi s
successfuli
ni t
sbiddingef for
ts.Unfortunatel
y,i
fthebidsaret ool
ow,afirmmi ght
notbeabl etocov eritscosts.Incont rast,ahi
gh-bidphil
osophywi l
lassi
sta
companyi ncov er
ingmor eofitscost sifthecompanywi nst hebi
d.Obv iousl
y,
ther
eisagr eaterchancef orlostbusi nesswiththi
sappr oach.Ineit
hercase,the
marginalfi
nancial healt
hoft hefir
m mayormaynoti mpr ove.

481 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
DI
SCUSSI
ONQUESTI
ONS

Rel
ati
onshi
psi
ntheEconomi
cPr
ofi
t-
Maxi
mizi
ngModel

82.Thef ol
lowingquesti
onsex ploretherelati
onshipsbet
weent otal
andmar gi
nal
functi
onsintheeconomi cprof i
t-
maximi zing(EPM)model :
A.Thet ot
alrevenuefunct
ionr i
sesov ertherangeofoperati
ngacti
vi
typort
ray
edi
nthe
text.Whydoest hemar ginalrevenuef uncti
ondecr
ease?
B.Whati sthebehaviorofthemar ginalcostcurve?
C.I ntheEPM model ,wherei stheprofit
-maximizi
ngvolumel ev
el?Expl
ain.

LO:
2 Ty
pe:
RC

Answer:
A.Thet otal
revenuef
unct
ioni
sincreasi
ngatadecr
easi
ngr
ate;
consequent
ly,
ther
ate
ofchangeinmargi
nalr
evenueisnegati
ve.

B.Themar ginalcostcurvedecreasesi
nit
ial
l
y,refl
ecti
ngeconomiesofscal
eachieved
atr
elati
velylowl evel
sofactivi
ty.However,
atrelat
ivel
yhighl
evel
sofactiv
ity
,the
marginalcostcur v
eincreasesbecauseofdiseconomiesofscal
e.

C.Theprof
it
-maxi
mizi
ngvol
umel
evel
isatt
hei
nter
sect
ionoft
hemar
ginal
costand
margi
nalrev
enuecur
ves.

Tar
getCost
ing,
Cost
-Pl
usPr
ici
ng,
ABC

83.Whenprici
ngpr
oduct
s,manycompani
esuset
argetcost
ingand/
orcost
-pl
uspr
ici
ng
methods.

Requi
red:
A.Briefl
yexpl
ainhowt ar
getcosti
ngisappli
edtonewproduct
s.
B.Howdoest argetcosti
ngdiff
erfrom cost
-pl
uspr
ici
ng?
C.Cananact i
vit
y-basedcost
ingsystem beusedwit
htar
getcost
ing?Expl
ain

LO:
3,5,
6 Ty
pe:
RC

Chapt
er15 482
 Answer:
A.Tar getcost
ingbegi
nswi t
hthel i
kel
ymarketpri
ceforthenewpr oductand
subtr
actsanacceptabl
eprof i
tmargi
ntoarri
veatthemanuf acturi
ngcost
necessaryt
oachiev
et hetargetmargi
n.Then,toachievethetargetcost,
the
productmayneedtober edesignedand/
orre-
engineered.

B.Incost-
plusprici
ng,costi
sthest
arti
ngpoi
nt.Anacceptableprof
itmarginisthen
addedtoar r
iveatthedesi
redsel
li
ngpri
ce.Int
argetcosti
ng,themanufacturi
ng
costi
sthet arget
,deter
minedbystar
ti
ngwit
hmar ketpr
iceandsubtract
ingapr of
it
margin.

C.Yes.Acti
vi
ty-
basedcosti
nghelpstofocusont hevari
ousact i
vi
tiesr equi
redto
manufact
ureaproductandthecostsofthoseactiv
iti
es.Hence, itismor euseful
thantr
adi
ti
onalvol
ume-basedcosti
ngsy stemsthatspreadoverheadr at
herthan
baseover
headassignmentontheutil
i
zationofspecif
icactiv
iti
es.Gener al
l
y
speaki
ng,t
heendresulti
simprovedcostingofgoodsand/ orservices.

Activ
ity
-basedcostingcanalsohelpfocusat
tenti
ononnon- v
alue-
addedacti
vit
ies
thatconsumer esourcesandincr
easeaproduct'
scost.Reducti
onoreli
minat
ionof
theseacti
vit
iescanhel pachi
evetheproduct
'
st ar
getcost.

St
rat
egi
cPr
ici
ngofNewPr
oduct
s

84.Whenintr
oduci
ngnewproduct
s,somecompani
esusepr
iceski
mmi
ngwher
easot
her
s
usepenet
rat
ionpr
ici
ng.

Requi
red:
A.Disti
nguishbet
weenpri
ceski
mmi ngandpenet
rat
ionpr
ici
ng.
B.Ispriceski
mmingaviabl
ealt
ernat
ivef
ormostnewproducts?Expl
ain.

LO:
4 Ty
pe:
RC,
N

Answer :
A.Pr iceskimmingisdesi gnedtoobtai
nahi ghpr iceperunitatrelat
ivel
ylowlevelsof
sales.Astheproductbecomesknownandi nterestini
tgrows, t
hepriceisl
ower ed,
thusstimul
atingsalesv ol
ume.Penet rat
ionpr icing,
ontheotherhand, seeksto
generatearelat
ivel
yhighl ev
elofsal
esi nit
iall
yi nordert
oachi eveahighmar ket
share.Suchpenet r
ationisaccomplishedthr oughani ni
ti
alpricethatisrel
ati
vely
l
ow.

B.Priceskimmi ngisprobabl
ynotviabl
ef ormostproducts.Theskimmingstrat
egy
requir
esasmal lcor
eofcustomer sforwhom pri
ceisunimportantcomparedto
othercharacteri
sti
csoftheproduct—whichmightbet hecasewithwealt
hybuyers
and/orluxurygoods.Thesecust omersarewill
i
ngt opayjustaboutanypri
ceto
securethepr oduct.

483 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on
Rol
eofExcessCapaci
tyi
nCompet
it
iveBi
ddi
ng

85.WardlawCompany ,
whichexperiencesconsider
abl
eseasonalvar
iat
ioni
nit
sacti
vi
ty
andhasahi ghl
eveloff
ixedcosts,isprepar
ingabidforapr
oject
.Thispar
ti
cul
ar
proj
ectwi
llbedoneduri
ngasl ackperiodoftheyear.

Requir
ed:
A.Howshoul dthefixedcostsbehandledi nt
hebiddingapproacht othisproject?
B.Assumet hatthecompanywi nsthebi dandperformsthejobonapr ofit
ablebasis,
consistentwiththeresult
sasprojectedinthebid.Severalmont hslater
,the
customercont actsWar dl
awandr equestsabidt odoanotherjob.Thi sproject,
howev er,mustbedonedur i
ngapeakseason.Howshoul dWar dlaw's
managementr espond?Howdoy outhinkthecustomerwillr
espond?

LO:
10 Ty
pe:
RC,
N

Answer:
A.Fixedcostsshoul
dnotrecei
vethesameemphasisthatwouldbegivenift
he
pr
ojectweretobedoneduri
ngapeakt i
me.Anycontri
but
ionthatthi
sproj
ectcan
makeinexcessoft
hedir
ectincr
ementalcost
swi
l
lboosttheprofi
tofthecompany.

B.Thebidforthesecondpr ojectcannotbepr eparedonthesamebasi sasthebidfor

thefi
rstpr
ojectbecauseoft iming.Ther equirementtoperfor
mt hejobduri
nga
peakseasonmeanst hatthejobmustpr ov i
deasuf fi
cientr
etur
nt omakeitmore
att
racti
vethanotherjobs.I notherwords,fixedcostsshouldbeconsider
ed,and
thebidpri
cewouldbehi gher .

Thecustomeri sli
kel
ytobeunhappyabouttheconsi
derabl
echangeinbidfr
omthe
fi
rstproj
ect.Howev er,
ift
hecustomerunderst
andstheseasonalnat
ureof
War dl
aw'sbusiness,
thenperhapst
hecustomerwil
lchangeit
sscheduleandbet
ter
"t
ime"itspurchasestooccurinWardl
aw'sslowseason.

Chapt
er15 484
Ant
it
rustLawsandPr
ici
ng

86.Anumberofant
it
rustl
awshav
ebeenenact
edt
hataf
fectpr
oductpr
ici
ng.

Requi
red:
A.Def i
nepri
cediscri
minati
onandpr
edat
orypri
cing.
B.Assumet hatafir
mhasbeenchargedwit
hpricedi
scr
iminati
on.Whatr
olecancost
i
nformat
ionplayindefendi
ngt
hefi
rm'
sprici
ngpract
ices?

LO:
11 Ty
pe:
RC

Answer :
A.Pr icediscr
iminati
oninvolv
eschar gingdif
ferentpr i
cestodi
ffer
entcustomersfor
thesamegoodsandser vi
ceswhent hepri
cedi ffer
encesarenotbasedon
variat
ionsi
npr oducti
on,sell
i
ng, and/ordi
stri
but i
oncost.Predator
yprici
ng,
ont he
otherhand,isthepracti
ceofr educingapricef orashortt
imeinordertoenhance
demandandt henraisi
ngthepr i
ceshar pl
y,oftenwi t
hrest
ri
ctedsupply
.

B.Suchinfor
mat i
oncanbeusedt oshowdif
ferencesincostsofpr ovi
dingapr oduct
orser
v i
cetocust omers.Forexample,
acustomert hatplacesaf ewlargeorders
havi
nglowqual i
tyrequir
ementscanbeservedl essexpensivel
ythananot her
cust
omert hatplacesmanysmal lor
derswit
ht i
ghtdeli
verytimesandexact ing
qual
it
yspecifi
cations.

485 Hi
l
ton,
Manager
ialAccount
ing,
Sev
ent
hEdi
ti
on