Question 1

The total production costs at Kellner Machine Works are $87,000 out of which $45,000 represent fixed costs. Which of the following is representative of the variable costs incurred by the company?
A) $35,000
B) $42,000
C) $45,000
D) $87,000
E) $132,000

Accepted Answer

Variable costs are calculated by subtracting fixed costs from total production costs. Therefore, $87,000 - $45,000 = $42,000.

Question 2

The simplest pricing method is ________ pricing.
A) value-based
B) fixed cost
C) cost-plus
D) target return
E) competition-based

Accepted Answer

Cost-plus pricing is the simplest method, where a fixed percentage is added to the cost of producing a product to determine its price.

Question 3

With accumulated production experience and a higher volume of production, companies not only become more efficient but also ________.
A) gain economies of scale
B) incur higher overhead costs
C) create derived demand in the market
D) spend more per unit of produced output
E) tend to routinely spend less on inputs

Accepted Answer

With accumulated production experience and a higher volume of production, companies are able to spread their fixed costs over a greater number of units, resulting in a lower cost per unit. This is known as economies of scale.

Question 4

A downward-sloping experience curve is indicative of ________.
A) the negative customer perception about a company's products
B) the falling demand for a company's products
C) the falling unit production cost of a company
D) the low quality of a company's products
E) slow and inadequate organizational learning

Accepted Answer

A downward-sloping experience curve indicates a decrease in the unit production cost, meaning the company is becoming more efficient in its production process.

Question 5

As production workers become better organized and more familiar with equipment, the average cost per unit tends to decrease with the ________.
A) increase in the diseconomies of scale
B) accumulated production experience
C) decrease in the economies of scale
D) increase in derived demand
E) increase in primary demand

Accepted Answer

As production workers become better organized and more familiar with equipment, they are able to work more efficiently and effectively, leading to accumulated production experience. This results in a decrease in the average cost per unit, known as economies of scale. This is the opposite of choice A, which refers to diseconomies of scale that occur when a company becomes too large and inefficient. Choices D and E refer to demand, which is not relevant to the question.

Question 6

Cost-plus pricing ________.
A) is a complex pricing method
B) involves pricing that accurately reflects production costs
C) involves adding a standard markup for profit
D) aims at breaking even on the costs of making and marketing a product
E) is a value-based pricing method

Accepted Answer

Cost-plus pricing involves adding a standard markup for profit to the production costs. It is a relatively simple pricing method that ensures that the seller recovers all of their costs and makes a profit by adding a predetermined percentage to the cost of producing the product.

Question 7

As production moves up, the average cost per unit decreases because ________.
A) variable costs decrease
B) of increasing diseconomies of scale
C) fixed costs are spread over more units
D) overhead costs decrease
E) revenue increases

Accepted Answer

As production increases, fixed costs (such as rent and salaries of management) can be spread over a larger number of units, reducing the average cost per unit. Variable costs may or may not decrease with increased production, and overhead costs and revenue may not directly impact average cost per unit. Increasing diseconomies of scale may actually cause average cost per unit to increase after a certain point.

Question 8

The experience curve reveals that ________.
A) repetition in production has no visible impact on production costs
B) repetition in production enhances efficiency
C) the average cost of production remains the same with accumulated production experience
D) repetition in production adds to the costs and thereby increases the prices of outputs
E) the average cost of production increases with accumulated production experience

Accepted Answer

The experience curve theory suggests that with cumulative experience in production, the overall cost of production decreases due to increased efficiency, learning, and economies of scale. Therefore, option B is the correct choice. Options A, C, D, and E are incorrect as they either contradict the theory or provide irrelevant information.

Question 9

Experience-curve pricing assumes that ________.
A) competitors are weak and not willing to match price cuts
B) competitors are strong and invincible
C) aggressive pricing adversely affects product image
D) volume-based production slows down organizational learning
E) lower-cost technologies are almost always inferior

Accepted Answer

Experience-curve pricing assumes that competitors are weak and not willing to match price cuts. This is because experience-curve pricing relies on the concept that as production levels increase, costs per unit decrease, allowing for price reductions while still maintaining profitability. If competitors are strong and invincible, they may match or beat the lower prices, leading to a price war and potentially damaging the product's image. Therefore, experience-curve pricing is most effective when a company has a strong competitive advantage that allows them to offer lower prices without risking retaliation from competitors.

Question 10

Lawyers, accountants, and other professionals typically price by adding a standard markup for profit. This exemplifies ________.
A) target pricing
B) cost-plus pricing
C) value-based pricing
D) break-even pricing
E) penetration pricing

Accepted Answer

Cost-plus pricing involves adding a markup to the cost of producing a product or providing a service to determine its selling price. This is commonly used by professionals like lawyers and accountants, who charge clients based on their hourly rates and add a markup for profit. Target pricing is when a company determines the price based on what the market is willing to pay, while value-based pricing involves setting a price based on the perceived value of the product or service to the customer. Break-even pricing is when a company sets a price that covers its costs and expenses, and penetration pricing involves setting a low price initially to gain market share.

Question 11

Which of the following is most likely a risk associated with experience-curve pricing?
A) High-volume production facilities are unable to meet demand.
B) New technology often leads to productivity problems.
C) Demand for the product fluctuates unpredictably.
D) Consumers tend to prefer new brands over established ones.
E) Aggressive pricing often gives a product a cheap image.

Accepted Answer

Aggressive pricing can lead consumers to perceive the product as low quality or cheap, which can damage the brand's image.

Question 12

The learning curve is representative of the ________.
A) per unit cost of output in the long run
B) drop in the average per-unit production cost that comes with accumulated production experience
C) number of units the market will buy in a given time period, at different prices that might be charged
D) total market demand resulting from different prices
E) per unit cost of output in the short run

Accepted Answer

The learning curve shows the drop in the average per-unit production cost that comes with accumulated production experience. As more units are produced, the cost per unit decreases due to increased efficiency and experience.

Question 13

To take advantage of a downward-sloping experience curve, a company must do all of the following EXCEPT ________.
A) increase the product's price
B) be able to sell the higher volume of product
C) price its product lower
D) increase its production output
E) decrease its costs through experience gained

Accepted Answer

To take advantage of the downward-sloping experience curve, a company must price its product lower, increase its production output, and decrease its costs through experience gained. Increasing the product's price would result in a decrease in demand, which would not be beneficial for taking advantage of the experience curve.

Question 14

Herbie Inc., a firm manufacturing sandwich makers, has fixed costs of $250,000, variable costs of $20 per unit of output, and expected unit sales of 50,000 units. What is the unit cost of a sandwich maker manufactured by Herbie?
A) $15
B) $25
C) $30
D) $50
E) $75

Accepted Answer

The total cost of producing 50,000 units can be calculated as follows:
Total cost = Fixed cost + (Variable cost per unit × Number of units)
Total cost = $250,000 + ($20 × 50,000)
Total cost = $1,250,000

The unit cost of a sandwich maker can be calculated as follows:
Unit cost = Total cost ÷ Number of units
Unit cost = $1,250,000 ÷ 50,000
Unit cost = $25

Therefore, the unit cost of a sandwich maker manufactured by Herbie is $25.

Question 15

The fixed cost in manufacturing a single LED monitor is $40 and the variable cost is $12. If the company expects to manufacture 5,000 monitors, the total costs would be ________.
A) $60,000
B) $200,000
C) $260,000
D) $420,000
E) $500,000

Accepted Answer

Total cost = Fixed cost + Variable cost per unit x number of units
Total cost = $40 + $12 x 5,000
Total cost = $40 + $60,000
Total cost = $260,000

Question 16

A manufacturing plant is designed to produce 2000 flat-screen TVs per day. But demand is higher than that. If the company tries to increase its production to 2500 TVs per day, the average costs will ________ because ________.
A) decrease; the plant becomes more efficient
B) stay the same; the plant becomes more efficient
C) decrease; the plant becomes inefficient
D) increase; the plant becomes more efficient
E) increase; the plant becomes inefficient

Accepted Answer

Increasing production from 2000 to 2500 TVs per day requires the plant to operate at a higher capacity, which could lead to higher costs due to the need for additional resources, such as labor and materials. This could also lead to inefficiencies in the production process, further increasing costs. Therefore, the average costs are likely to increase, and the plant may become inefficient.

Question 17

A cell phone manufacturing firm produced 1,000 cell phones a day but believed that it could reasonably step up production to 2,000 cell phones a day. Consequently, it built a larger plant and installed efficient machinery and work arrangements to realize the projected output. Which of the following can most likely be inferred from this information?
A) The unit cost of producing 2,000 cell phones per day would be twice that of the unit cost of producing 1,000 units per day.
B) A production plant with the capacity of producing 5,000 cell phones a day would be most efficient.
C) The unit cost of producing 2,000 cell phones per day would be lower than the unit cost of producing 1,000 units per day.
D) A 2,000-capacity production plant would be less efficient because of increasing diseconomies of scale.
E) The fixed costs of the firm are more likely to increase with the increase in output.

Accepted Answer

The firm invested in more efficient machinery and work arrangements to increase its production, which implies economies of scale. This suggests that the unit cost of producing 2,000 cell phones per day would be lower than the unit cost of producing 1,000 units per day. Therefore, option C is the correct answer. Option A is incorrect because there is no basis to assume that the unit cost would double. Option B is not necessarily true because the plant's efficiency is not solely dependent on its production capacity. Option D is incorrect because the information does not suggest that there are increasing diseconomies of scale. Option E is not supported by the information provided.

Question 18

In 2011, the fixed costs of a company were $500,000, and its variable costs equaled $150,000. In 2010, the company made an annual profit of $200,000. It has been predicted that, despite a steady growth, the company's variable costs will likely equal $300,000 by 2013. The total costs of the company in 2011 were ________.
A) $350,000
B) $450,000
C) $650,000
D) $800,000
E) $950,000

Accepted Answer

Total costs in 2011 = Fixed costs + Variable costs
Total costs in 2011 = $500,000 + $150,000
Total costs in 2011 = $650,000
Therefore, the answer is C.

Question 19

The long-run average cost (LRAC) curve indicates the ________.
A) per unit cost of output in the long run
B) projected total production costs of competitors
C) variable costs incurred by a firm over time
D) fixed costs incurred by a firm over the long term
E) number of units the market will buy in a given time period, at different prices that might be charged

Accepted Answer

The long-run average cost (LRAC) curve is a graphical representation of the per unit cost of output in the long run as a firm adjusts its production levels and inputs to minimize production costs. Therefore, choice A is the correct answer. Choices B, C, D, and E are not correct as they do not accurately describe the LRAC curve.

Question 20

Costs that change with the level of production are referred to as ________.
A) fixed costs
B) variable costs
C) target costs
D) total costs
E) overhead costs

Accepted Answer

Variable costs are costs that vary with the level of production and are directly tied to the inputs or resources required to produce a good or service. Examples of variable costs include costs of raw materials, labor costs, and sales commissions. Fixed costs, on the other hand, remain constant regardless of the level of production, such as rent or salaries. Target costs are the desired costs for a product or service, while overhead costs are indirect costs that cannot be directly tied to the production of a specific product or service. Total costs represent the sum of all costs, both fixed and variable.

Quiz 10: Pricing: Understanding and Capturing Customer Value

The total production costs at Kellner Machine Works are $87,000 out of which $45,000 represent fixed costs. Which of the following is representative of the variable costs incurred by the company?

The simplest pricing method is ________ pricing.

With accumulated production experience and a higher volume of production, companies not only become more efficient but also ________.

A downward-sloping experience curve is indicative of ________.

As production workers become better organized and more familiar with equipment, the average cost per unit tends to decrease with the ________.

Cost-plus pricing ________.

As production moves up, the average cost per unit decreases because ________.

The experience curve reveals that ________.

Experience-curve pricing assumes that ________.

Lawyers, accountants, and other professionals typically price by adding a standard markup for profit. This exemplifies ________.

Which of the following is most likely a risk associated with experience-curve pricing?

The learning curve is representative of the ________.

To take advantage of a downward-sloping experience curve, a company must do all of the following EXCEPT ________.

Herbie Inc., a firm manufacturing sandwich makers, has fixed costs of $250,000, variable costs of $20 per unit of output, and expected unit sales of 50,000 units. What is the unit cost of a sandwich maker manufactured by Herbie?

The fixed cost in manufacturing a single LED monitor is $40 and the variable cost is $12. If the company expects to manufacture 5,000 monitors, the total costs would be ________.

A manufacturing plant is designed to produce 2000 flat-screen TVs per day. But demand is higher than that. If the company tries to increase its production to 2500 TVs per day, the average costs will because .

The long-run average cost (LRAC) curve indicates the ________.

Costs that change with the level of production are referred to as ________.