Question 1

In target costing, effort is concentrated on effectively marketing the product to maximize its selling price.

Accepted Answer

In target costing, effort is focused on determining the cost at which a product must be manufactured in order to make a desired profit margin. The selling price is then set based on this cost, ensuring profitability for the company.

Question 2

In target costing, the selling price is the starting point and the cost follows from the selling price.

Accepted Answer

In target costing, the selling price is considered first, and then the maximum allowable cost is determined to achieve the desired profit margin. The cost follows from the selling price and is a result of the target costing process, rather than the starting point.

Question 3

Holding all other things constant, an increase in fixed production costs will affect:

Accepted Answer

An increase in fixed production costs will affect the markup under the absorption costing approach to cost-plus pricing because absorption costing includes fixed costs in the product cost.

Question 4

If a product is price inelastic, then only a very large change in selling price will result in a substantial change in the volume of units sold.

Accepted Answer

Price inelasticity means that the quantity demanded does not change significantly with price changes, so only a large price change would lead to a noticeable change in sales volume.

Question 5

The markup over cost under the absorption costing approach would increase if the required rate of return increases, holding everything else constant.

Accepted Answer

Under the absorption costing approach, the markup over cost includes a portion to cover overhead costs. If the required rate of return increases, the overhead costs become a greater percentage of the total cost and therefore increase the markup over cost.

Question 6

Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum cost figure.

Accepted Answer

Target costing is a cost management tool that involves setting a target cost for a product or service and then working to achieve that cost through design, engineering, and production efforts. The goal is to ensure that the product can be sold at a competitive price while still generating a desired profit margin.

Question 7

If the unit sales for one product are more sensitive to price increases than another product, then its markup over variable cost should be less than for the other product if the company wants to maximize profit.

Accepted Answer

If the unit sales for one product are more price sensitive, it means that increasing the price of the product will lead to a significant decrease in demand. Therefore, in order to maximize profit, the markup over variable cost for this product should be less than the markup for the other product which is less price sensitive. This allows the company to keep the price of the more price sensitive product lower and attract more customers, ultimately resulting in higher profits.

Question 8

Holding all other things constant, an increase in how sensitive customers are to price would affect:

Accepted Answer

An increase in price sensitivity of customers would lead to a decrease in demand for a product, which would require a decrease in the markup used to calculate the profit-maximizing price in order to maintain the desired level of profitability. The absorption costing approach to cost-plus pricing is not affected by changes in customer price sensitivity as it is based on the overall cost structure of a product.

Question 9

The formula for target cost is:
Target cost = Anticipated selling price + Desired profit

Accepted Answer

The formula for target cost is actually:
Target cost = Anticipated selling price - Desired profit. This is because the target cost is the maximum cost that the company can afford to incur in producing a product, while still making the desired profit at the anticipated selling price.

Question 10

Price elasticity measures the degree to which consumers resent an increase in price.

Accepted Answer

Price elasticity measures the degree to which demand for a product changes in response to a change in price. It does not necessarily measure consumer resentment towards such changes.

Question 11

The price elasticity of demand is NOT used to determine the markup over cost when computing the profit-maximizing price.

Accepted Answer

The price elasticity of demand is used to determine the markup over cost, as it helps in setting the profit-maximizing price by indicating how sensitive the quantity demanded is to price changes.

Question 12

The price elasticity of demand is NOT used in the absorption costing approach to cost-plus pricing to determine the markup over cost.

Accepted Answer

In absorption costing approach to cost-plus pricing, the markup over cost is determined by adding a desired profit margin to the total cost of production. The price elasticity of demand, which measures the responsiveness of quantity demanded to changes in price, is not taken into consideration in this approach.

Question 13

Most of the opportunities to reduce the cost of a product come from designing the product so that it is simple to make, uses inexpensive parts, and is robust and reliable.

Accepted Answer

This statement is correct as designing a product that is easy to manufacture, uses affordable components, and is sturdy and dependable can significantly reduce the cost of production.

Question 14

In the absorption approach to cost-plus pricing, the anticipated markup in dollars is NOT equal to the anticipated profit.

Accepted Answer

In the absorption approach to cost-plus pricing, the anticipated markup in dollars includes both the anticipated profit and the anticipated overhead costs, so it is not equal to the anticipated profit alone.

Question 15

Holding all other things constant, an increase in the company's required return on investment (ROI) will affect:

Accepted Answer

An increase in the company's required ROI will increase the markup in cost-plus pricing, thus affecting the selling price under the absorption costing approach. However, it does not directly affect the profit-maximizing price, which is determined by demand and marginal cost.

Question 16

Pricing decisions are most difficult in those situations in which a company makes a product that is in competition with other, identical products for which a market already exists.

Accepted Answer

The answer of Pricing decisions are most difficult in those...

Question 17

Under the absorption approach to costs-plus pricing described in the text, selling and administrative costs are included in the cost base when computing a selling price.

Accepted Answer

The absorption approach to cost-plus pricing includes only manufacturing costs (direct materials, direct labor, and manufacturing overhead) in the cost base, not selling and administrative costs.

Question 18

If the formula for the markup percentage on absorption cost is used for setting prices, then the company's desired return on investment (ROI) will not usually be attained unless the assumed number of units sold is actually sold.

Accepted Answer

The markup percentage on absorption cost formula only takes into account the cost of goods sold and desired profit margin, not the actual sales volume. Therefore, if the assumed sales volume does not actually occur, the desired ROI may not be attained.

Question 19

Holding all other things constant, if the price elasticity of demand increases (i.e., becomes more negative), then the markup under the economists' approach to pricing will:

Accepted Answer

The economists' approach to pricing involves setting a markup equal to the inverse of the price elasticity of demand. Therefore, if the price elasticity of demand becomes more negative (i.e., more responsive to price changes), the markup must decrease in order to maintain the same level of profit.

Question 20

The markup over cost under the absorption costing approach would increase if selling and administrative expenses increase, holding everything else constant.

Accepted Answer

Under absorption costing, selling and administrative expenses are not considered direct product costs and are instead treated as period expenses. As a result, an increase in these expenses would not impact the variable or fixed manufacturing costs per unit but would increase the total period expenses. This increase in total period expenses would then be spread out over the entire production volume, resulting in a higher markup over cost for each unit.

Quiz 1: Pricing Products and Services