Question 1

Which one of the following does economic theory suggest?
A)Set a price that allows profit maximization
B)Set a price that allows the minimum number of units to be sold at the highest unit price
C)Set a price that will maximize revenues
D)Set a price that will maximize market share

Accepted Answer

Economic theory suggests setting a price that allows for profit maximization, which involves balancing costs and revenues to achieve the highest possible profit.

Question 2

Winslow Carpet produces and sells berber carpet by the yard with a variable cost of $16 per yard.Total fixed costs are $280,000.The following chart represents the estimated demand at various price levels. $\begin{array}{ll}\text { Yards Dem anded }&\text { Unit Price }\
57,000 & \$ 25 \
67,500 & \$ 24 \
72,500 & \$ 23 \
86,000 & \$ 21
\end{array}$ Which price will generate the largest profit for Winslow Carpets?
A)$25
B)$24
C)$23
D)$21

Accepted Answer

The answer of Winslow Carpet produces and sells berber carpet...

Question 3

Which of the following statements about prices and profit is true?
A)Higher prices always lead to lower profits because fewer units will be sold.
B)Higher prices always lead to lower demand and higher profits.
C)Higher prices combine with lower demand to change the level of profits.
D)Higher prices will be offset by lower demand so profits will stay constant.

Accepted Answer

Higher prices may lead to an increase in profits if the increase in price is perceived to be due to higher quality, exclusivity, or other factors that increase the perceived value of the product. However, in most cases, higher prices typically result in lower demand. Therefore, the combination of higher prices and lower demand will impact the level of profits.

Question 4

Activity-based pricing is utilized when a customer buying products is charged for the full cost of a product or service plus a markup added to the cost.

Accepted Answer

Activity-based pricing is a method where prices are determined based on the activities and processes involved in producing a product or delivering a service, rather than simply adding a markup to the cost.

Question 5

Which of the following statements about price, demand, and profit is generally true?
A)As price increases, demand decreases.
B)As demand increases, profit decreases.
C)As price increases, demand increases.
D)As price decreases, demand decreases.

Accepted Answer

The law of demand states that as the price of a good or service increases, the quantity demanded of that good or service will decrease, all else being equal. This means that as price increases (option A), demand will generally decrease. As for the relationship between demand and profit, it can vary depending on the specific circumstances of the market. Generally, an increase in demand (option C) can lead to an increase in profit, but this depends on the cost of production and other factors affecting the market. Option B is generally untrue, as an increase in demand can lead to an increase in profit if the increase in revenue from higher demand outweighs any increase in costs of production. Option D is also generally untrue, as a decrease in price can lead to an increase in demand.

Question 6

What should be maximized when setting the price for a product?
A)Total revenue
B)Contribution margin per unit
C)Net income
D)The number of units of product sold

Accepted Answer

Net income should be maximized as it reflects the overall profitability of the company after all expenses, including costs and taxes, have been deducted from total revenue.

Question 7

Target cost is computed by determining the appropriate selling price and then subtracting desired profit from it.

Accepted Answer

Target cost is indeed calculated by first determining the selling price that the market will bear and then subtracting the desired profit margin from that price to arrive at the target cost. This approach helps companies ensure their products are competitively priced while still achieving their profit objectives.

Question 8

Which of the following factors is considered in a product pricing decision made using cost-plus pricing?
A)Price customers are willing to pay
B)Selling and administrative costs
C)Competitors' actions
D)Fixed cost per unit

Accepted Answer

Cost-plus pricing involves setting the price based on the cost per unit plus a markup. The fixed cost per unit is a key factor in determining the cost per unit, which is then used to calculate the final price. The other factors listed (price customers are willing to pay, selling and administrative costs, competitors' actions) are not explicitly considered in cost-plus pricing.

Question 9

In effect, a CPM system uses ABC to allocate costs to customers instead of to products and services.

Accepted Answer

A CPM system, or Customer Profitability Management system, uses ABC (Activity-Based Costing) to allocate costs to customers instead of to products and services. This allows companies to better understand which customers are the most profitable and prioritize their efforts accordingly.

Question 10

When order processing costs do not vary based on the size of the order, a customer who makes large, infrequent orders is generally more profitable than a customer who makes small, more frequent orders, for the same quantity and price.

Accepted Answer

When order processing costs do not vary based on the size of the order, a customer who makes large, infrequent orders is generally more profitable because their order will have lower processing costs per unit compared to a customer who makes small, more frequent orders. This is because the fixed order processing costs are spread out over a larger quantity of items in the larger order, resulting in a lower per-unit processing cost.

Question 11

A customer's profitability is calculated by dividing the sales revenue generated from each customer by the cost of goods sold for each customer.

Accepted Answer

A customer's profitability is calculated by subtracting the cost of goods sold for each customer from the sales revenue generated from that customer. The formula for customer profitability is: Customer Profitability = Sales Revenue - Cost of Goods Sold.

Question 12

In activity-based pricing, customers are offered separate prices for separate items or services they choose in addition to the price of goods they purchase.

Accepted Answer

In activity-based pricing, customers are offered separate prices for separate items or services they choose in addition to the price of goods they purchase.

Question 13

In a CPM system, costs are allocated to customers, who are the cost objectives.

Accepted Answer

In a CPM system, costs are allocated to customers as they are seen as the cost objectives. This allows for a better understanding of the cost associated with each customer and enables more effective pricing strategies.

Question 14

Which of the following stays constant when the price per unit changes?
A)Demand
B)Contribution margin per unit
C)Total fixed costs
D)Profit

Accepted Answer

Total fixed costs remain constant regardless of the change in price per unit.

Question 15

What occurs to the quantity demanded as the price decreases?
A)It will increase.
B)It will decrease.
C)It will remain constant.
D)It will increase and then decrease.

Accepted Answer

According to the law of demand, as the price of a good decreases, the quantity demanded will increase, all other things remaining constant. Therefore, when the price decreases, the demand for the good will increase.

Question 16

Suppliers adopting activity-based pricing may encourage customers to limit the variety of goods they purchase to mitigate the price to be charged.

Accepted Answer

Activity-based pricing charges customers based on the resources used to provide a service or product, which means that customers may try to reduce the number of resources used by limiting the variety of goods they purchase.

Question 17

Activity-based pricing uses ABC concepts to determine one optimum uniform price to charge all customers.

Accepted Answer

Activity-based pricing uses ABC concepts to determine the costs associated with individual activities and then uses that information to price products or services accordingly. This can result in different prices for different customers based on the specific costs incurred for each customer. Therefore, activity-based pricing does not use a uniform price for all customers.

Question 18

Target costing establishes selling prices based on the full cost of the product.

Accepted Answer

Target costing establishes the maximum cost of a product based on the selling price that is predetermined by market considerations. In other words, the selling price is established first and then the cost is managed to ensure profitability.

Question 19

Rosetone Retail sells one product with a variable cost of $3.50 per unit.The demand at different prices to be charged is shown below: $$\begin{array} { c c } 
\text { Units Dem anded } &\text { Unit Price }  \
10,000 & \$ 9 \
15,000 & \$ 8 \
20,000 & \$ 7 \
25,000 & \$ 6
\end{array}$$ If fixed costs are $42,000, what price should Rosetone charge in order to maximize profits?
A)$9
B)$8
C)$7
D)$6

Accepted Answer

To maximize profits, we calculate the profit for each price point. Profit = (Unit Price - Variable Cost) * Units Demanded - Fixed Costs. For each price:- At $9: Profit = ($9 - $3.50) * 10,000 - $42,000 = $55,000 - $42,000 = $13,000- At $8: Profit = ($8 - $3.50) * 15,000 - $42,000 = $67,500 - $42,000 = $25,500- At $7: Profit = ($7 - $3.50) * 20,000 - $42,000 = $70,000 - $42,000 = $28,000- At $6: Profit = ($6 - $3.50) * 25,000 - $42,000 = $62,500 - $42,000 = $20,500The maximum profit of $28,000 is achieved at a price of $7.

Question 20

Prices developed using target costing are based on competing products and customer needs and wants.

Accepted Answer

Target costing involves determining a product's target cost by considering the price of competing products and the desired level of profitability, while also taking into account customer needs and wants. Therefore, the prices developed using target costing are indeed based on competing products and customer needs and wants.

Quiz 8: Pricing Decisions

Which one of the following does economic theory suggest?

Which of the following statements about prices and profit is true?

Activity-based pricing is utilized when a customer buying products is charged for the full cost of a product or service plus a markup added to the cost.

Which of the following statements about price, demand, and profit is generally true?

What should be maximized when setting the price for a product?

Target cost is computed by determining the appropriate selling price and then subtracting desired profit from it.

Which of the following factors is considered in a product pricing decision made using cost-plus pricing?

In effect, a CPM system uses ABC to allocate costs to customers instead of to products and services.

When order processing costs do not vary based on the size of the order, a customer who makes large, infrequent orders is generally more profitable than a customer who makes small, more frequent orders, for the same quantity and price.

A customer's profitability is calculated by dividing the sales revenue generated from each customer by the cost of goods sold for each customer.

In activity-based pricing, customers are offered separate prices for separate items or services they choose in addition to the price of goods they purchase.

In a CPM system, costs are allocated to customers, who are the cost objectives.

Which of the following stays constant when the price per unit changes?

What occurs to the quantity demanded as the price decreases?

Suppliers adopting activity-based pricing may encourage customers to limit the variety of goods they purchase to mitigate the price to be charged.

Activity-based pricing uses ABC concepts to determine one optimum uniform price to charge all customers.

Target costing establishes selling prices based on the full cost of the product.

Prices developed using target costing are based on competing products and customer needs and wants.