Question 1

The product cost method includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price.

Accepted Answer

The product cost method includes only the manufacturing costs (direct materials, direct labor, and manufacturing overhead) in the cost amount, not selling and administrative expenses. These expenses are considered period costs and are not included in product cost calculations.

Question 2

In using the variable cost method of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup.

Accepted Answer

In the variable cost method, only variable costs are included in the cost base, so the markup must cover fixed costs and desired profit.

Question 3

When a bottleneck occurs in a process used in the production of multiple products, the company must determine the contribution margin for each product and give priority to the product that has the lowest contribution margin per bottleneck hour.

Accepted Answer

When a bottleneck occurs, the company should prioritize the product with the highest contribution margin per bottleneck hour, as this maximizes profitability and efficiency by focusing on the products that contribute the most to covering fixed costs and generating profit per limited resource hour.

Question 4

A bottleneck begins when demand for the company's product exceeds the ability to produce the product.

Accepted Answer

A bottleneck occurs when there is a constraint on a specific process or resource that limits the company's overall output, causing demand to exceed the ability to produce the product.

Question 5

Businesses with fixed capacity will charge higher prices when demand is low in an effort to cover fixed costs.

Accepted Answer

Businesses with fixed capacity are more likely to charge higher prices when demand is high to maximize profits, not when demand is low. When demand is low, they might actually lower prices to attract more customers.

Question 6

The product cost method includes all manufacturing costs in the cost amount to which the markup is added to determine product price.

Accepted Answer

The product cost method involves adding all manufacturing costs, including direct materials, direct labor, and manufacturing overhead, to determine the total cost of the product. A markup is then added to this cost to set the product price.

Question 7

Yield pricing practices are common in low-fixed-cost service businesses.

Accepted Answer

Yield pricing practices are more common in high-fixed-cost service businesses, such as airlines and hotels, where the cost of providing the service to one more customer is relatively low compared to the fixed costs of operating the business.

Question 8

The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a process.

Accepted Answer

The theory of constraints specifically targets bottlenecks in manufacturing processes in order to improve efficiency and increase production.

Question 9

In using the product cost method of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

Accepted Answer

In the product cost method of cost-plus pricing, the markup added to the product's cost typically covers not only the direct costs of producing the product but also an allocation for selling and administrative expenses, as well as a profit margin. This ensures that all costs are covered in the price, along with a profit.

Question 10

In a production bottleneck situation, the product with the highest contribution margin per unit should be given priority over a product that has the highest contribution margin per bottleneck hour.

Accepted Answer

In a production bottleneck situation, the product with the highest contribution margin per bottleneck hour should be given priority because it maximizes the profitability per limited resource hour, making the overall production process more efficient.

Question 11

In using the variable cost method of applying the cost-plus approach to product pricing, fixed manufacturing costs and both fixed and variable selling and administrative expenses must be covered by the markup.

Accepted Answer

In the variable cost method, only variable costs are considered when setting prices. Fixed costs are covered by the contribution margin, which is the difference between the selling price and variable costs.

Question 12

Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses.

Accepted Answer

Discontinuing a segment or product that contributes to fixed expenses would result in a decrease in revenue and may not necessarily lead to cost savings. It is important to consider the overall impact on the business before making such a decision.

Question 13

Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup.

Accepted Answer

This is the definition of cost-plus pricing.

Question 14

Under the total cost method, manufacturing cost plus desired profit is included in the total cost per unit.

Accepted Answer

The answer of Under the total cost method, manufacturing cost...

Question 15

When a segment of a company is showing a net loss, it is always best to discontinue the segment in order not to continue with losses.

Accepted Answer

Discontinuing a segment may not always be the best solution as the loss-making segment may have hidden potential or may be important for the overall strategy of the company. It is important to analyze and evaluate the segment thoroughly before making any decisions.

Question 16

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on ideal levels of performance.

Accepted Answer

The estimates used in the cost-plus approach to product pricing should be based on actual or expected costs, not ideal levels of performance. Using ideal performance levels could result in overpriced products, which may not be competitive in the market.

Question 17

In using the total cost method of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup.

Accepted Answer

The answer of In using the total cost method of...

Question 18

When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on normal levels of performance.

Accepted Answer

Estimated costs used in applying the cost-plus approach to product pricing should be based on normal levels of performance, meaning that they should reflect the costs incurred under normal operating conditions, rather than unusually high or low levels of performance. This helps to ensure that the price is fair to both the customer and the business, and that the business is able to cover its costs and earn a reasonable profit.

Question 19

Yield pricing is a type of "accepting business at a special price" differential analysis.

Accepted Answer

Yield pricing, often used in industries like airlines and hotels, involves accepting business at different price points based on demand, capacity, and timing, which is a form of differential analysis to maximize revenue.

Question 20

A bottleneck happens when a key piece of manufacturing machinery can produce 1,000 units per hour and demand for the product supports a production rate of 1,200 units per hour.

Accepted Answer

This situation describes a bottleneck, where the production capacity of the machinery is a limiting factor on the overall production rate.

Quiz 25: Differential Analysis and Product Pricing