Question 1

Return on assets pricing has the same objective as gross margin pricing for the price determination process.

Accepted Answer

Return on assets pricing aims to set prices based on a desired return on investment, while gross margin pricing sets prices based on the difference between the cost of goods sold and the selling price. While both methods are used to determine prices, they have different objectives.

Question 2

The gross margin pricing method computes unit selling price based on production costs rather than total costs.

Accepted Answer

The gross margin pricing method only takes into account the production costs (such as materials, labor, and overhead) when determining the unit selling price, rather than including all costs such as marketing, distribution, and administrative expenses.

Question 3

A company should not deviate from the traditional approaches to price determination.

Accepted Answer

A company should not be afraid to deviate from traditional approaches to price determination in order to remain competitive and meet the needs of their customers. It's important to consider factors such as demand, competition, and cost structure when setting prices, and sometimes a traditional approach may not be the most effective option. Companies should be flexible and willing to experiment with different pricing strategies to find what works best for their specific situation.

Question 4

When using a cost-based approach,once the cost of a good or service has been determined,additional factors need not be considered in establishing a selling price.

Accepted Answer

While the cost-based approach provides a starting point for setting a selling price, additional factors such as market demand, competition, and consumer willingness to pay should also be taken into consideration when establishing a final selling price.

Question 5

Under microeconomic theory,total revenue will continue to increase,but the rate of increase will diminish as more and more units are sold.

Accepted Answer

This is due to the law of diminishing marginal returns, which states that as more units of a good or service are produced, the marginal revenue generated by each additional unit will eventually diminish. Therefore, while total revenue will continue to increase, the rate at which it increases will slow down.

Question 6

The gross margin-based price is computed by adding total production costs per unit to the total production costs per unit times the gross margin markup percentage.

Accepted Answer

This statement describes the formula for calculating the gross margin-based price, where the total production costs per unit are added to the product of the total production costs per unit and the gross margin markup percentage.

Question 7

The denominator of the gross margin markup percentage is total production costs.

Accepted Answer

The gross margin markup percentage is calculated by dividing the gross margin by the total production costs. Therefore, the denominator of the gross margin markup percentage is total production costs.

Question 8

In gross margin pricing,the markup percentage is based on total production costs.

Accepted Answer

In gross margin pricing, the markup percentage is based on the total cost of goods sold, which includes production costs.

Question 9

Marginal revenue is the change in total revenue caused by a one-unit change in output.

Accepted Answer

Marginal revenue is defined as the additional revenue generated from producing one more unit of product. Mathematically, it can be calculated as the change in total revenue divided by the change in output. Therefore, the statement is true.

Question 10

For the return on assets pricing method,the desired rate of return on assets per unit is added to the total costs and expenses per unit to determine the selling price.

Accepted Answer

The return on assets pricing method adds the desired rate of return on assets per unit to the total costs and expenses per unit to determine the selling price.

Question 11

It is realistic to assume that a total revenue line will be straight rather than curved.

Accepted Answer

It is not always realistic to assume that a total revenue line will be straight. In some cases, total revenue may increase or decrease at a decreasing rate, resulting in a curved line. This can occur in situations where there are diminishing returns or increasing marginal costs.

Question 12

Service-oriented businesses take the same approach to pricing their "product" as product-oriented businesses.

Accepted Answer

Service-oriented businesses typically use a different approach to pricing than product-oriented businesses. While product-oriented businesses usually base their prices on the cost of producing and distributing the product, service-oriented businesses often base their prices on the value of the service they provide to the customer. This can include factors such as the expertise and experience of the service provider, the level of customization or personalization of the service, and the specific needs or preferences of the customer.

Question 13

For the return on assets pricing method,desired earnings are computed by dividing asset costs by projected units to be produced and then multiplying by the desired rate of return on assets.

Accepted Answer

This is correct. The return on assets pricing method takes into account the cost of assets and the desired rate of return on those assets in order to calculate the desired earnings. This is done by dividing the asset costs by projected units to be produced and then multiplying by the desired rate of return on assets.

Question 14

Economic theory indicates that as a product is marketed,price reductions will have to be made to sell additional units.

Accepted Answer

This is known as the Law of Demand which states that as the price of a product decreases, the quantity demanded will increase. As such, in order to sell more units, a price reduction may be necessary to stimulate demand.

Question 15

Beyond the sales level that achieves maximum profits,total costs rise at a faster rate than total revenue.

Accepted Answer

This is because as the level of sales increases beyond the point of maximum profits, the firm incurs additional costs such as overtime pay, higher material costs, and increased administrative expenses, which contribute to an increase in total costs. However, the additional revenue generated by increased sales is not enough to cover these extra costs, resulting in lower profits or even losses.

Question 16

A good starting point for any pricing method is to develop a price based on the cost of producing the good or service.

Accepted Answer

Cost-based pricing is a common method where you add a markup to the cost of producing a good or service to determine the selling price.

Question 17

Gross margin pricing establishes selling prices at an amount that is a stipulated rate above variable production costs.

Accepted Answer

Gross margin pricing establishes selling prices at an amount that is above the total cost of a product, which includes both variable and fixed costs, not just variable production costs.

Question 18

Because a business should have as its primary objective the earning of a minimum rate of return on assets,the return on assets pricing method has a great deal of appeal and support.

Accepted Answer

The statement is true. The return on assets pricing method is based on the idea that the primary objective of a business is to earn a minimum rate of return on its assets, making this method a popular approach to pricing products and services.

Question 19

For service-oriented businesses,pricing is determined using cost-based approaches that add the cost of overhead to materials,parts,and labor via markup percentages.

Accepted Answer

Service-oriented businesses typically determine pricing by adding the cost of overhead to materials, parts, and labor using markup percentages. This is known as a cost-based pricing approach.

Question 20

A company will choose a cost-based pricing method based on the degree of trust it has in the cost base.

Accepted Answer

A company's trust in the accuracy and reliability of its cost base will determine its choice of cost-based pricing method. If the company has high confidence in its cost data, it may choose to use a cost-plus or markup pricing approach. If there is less trust in cost data, the company may use target costing or other methods to set prices based on market demand and competition. Therefore, the statement is true.

Quiz 25: Pricing Decisions, including Target Costing and Transfer Pricing