B) What will be the change in operating income if Extreme Sports accepts the special order?
79) When making a pricing decision, it is not necessary to separate costs into fixed and variable
Answer: FALSE Diff: 1
LO: 8-3 EOC: S8-4
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
80) Cost-plus price minus desired profit equals total cost.
Answer: TRUE Diff: 2
LO: 8-3 EOC: S8-4
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
81) When using a target costing approach, the company starts with revenue at market price, and then subtracts its desired profit, to yield the target total cost.
Answer: TRUE Diff: 2
LO: 8-3 EOC: S8-4
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
82) Companies often try to gain more control over pricing by attempting to differentiate their products.
Answer: TRUE Diff: 2
LO: 8-3 EOC: S8-4
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
83) Product differentiation allows companies to become more of a price-setter, and less of a price-taker.
Answer: TRUE Diff: 2
LO: 8-3 EOC: S8-4
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
84) When setting prices, managers need to consider all costs.
Answer: TRUE Diff: 2
LO: 8-3 EOC: S8-4
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
85) Managers need to consider variable costs, fixed costs, inventoriable product costs and period costs when setting prices.
Answer: TRUE Diff: 2
LO: 8-3 EOC: S8-4
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions 86) Cost-plus pricing is essentially the opposite of target-costing.
Answer: TRUE Diff: 2
LO: 8-3 EOC: S8-4
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions 87) Which of the following best describes "target costing"?
A) An approach to pricing that begins with revenue at market price and subtracts desired profit to arrive at target total cost
B) A factor that restricts production or sales of a product
C) All costs incurred along the value chain in connection with the product or service D) An approach to pricing that begins with the product's total cost and adds desired profit Answer: A
Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
88) "Total cost of product or service" is best described as which of the following?
A) Benefits foregone by choosing a particular alternative course of action B) A factor that restricts production or sales of a product
C) Costs that were incurred in the past and can not be changed
D) All costs incurred along the value chain in connection with the product or service Answer: D
Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
89) Which of the following describes the products and services of companies that are price-setters?
A) They tend to be unique.
B) They are priced by managers using a target-costing emphasis.
C) They tend to have a lot of competitors.
D) They tend to be commodities.
Answer: A Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
90) Stockholders' expectations of company profits are affected by which of the following?
A) Industry risk
B) Historical company earnings C) General economic conditions D) All of the above
Answer: D Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions 91) The cost-plus price is described by which of the following?
A) Target total cost plus desired profit B) Total cost plus desired profit
C) Revenue at market price plus desired profit D) Variable cost plus desired profit
Answer: B Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions 92) Target total cost is described by which of the following?
A) Total cost plus desired profit
B) Revenue at market price plus desired profit C) Revenue at market price minus desired profit D) Total cost minus actual cost
Answer: C Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
93) Managers must consider which of the following when pricing a product or service?
A) All costs
B) Only period costs
C) Only manufacturing costs D) Only variable costs Answer: A
Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
94) Which of the following pairs are characteristics of price-takers?
A) Less competition and target pricing B) Cost-plus pricing and less competition C) Target costing and heavy competition
D) Cost-plus pricing and lack of product uniqueness Answer: C
Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions 95) Which of the following pairs are characteristics of price-setters?
A) Less competition and target costing B) Cost-plus pricing and less competition
C) Lack of product uniqueness and heavy competition D) Less competition and lack of product uniqueness Answer: B
Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions 96) Big-box retailers such as Lowe's are considered price-takers because A) their products are not unique.
B) there is less competition in the home improvement retail sector.
C) their products are unique.
D) they emphasize cost-plus pricing.
Answer: A Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
97) Target total cost is defined as
A) cost of goods sold less desired profit.
B) revenue at market price less desired profit.
C) revenue at market price less variable costs.
D) revenue at market price less fixed costs.
Answer: B Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
98) Methods for a company to meet target total cost and the profit goals if the current cost of the product is higher than the target cost include which of the following?
A) Accept a lower profit
B) Cut fixed costs, cut variable costs C) Cut fixed costs
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions 99) In pricing a product, managers should consider which of the following?
A) Only fixed costs B) Only variable costs C) Only period costs D) None of the above Answer: D
Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.
100) All of the following factors affect the amount a customer is willing to pay for a product, except A) the selling company's costs.
B) the competition's price.
C) the product's uniqueness.
D) general economic conditions.
Answer: A Diff: 2 LO: 8-3 EOC: S8-3
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
101) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12%
return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer. Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Mountaintop charge for a round of golf?
A) $51.50
Variable costs per unit $ 15.00
Expected volume 400,000
Total variable costs $ 6,000,000
Investors' return (% of assets) 12%
Total assets $45,000,000
Desired profit $ 5,400,000
Total fixed costs $20,000,000
Total variable costs $ 6,000,000
Total costs $26,000,000
Desired profit $ 5,400,000
Target revenue $31,400,000
Divide by Divide by
Expected volume 400,000
Cost-plus price per round of golf $ 78.50
Diff: 3 LO: 8-3 EOC: S8-4
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant
102) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12%
return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn in terms of dollars?
A) $16,000,000 B) $(4,000,000) C) $ 4,000,000 D) $(20,000,000) Answer: C Explanation: C)
Market price per unit $ 75.00
Expected volume
Revenue $ 30,000,000
Expected volume 400,000
Variable costs per unit
Total variable costs $ 6,000,000
Total fixed costs $ 20,000,000
Total variable costs
Total product costs $ 26,000,000
Revenue $ 30,000,000
Total product costs Expected profit Diff: 3
LO: 8-3 EOC: E8-19A
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.
103) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12%
return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer. Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn as a percent of assets?
A) Loss of 8.89%
Expected volume 400,000
Variable costs per unit
Total variable costs $ 6,000,000
Total fixed costs $ 20,000,000
Total variable costs
Total product costs $ 26,000,000
Revenue $ 30,000,000
Total product costs
Expected profit $ 4,000,000
Expected profit $ 4,000,000
Divide by Divide by
Total assets
Expected profit as a percent of assets
Diff: 3 LO: 8-3 EOC: E8-19A
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.
104) Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pool. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer. The Philadelphia Swim Club has a favorable reputation in the area and therefore, has some control over the membership price. Using a cost-plus approach, what price should Philadelphia Swim Club charge for a membership?
A) $41.00 B) $37.50 C) $29.00 D) $ 0.17 Answer: A Explanation: A)
Variable costs per unit $ 10.00
Expected volume 500,000
Total variable costs $ 5,000,000
Investors' return (% of assets) 10%
Total assets $30,000,000
Desired profit $ 3,000,000
Total fixed costs $12,500,000
Total variable costs $ 5,000,000
Total costs $17,500,000
Desired profit $ 3,000,000
Target revenue $20,500,000
Divide by Divide by
Expected volume 500,000
Cost-plus price per round of golf $ 41.00
Diff: 3 LO: 8-3 EOC: E8-19A
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.
105) Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.00 for a membership.
What profit will it earn in terms of dollars?
A) $11,000,000 B) $(12,500,000) C) $1,000,000 D) $(1,000,000) Answer: C Explanation: C)
Market price per unit $ 37.00
Expected volume
Revenue $ 18,500,000
Expected volume 500,000
Variable costs per unit
Total variable costs $ 5,000,000
Total fixed costs $ 12,500,000
Total variable costs
Total product costs $ 17,500,000
Revenue $ 18,500,000
Total product costs Expected profit Diff: 3
LO: 8-3 EOC: E8-19A
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.
106) Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.00 per hour of court time. What profit will it earn as a percent of assets?
A) Profit of 3.33%
Expected volume 500,000
Variable costs per unit
Total variable costs $ 5,000,000
Total fixed costs $ 12,500,000
Total variable costs
Total product costs $ 17,500,000
Revenue $ 18,500,000
Total product costs
Expected profit $ 1,000,000
Expected profit $ 1,000,000
Divide by Divide by
Total assets
Expected profit as a percent of assets
Diff: 3 LO: 8-3 EOC: E8-19A
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.
107) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12%
return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a favorable reputation in the area and therefore, has some control over the price of a round of golf.
Based on these numbers, what are Green Pasture's total costs?
Answer: $20,000, 000 in fixed costs + (500,000 golfers × $12 variable cost/golfer) = $26,000,000 Diff: 2
LO: 8-3
EOC: S8-4; E8-19A
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
108) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12%
return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Green Pastures course has a favorable reputation in the area and therefore, has some control over the price of a round of golf.
Based on these numbers, what is Green Pasture's target revenue?
Answer: $20,000, 000 in fixed costs + (500,000 golfers × $12 variable cost/golfer) = $26,000,000
$26,000, 000 in total costs + ($40,000,000 × 12% return) = $30,800,000 Diff: 2
LO: 8-3 EOC: E8-19A
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
109) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12%
return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition.
What will Green Pasture's revenue be at a market price of $60/round?
Answer: 500,000 golfers × $60/round = $30,000,000 Diff: 2
LO: 8-3 EOC: E8-19A
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
110) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12%
return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition.
What will Green Pasture's expected profit shortfall be if it charges $60/round?
Answer: $20,000,000 in fixed costs + (500,000 golfers × $12 variable cost/golfer) = $26,000,000
$26,000,000 in total costs + ($40,000,000 × 12% return) = $30,800,000
$30,000,000 - 26,000,000 = 4,000,000
$4,800,000 desired operating income - $4,000,000 operating income at $60/round equals a shortfall of
$800,000 Diff: 2 LO: 8-3 EOC: E8-19A
AACSB: Analytical Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
111) If a product line has a negative contribution margin, the product is not covering its fixed costs and should be discontinued.
Answer: TRUE Diff: 1
LO: 8-4 EOC: S8-5
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
112) If the cost savings from discontinuing a product exceed the lost revenues from discontinuing the product, it should be retained.
Answer: FALSE Diff: 1
LO: 8-4 EOC: S8-5
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
113) From a purely financial standpoint, if a product line has a negative contribution margin, the product line should be discontinued.
Answer: TRUE Diff: 2
LO: 8-4 EOC: S8-5
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
114) Fixed costs that exist even after a product is discontinued are called unavoidable fixed costs.
Answer: TRUE Diff: 2
LO: 8-4 EOC: S8-5
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.
115) When deciding whether to discontinue a product, managers should only consider the costs that will be saved.
Answer: FALSE Diff: 2
LO: 8-4 EOC: S8-5
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.
116) If a product has a negative contribution margin, it should not be discontinued.
Answer: FALSE Diff: 2
LO: 8-4 EOC: S8-5
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions
117) Fixed costs that will continue to exist if a product is discontinued are relevant.
Answer: FALSE Diff: 2
LO: 8-4 EOC: S8-5
AACSB: Reflective Thinking
Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.
118) Unavoidable fixed costs are
A) irrelevant to the decision of whether to discontinue a product line because they will differ between