Question 1

What term describes a pricing strategy in which the initial price is set relatively low for a new product in order to gain a large market share?

Accepted Answer

A)   Penetration pricing
B)   Target pricing
C)   Designed pricing
D)   Market share pricing A

Question 2

Skimming pricing will lead to a much lower acceptance of a new product and

Accepted Answer

A)   higher unit costs.
B)   lower unit costs.
C)   higher unit profits.
D)   lower unit profits. C

Question 3

Which of the following formulas represents the mark-up percentage on full cost?

Accepted Answer

A)   Mark-up % = target profit / (annual volume  ×	imes×  total cost per unit) 
B)   Mark-up % = target profit  ×	imes×  total cost per unit
C)   Mark-up % = target profit  ×	imes×  annual volume
D)   Mark-up % = (target profit  ×	imes×  total cost per unit)  / annual volume  A

Question 4

The pricing strategy that results in greater initial sales volume but lower unit profits is called:

Accepted Answer

A)   skimming pricing.
B)   target pricing.
C)   predatory pricing.
D)   penetration pricing.

Question 5

Which of the following is not an issue when making a pricing decision?

Accepted Answer

A)   Legal issues like collusion and oligopolies.
B)   Political considerations
C)   Environmental regulations
D)   Competition

Question 6

The Competition and Consumer Act 2010 (Cwlth) is legislation that:

Accepted Answer

A)   restricts certain types of commercial activities, including pricing.
B)   restricts employee benefits.
C)   describes loan procedures.
D)   generally allows the use of price-fixing contracts.

Question 7

One of the advantages of activity-based costing (ABC) over traditional methods of overhead allocation, when combined with cost-based pricing, is that ABC avoids the problem of:

Accepted Answer

A)   low-volume products being underpriced.
B)   low-volume products being overpriced.
C)   high-volume products being underpriced.
D)   complex products being overpriced.

Question 8

A firm employs average assets of $600 000 and calculates its mark-up on full cost based on a desired return on investment of 20 per cent. Expected production is 10 000 units, and the full cost per unit is $80. What is the mark-up percentage?

Accepted Answer

A)   20%
B)   120%
C)   15%
D)   25%

Question 9

If the target profit is $60 000 for an annual volume of 480 units, the total annual fixed costs are $168 000 and the total variable cost per unit is $450, then what is the mark-up percentage on total variable cost?

Accepted Answer

A)   15.6%
B)   13.5%
C)   105.6%
D)   115.6%

Question 10

Linear programming is a tool used to determine an optimal solution given a number of constraints, by identifying linear relationships between decision variables.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements regarding absorption cost pricing formulas is/are true?
i. Absorption cost pricing formulas provide a justifiable price that tends to be perceived as equitable by all parties.
ii. Since absorption cost information is necessary for external reporting, it is cost effective to use it for pricing.
iii. Absorption cost-plus pricing formulas generally will result in a higher mark-up percentage than variable manufacturing cost formulas.

Accepted Answer

A)   i and ii
B)   ii and iii
C)   i and iii
D)   All of the given answers

Question 12

Role of excess capacity in competitive bidding
Yendys Pty Ltd is preparing a bid for a project. Yendys experiences considerable seasonal variation in the level of activity. This particular project would be done during a slack period of the year. The cost structure of the company reflects high fixed costs.
i. How should the fixed costs be handled in the 'time and materials' bidding approach to this project?
ii. Assume the company wins the bid and performs the job with financial results as projected in the bid. Several months later, the customer contacts Yendys directly and requests a bid to do another job. However, this project must be done during a peak season. How should Yendys' management respond? How do you think the customer will respond?

Accepted Answer

The answer of Role of excess capacity in competitive bidding
Yendys...

Question 13

The managing director of H Limited is setting the production plan for the next financial year. H has a shortage of skilled labour and wishes to maximise the profitability of the company. H manufactures three products X, Y and Z. There is 200 000 hours of skilled labour available in the year at a cost of $10 per hour. The following information relates to each product. 
Assuming all relevant information is provided, in what order should H manufacture its products to maximise profit in the current year?

Accepted Answer

A)   Z then X
B)   X then Z
C)   X, Y then Z
D)   None of the given answers

Question 14

In the economic profit-maximising pricing model, how do the marginal revenue and marginal cost curves generally behave?

Accepted Answer

A)   
B)   
C)   
D)

Question 15

Contribution margin per machine hour can be calculated by dividing:

Accepted Answer

A)   machine hours required per unit by sales margin per unit.
B)   contribution margin per unit by machine hours required per unit.
C)   total contribution margin per unit by total sales revenue per unit.
D)   total machine hours required by total contribution margin.

Question 16

Which of the following statements about product-cost distortions and product pricing is/are true?
i. Under traditional volume-based product costing systems, high volume and relatively simple products are often overcosted while low volume and complex products are undercosted.
ii. The use of a traditional volume-based product costing system may result in significant cost distortions among product lines.
iii. Overpricing high-volume products can lead to pricing errors.

Accepted Answer

A)   i and ii
B)   ii and iii
C)   i and iii
D)   All of the given answers

Question 17

The total cost curve:

Accepted Answer

A)   shows the changes in total revenue that accompany a change in quantity sold.
B)   shows the relationship between total cost and units produced and sold.
C)   shows the relationship between sales revenue and quantity.
D)   shows the average price at which any particular quantity can be sold.

Question 18

Which of the following statements about price-fixing contracts is/are true?
i. Price-fixing contracts are prohibited where they have the effect of substantially lessening competition.
ii. Price-fixing contracts are a means of quoting different prices for different customers.
iii. Price-fixing contracts result in controlling the prices of goods or services.

Accepted Answer

A)   i
B)   ii and iii
C)   i and iii
D)   iii

Question 19

Silco Pty Ltd manufactures various lines of computer equipment. They are planning to introduce a line of laptop computers in January 2008. Current plans call for the production and sale of 1000 computers with estimated production costs as follows. 
The average amount of capital invested in the laptop computer line is $900 000 and Silco's target return on investment for the line is 18 per cent. What is the mark-up percentage if the company uses cost-plus pricing based on total variable cost?

Accepted Answer

A)   116.7%
B)   142.7%
C)   121.6%
D)   58.9%

Question 20

Which of the following statements about time and material pricing is/are true?
i. The material charge includes the direct cost of the employee's time.
ii. The material charge includes the direct cost of materials used.
iii. The material charge includes a charge for material handling and storage.

Accepted Answer

A)   ii
B)   iii
C)   ii and iii
D)   All of the given answers

Exam 20: Pricing and Product Mix Decisions