Question 1

Linear programming is used by decision makers when there are:

Accepted Answer

A)  limited resources for labour. 
B)  scarce resources for machine hours. 
C)  scarce resources for both labour and machine hours. 
D)  multiple scarce resources.

Question 2

When pricing new products, one strategy that can be used is price skimming where the initial product price is set low and in doing this management hope the product will be widely accepted in the long term.

Accepted Answer

A) True 
 B)False

Question 3

Town and Country Auto Repair uses time and material pricing. The Body Shop has the following cost data. 
If a particular job takes 10 hours in labour and $500 in materials, determine the price charged for the job.

Accepted Answer

A)  $775 
B)  $850 
C)  $390 
D)  $890

Question 4

Close attention should be paid to customer and competitor behaviour when managers are making both pricing and product mix decisions.

Accepted Answer

A) True 
 B)False

Question 5

Consider the following statements regarding cost-plus pricing formulas.
i. Full cost pricing formulas have the advantage of keeping the manager's attention focused on covering total costs.
ii. With cost-plus pricing formulas, management must consider market conditions and likely actions of competitors.
iii. Variable cost-plus formulas have the advantage of not obscuring important information about cost behaviour.
Which of the above statements is/are true?

Accepted Answer

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

Question 6

Avocado Ltd produces small electronic components for kitchen appliances. This year it expects to produce 10 000 units of component X. The variable manufacturing cost of component X represents 50% of its total costs. The target profit is $2 per unit. Using the cost-plus pricing approach based on total costs, the selling price per unit of component X is $20. If Avocado Ltd decides to change its cost-plus pricing approach to base the mark up percentage on variable manufacturing costs, the selling price for each unit of component X will be:

Accepted Answer

A)  $10. 
B)  $20. 
C)  $30. 
D)  Not enough information is provided.

Question 7

The marginal revenue curve:

Accepted Answer

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

Question 8

Managers must have an understanding of customers' preferences as these flow through to all aspects of the:

Accepted Answer

A)  pricing strategies. 
B)  product/service creation. 
C)  marketing strategies. 
D)  competitors' strategies.

Question 9

Value-based pricing refers to:

Accepted Answer

A)  a pricing strategy that takes into account the costs and benefits experienced by the customer that extend beyond the initial purchase price. 
B)  a pricing strategy where customers' perceptions of value guide the price. 
C)  a pricing strategy where prices are determined based on net value of each component of a product or service. 
D)  a pricing strategy based on a labour and material pricing formula.

Question 10

A firm produces products X, Y and Z with contribution margins of $4, $5 and $10 respectively. The firm has only 5000 machine hours available for a particular period. Machine hours required for each of the products are 1, 1 and 5 hours respectively. Demand for the products is 1000 for X, 3000 for Y and 2000 for Z. How many units of each product will the firm produce?

Accepted Answer

A)  2000 Z 
B)  1000 X, 3000 Y, 2000 Z 
C)  3000 Y, 1000 X, 200 Z 
D)  2000 Z, 3000 Y

Question 11

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. If the firm changed its pricing policy and determined in future to calculate its mark-up based on absorption cost, which of the following statements (if any) is correct about the firm's new mark-up percentage?

Accepted Answer

A)  The mark-up percentage will be lower. 
B)  The mark-up percentage will be higher. 
C)  Because the price charged will be the same, there will be no change in the mark-up percentage. 
D)  None of the given answers

Question 12

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 full cost?

Accepted Answer

A)  15.6% 
B)  13.5% 
C)  105.6% 
D)  51.4%

Question 13

Product cost distortion and pricing
Assume a firm relies heavily on cost-plus pricing to arrive at selling prices for its many products.
i. Define product cost distortion.
ii. Can product cost distortion ever be eliminated?
iii. Are there certain manufacturing situations in which product cost distortion is more likely? Explain.
iv. How can cost-plus pricing be improved in the situation described at the start of this question?

Accepted Answer

The answer of Product cost distortion and pricing
Assume a firm...

Question 14

If a firm has excess capacity, which of the following is a sensible bidding strategy?

Accepted Answer

A)  Set a price to cover all costs. 
B)  Base the bid on the incremental costs incurred because the job will contribute toward covering the company's fixed costs and profit. 
C)  Base the bid solely on direct labour hours. 
D)  Common fixed costs must be allocated to individual jobs before preparing the bid.

Question 15

Town and Country Auto Repair uses time and material pricing. The Body Shop has the following cost data. 
Determine the time charge per hour.

Accepted Answer

A)  $18.00 
B)  $35.00 
C)  $25.50 
D)  $40.00

Question 16

When decisions are being made about unprofitable products, one of the options available to managers is to retain the loss-making product particularly if it forms a part of a range of products that the firm wishes to sell.

Accepted Answer

A) True 
 B)False

Question 17

What is predatory pricing?

Accepted Answer

A)  Quoting a very low level price to all customers 
B)  Quoting market prices to different customers for different goods and services 
C)  Quoting higher prices to different customers for the same goods or services 
D)  Quoting different prices to a customer, depending on the quantity of goods or services demanded

Question 18

Which of the following represents the cost-based pricing formula?

Accepted Answer

A)  Price = cost + (mark-up % $\times$ cost) 
B)  Price = cost + mark-up % 
C)  Price = mark-up % $\times$ cost 
D)  Price = cost + (mark-up % + cost)

Question 19

Which of the following is not prohibited by the ACCC?

Accepted Answer

A)  Preventing entry of other corporations into the market 
B)  Preventing other corporations in competing in the market 
C)  Taking advantage of a company's market power to bulk purchase in order to eliminate or substantially damage a competitor 
D)  All of the above are acts prohibited by ACCC

Question 20

Avocado Ltd produces small electronic components for kitchen appliances. Two of its products are Component Y and Component Z. The selling price of Component Y is $15, and the selling price of Component Z is $20. The variable cost per unit for Component Y is $8 and the variable cost per unit of Component Z is $11. The machine hour requirement and demand for the two products are: 
Avocado Ltd's production capacity is 6500 machine hours per month. The optimal product mix is:

Accepted Answer

A)  1000 units X, 1500 units Y. 
B)  0 units X, 2167 units Y. 
C)  1000 units X, 2500 units Y. 
D)  1500 units X, 1000 units Y.

Exam 20: Pricing and Product Mix Decisions

Linear programming is used by decision makers when there are:

When pricing new products, one strategy that can be used is price skimming where the initial product price is set low and in doing this management hope the product will be widely accepted in the long term.

Town and Country Auto Repair uses time and material pricing. The Body Shop has the following cost data. If a particular job takes 10 hours in labour and $500 in materials, determine the price charged for the job.

Close attention should be paid to customer and competitor behaviour when managers are making both pricing and product mix decisions.

The marginal revenue curve:

Managers must have an understanding of customers' preferences as these flow through to all aspects of the:

Value-based pricing refers to:

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 full cost?

If a firm has excess capacity, which of the following is a sensible bidding strategy?

Town and Country Auto Repair uses time and material pricing. The Body Shop has the following cost data. Determine the time charge per hour.

When decisions are being made about unprofitable products, one of the options available to managers is to retain the loss-making product particularly if it forms a part of a range of products that the firm wishes to sell.

What is predatory pricing?

Which of the following represents the cost-based pricing formula?

Which of the following is not prohibited by the ACCC?