tb_ch13_2ce

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Jan 9, 2024

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Chapter 13 Pricing Decisions Summary of Questions by Learning Objectives Learning Objectives True / False Multiple Choice Matching Exercises Short Answer Problems LO1: Compare the different pricing methods and calculate prices using each method 1-5 24-39, 94, 96, 102 114, 115 117, 118, 119 124, 125 LO2: Discuss other market- based sources of pricing information 6-8 40 LO3: Explain the uses and limitations of cost-based and market-based pricing 9 41-44, 95, 98, 100 120 125 LO4: Explain price elasticity of demand and its impact on pricing 10-12 45, 46 LO5: Discuss the additional factors that affect price 13-16 47-63, 93, 97, 99, 101 112 LO6: Compare the different pricing methods used for transferring goods and services within an organization 17, 18 64, 65, 68-71, 74, 80, 84, 86-90, 103, 105, 106 113 116 122 126 LO7: Discuss the uses and limitations of different transfer pricing methods 19-22 66, 67, 72, 73, 75-79, 81-83, 85, 104, 107- 111 116 121, 123 126, 127 LO8: Discuss additional factors that affect transfer prices 23 91, 92 True / False Statements 1) To establish a cost-based price, managers need data on consumer demand. 2) In cost-based pricing, managers must use only variable costs in the cost base. 3) In cost-based pricing, mark-up percentages often originate from general industry practice. 4) Market-based prices are typically based on some measure of customer demand.

13-2 Cost Management 5) Market-based prices are influenced by product differentiation and competition. 6) Companies sometimes use competitors’ prices to establish their own prices. 7) The internet enables managers to have greater access to market prices which results in prices being more consistent. 8) The internet is likely to makes prices more inelastic because substitutes are more easily discovered. 9) In an economic downturn, a problem with cost-based pricing is a potential death spiral. 10) The sensitivity of sales to price increases is called the price elasticity of demand. 11) Profit-maximizing price occurs when marginal profits equal marginal revenues. 12) Changes in variable costs and changes in the product’s demand sensitivity to price are the two factors that affect the profit-maximizing price. 13) Not-for-profit organizations price products in the same manner as for-profit organizations. 14) Peak load pricing refers to the illegal practice of charging different prices at different times to reduce capacity constraints. 15) A penetration price is the price charged for transactions that take place within a single organization. 16) Predatory pricing is illegal in Canada. 17) A transfer price is required only when goods or services are transferred between cost centres in the same organization. 18) An ideal transfer price would be the opportunity cost of internal transfers.

19) If a supplying division has excess capacity, the best transfer price is the product’s variable cost. 20) If a product has an external market and divisions are treated as profit centres, cost-based transfer prices can often lead to suboptimal decisions. 21) In a dual-rate transfer pricing system, the selling department is credited for the market price and the buying department is charged the product’s variable cost. 22) Transfer pricing policies can affect a company’s tax liability, particularly if it does business internationally. 23) A company with subsidiaries located in both high and low tax countries could charge a low transfer price in the high-tax countries so that most of the contribution margin arises where taxes are the lowest. ANSWERS TO TRUE-FALSE STATEMENTS Item Ans. Item Ans. Item Ans. Item Ans. 1. F 7. T 13. F 19. T 2. F 8. F 14. F 20. T 3. T 9. T 15. F 21. T 4. T 10. T 16. T 22. T 5. T 11. F 17. F 23. F 6. T 12. T 18. T Chapter 13: Pricing Decisions 13-3

13-4 Cost Management Multiple Choice Questions 24) BLG Corporation produces and sells yachts for wealthy customers. BLG’s accountants produced the data shown below as a basis for client negotiations for the coming year: Big Winner Sport Star CEO Basic yacht $ 600 $ 600 $ 600 Customization costs 300 500 200 Marketing costs 100 400 300 Total costs $1,000 $1,500 $1,100 Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. BLG’s managers want to achieve a profit margin of 80% based on total costs. BLG’s system is best described as: a) Market-based pricing b) Life cycle costing c) Cost-based pricing d) Kaizen costing 25) BLG Corporation produces and sells yachts for wealthy customers. BLG’s accountants produced the data shown below as a basis for client negotiations for the coming year: Big Winner Sport Star CEO Basic yacht $ 600 $ 600 $ 600 Customization costs 300 500 200 Marketing costs 100 400 300 Total costs $1,000 $1,500 $1,100 Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. BLG’s managers want to achieve a profit margin of 80% based on total costs. If unavoidable costs are allocated as a percentage of avoidable costs, the total cost of Sport Star’s yacht will be: a) $1,500 b) $2,300 c) $1,833 d) $1,167

26) BLG Corporation produces and sells yachts for wealthy customers. BLG’s accountants produced the data shown below as a basis for client negotiations for the coming year: Big Winner Sport Star CEO Basic yacht $ 600 $ 600 $ 600 Customization costs 300 500 200 Marketing costs 100 400 300 Total costs $1,000 $1,500 $1,100 Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. BLG’s managers want to achieve a profit margin of 80% based on total costs. Which customer’s yacht will have the lowest total cost if unavoidable costs are allocated based on the cost of a basic yacht? a) Big Winner b) Sport Star c) CEO d) Costs will be equal for all three customers 27) BLG Corporation produces and sells yachts for wealthy customers. BLG’s accountants produced the data shown below as a basis for client negotiations for the coming year: Big Winner Sport Star CEO Basic yacht $ 600 $ 600 $ 600 Customization costs 300 500 200 Marketing costs 100 400 300 Total costs $1,000 $1,500 $1,100 Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. BLG’s managers want to achieve a profit margin of 80% based on total costs. Suppose BLG allocates unavoidable corporate costs based on total avoidable costs. The selling price of Sport Star’s yacht will be: a) $1,833 b) $3,300 c) $1,467 d) $2,200 28) Market-based prices are least likely to be influenced by: a) The degree of product differentiation b) Competition Chapter 13: Pricing Decisions 13-5

13-6 Cost Management c) Whether or not the product is a commodity d) The cost to produce the product 29) Which of the following is a formal method for incorporating demand into prices? a) Cost-based pricing b) Market-based pricing c) Price elasticity of demand d) Price elasticity of supply 30) Which of the following formulas calculates price elasticity of demand? a) ln (1 + % change in quantity sold) / ln (1 + % change in price) b) (1 + % change in quantity sold) / (1 + % change in price) c) % change in quantity sold / % change in price d) ln (1 - % change in quantity sold) / ln (1 - % change in price) 31) Which of the following formulas calculates the profit-maximizing price? a) Total variable cost + total fixed cost b) (Total variable cost + total fixed cost) / price elasticity of demand c) Variable cost × [elasticity / (elasticity + 1)] d) Total cost × [elasticity / (elasticity + 1)] 32) Which of the following factors affect a product’s profit-maximizing price? I. Fixed costs II. Price elasticity of demand III. Variable costs a) I and III b) II and III c) I and II d) I, II, and III 33) Market-based prices are normally determined using some measure of: a) Supplier prices b) Supplier demand c) Customer demand d) Degree of governmental regulation

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