5.1 Questions: Chapter 5 Relevant Information For Decision Making With A Focus On Pricing Decisions

Introduction to Management Accounting, 15e (Horngren)
Chapter 5 Relevant Information for Decision Making with a Focus

on Pricing Decisions
5.1 Questions
1) Historical or past information can have an indirect bearing on a decision because ________.
A) the past can be changed
B) it can help predict the future
C) past decisions are always good decisions
D) none of the above
Answer: B
Diff: 1 Page Ref: 179
LO: 5-1
AACSB: None
2) In the decision-making process, the accountant's primary role is ________.

A) making the decision
B) providing relevant information
C) choosing the least costly alternative
D) choosing the best alternative
Answer: B
LO: 5-1
AACSB: None
3) ________ is the predicted future costs and revenues that will differ among alternative courses of action.
A) Relevant information
B) Sunk costs
C) Predictable information
D) Target pricing
Answer: A
LO: 5-1
AACSB: None
4) Information is relevant in business decisions if it is a(n) ________.

A) expected future cost or it differs among alternatives
B) expected future cost and it differs among alternatives
C) historical cost and it differs among alternatives
D) expected future cost that differs from a past cost
Answer: B
LO: 5-1
AACSB: None
1
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
5) Cougar Company is trying to decide which product to manufacture. Expected direct materials costs
are $4 for each product. In choosing between the two products, the direct materials costs are ________.
A) relevant because it is an expected future cost
B) relevant because it is a product cost
C) irrelevant because it is an estimated cost
D) irrelevant because it does not differ between the two alternatives
Answer: D
LO: 5-1
AACSB: Analytic Skills
6) A company is trying to decide which product to manufacture. The following information is available:
Costs Product A Product B

Direct Materials 1 $2.00 per unit $2.00 per unit
Direct Labor $0.70 per unit $0.70 per unit
Which product cost is relevant to the decision?

A) Direct Materials 1
B) Direct Materials 2
C) Direct Materials 3
D) Direct Labor
Answer: C
LO: 5-1
7) Relevant information is the historical costs and revenues that differ due to alternative courses of action.
Answer: FALSE
LO: 5-1
AACSB: None
8) Historical data may have a direct bearing on a decision made today.

Answer: FALSE
LO: 5-1
AACSB: None
9) The accountant's role in decision making involves providing the relevant information for decision
makers.
Answer: TRUE
LO: 5-1
AACSB: None
2
5.2 Questions
1) ________ is (are) defined as any method used for making a choice.

A) A decision model
B) An implementation model
C) Relevant costs
D) The prediction model
Answer: A
LO: 5-2
AACSB: None
2) If perfectly accurate and relevant information is not available for decision making, the accountant
should consider using information that is ________.
A) precise but irrelevant
B) imprecise but irrelevant
C) imprecise but relevant
D) imprecise but timely
Answer: C
LO: 5-2
3) In determining whether to purchase a labor-saving machine, extreme resistance to the machine by

employees would be a(n) ________.
A) relevant qualitative factor
B) relevant quantitative factor
C) irrelevant qualitative factor
D) irrelevant quantitative factor
Answer: A
LO: 5-2
4) In considering whether to produce a single product, the associated direct materials and direct labor
costs would probably be ________.
A) relevant qualitative factors
B) relevant quantitative factors
C) irrelevant qualitative factors
D) irrelevant quantitative factors
Answer: B
LO: 5-2
3
5) In the decision process, predictions obtained from the accounting system and other sources become
________.
A) inputs to a business evaluation of a decision
B) inputs to implementation of a decision
C) feedback
D) inputs to a decision model
Answer: D
LO: 5-2
AACSB: None
6) In decision making, relevance is more crucial than ________.

A) precision
B) predictability
C) variable costs
D) fixed costs
Answer: A
LO: 5-2
AACSB: None
7) In decision making situations, ________ aspects may dominate quantitative aspects in many decisions.
A) relevant
B) precision
C) accuracy
D) qualitative
Answer: D
LO: 5-2
AACSB: None
8) What are the qualitative aspects of a decision?

A) those for which measurement in dollars and cents is difficult and imprecise
B) those with a definite dollar value
C) those with a cost figure
D) those which are never relevant to a decision
Answer: A
LO: 5-2
4
9) Which statement is FALSE about information used for decision making?
A) Precise but irrelevant information is worthless for decision making.
B) Imprecise but relevant information can be useful for decision making.
C) Relevant information must be reasonably accurate but not precisely so.
D) Relevant information must be totally accurate or it is useless.
Answer: D
LO: 5-2
10) In the decision process, ________ is the process of putting a decision into action.
A) Prediction
B) Feedback
C) Implementation
D) Evaluation by performance
Answer: C
LO: 5-2
AACSB: None
11) Precise but irrelevant information may still be useful for decision making.
Answer: FALSE
LO: 5-2
AACSB: None
12) The degree to which information is relevant or precise often depends on the degree to which it is
qualitative or quantitative.
Answer: TRUE
LO: 5-2
AACSB: None
13) Accountants are sometimes forced to trade relevant information for accurate information.
Answer: TRUE
LO: 5-2
AACSB: None
14) Imprecise but relevant information can be useful.

Answer: TRUE
LO: 5-2
AACSB: None
5
15) Qualitative aspects of information are those for which measurement in dollars and cents is easy and
precise.
Answer: FALSE
LO: 5-2
AACSB: None
16) Qualitative aspects of information can carry more weight than quantitative aspects in a business
decision.
Answer: TRUE
LO: 5-2
AACSB: None
5.3 Questions
1) Under absorption costing, all ________ costs are product or inventoriable costs.
A) direct and indirect manufacturing
B) direct manufacturing
C) indirect manufacturing
D) selling and administrative
Answer: A
LO: 5-3
AACSB: None
2) Under absorption costing, product costs include direct manufacturing costs and ________.
A) variable selling and administrative expenses
B) indirect manufacturing costsvariable costs only
C) indirect manufacturing costsfixed costs only
D) indirect manufacturing costsvariable and fixed costs
Answer: D
LO: 5-3
3) Under the contribution approach to the income statement, the difference between sales and ________ is
contribution margin.
A) cost of goods sold
B) manufacturing costs
C) all variable expenses
D) all fixed expenses
Answer: C
LO: 5-3
6
4) The contribution approach to the income statement emphasizes the distinction between ________.
A) value chain functions
B) different functional areas in a firm
C) different business segments
D) variable and fixed costs
Answer: D
LO: 5-3
5) Using absorption costing, the primary classifications of costs on the income statement are by:
A) cost behavior patterns
B) manufacturing departments
C) major management functions
D) manufacturing segments
Answer: C
LO: 5-3
AACSB: None
6) Santa Company reported the following information for its only product:
Direct materials used $450,000

Direct labor 170,000
Indirect manufacturingfixed 80,000
Indirect manufacturingvariable 20,000
Selling and administrativevariable 40,000
Selling and administrativefixed 10,000
Units produced and sold 40,000
Santa Company uses the absorption approach. What is the product cost per unit?
A) $13.00
B) $13.50
C) $14.75
D) $18.00
Answer: D
LO: 5-3
7
7) Colorado Company has the following data about its only product:

Direct labor 80,000
Selling price(per unit) 84
Colorado Company uses the absorption approach. What is the product cost per unit?
A) $28
B) $30
C) $36
D) $40
Answer: D
LO: 5-3
8) The contribution approach offers several benefits to decision makers. Which of the following is NOT a
benefit of this approach?
A) This approach makes it easier to understand the impact of changes in sales demand on operating
income.
B) This approach stresses the role of fixed costs in operating income.
C) This approach is used with CVP analysis.
D) This approach is accepted by U.S. Generally Accepted Accounting Principles.
Answer: D
LO: 5-3
8
9) Ohio Company has the following data about its only product:

Direct labor 80,000
Ohio Company uses the absorption approach. What is the manufacturing cost of goods sold?
A) $280,000
B) $300,000
C) $360,000
D) $500,000
Answer: D
LO: 5-3
10) Penn Company has the following data about its only product:

Direct labor 80,000
Penn Company uses the absorption approach. What is the gross margin?
A) $300,000
B) $390,000
C) $450,000
D) $470,000
Answer: A
LO: 5-3
9
11) When absorption costing is used for the income statement, the difference between sales and ________
is gross margin.
A) manufacturing cost of goods sold
B) selling expenses
C) selling and administrative expenses
D) variable expenses
Answer: A
LO: 5-3
12) Wyoming Company has the following data about its only product:

Wyoming Company uses the absorption approach. What is the operating income?
A) $2,060,000
B) $2,120,000
C) $2,240,000
D) $2,970,000
Answer: A
LO: 5-3
10
13) Arizona Company has the following data about its only product:

Arizona Company uses the contribution approach. What is the operating income?
A) $2,060,000
B) $2,120,000
C) $2,240,000
D) $2,970,000
Answer: A
LO: 5-3
14) Under the contribution approach, variable selling and administrative expenses are used to calculate
________. Under the absorption approach, variable selling and administrative expenses are used to
calculate ________.
A) contribution margin; operating income
B) gross margin; operating income
C) contribution margin; gross margin
D) gross margin; contribution margin
Answer: A
LO: 5-3
15) Under absorption costing, fixed manufacturing costs are used to calculate ________.
A) contribution margin
B) manufacturing cost of goods sold
C) product costs
D) manufacturing cost of goods sold and product costs
Answer: D
LO: 5-3
11
16) The ________ approach is useful for short-run decisions and the ________ approach is useful for long-
run decisions.
A) contribution; absorption
B) absorption; contribution
C) full costing; target costing
D) full costing; contribution
Answer: A
LO: 5-3
17) The absorption approach separates manufacturing costs from ________.

A) some nonmanufacturing costs
B) all nonmanufacturing costs
C) all variable costs
D) all fixed costs
Answer: B
LO: 5-3
18) Which of the following statements is correct?

A) The income statement prepared under the contribution approach reports gross margin.
B) The income statement prepared under the absorption approach reports contribution margin.
C) The income statement prepared under the contribution approach reports total variable expenses.
D) None of the above
Answer: C
LO: 5-3
12
19) Washington Company has the following data about its only product:

Direct labor 80,000
Washington Company uses the absorption approach. What is the gross margin?
A) $240,000
B) $540,000
C) $600,000
D) $660,000
Answer: C
LO: 5-3
20) Nevada Company has the following data about its only product:

Direct labor 80,000
Nevada Company uses the contribution approach. What is the contribution margin?
A) $570,000
B) $720,000
C) $900,000
D) $960,000
Answer: C
LO: 5-3
13
21) Oregon Company has the following data about its only product:

Oregon Company uses the contribution approach. What is the contribution margin?
A) $450,000
B) $550,000
C) $640,000
D) $700,000
Answer: C
LO: 5-3
22) Mexico Company has the following data about its only product:

Direct labor 80,000
Mexico Company uses the contribution approach. What is the contribution margin?
A) $350,000
B) $390,000
C) $440,000
D) $500,000
Answer: C
LO: 5-3
14
23) Today Company has the following data about its only product:

Selling and administrativevariable 0
Today Company uses the contribution approach. What is the operating income?
A) $2,060,000
B) $2,120,000
C) $2,240,000
D) $2,970,000
Answer: B
LO: 5-3
24) The absorption costing approach to the income statement is used by companies for external financial
reporting.
Answer: TRUE
LO: 5-3
AACSB: None
25) The absorption approach to the income statement emphasizes the distinction between fixed and
variable costs.
Answer: FALSE
LO: 5-3
AACSB: None
26) The contribution margin is computed using variable manufacturing costs and variable selling and
administrative costs.
Answer: TRUE
LO: 5-3
AACSB: None
15
27) Colbert Company has the following information about its only product:

Direct labor 17,000
Variable factory overhead 13,000
Fixed factory overhead 8,000
Variable selling and administrative expenses 22,000
Fixed selling and administrative expenses 11,000

Selling price per unit $20
Required:
A) Prepare an income statement using the contribution approach.
B) Prepare an income statement using the absorption approach.
Answer:
A)
Sales (10,000 x $20) $200,000
Variable expenses:
Direct materials 9,000
Direct labor 17,000
Variable overhead 13,000
Variable selling and admin. 22,000
Total variable expenses 61,000
Contribution margin 139,000
Fixed costs:
Manufacturing 8,000
Selling and admin. 11,000
Total fixed expenses 19,000
Operating income $120,000
B)
Sales $200,000
Manufacturing cost of goods sold:
Direct materials $9,000
Direct labor 17,000
Fixed overhead 8,000
Manufacturing cost of goods sold 47,000
Gross margin 153,000
Selling and administrative expenses 33,000
Diff: 2 Page Ref: 183-184
LO: 5-3
16
28) Georgia Company has been producing and selling 100,000 units per year. They have excess capacity.
The following budget was prepared for the next year:
Selling price per unit $12.50

Direct materials per unit 5.00
Direct labor per unit 3.00
Variable overhead per unit 1.00
Variable selling and administrative per unit 0.25
Total fixed overhead costs $80,000

Total fixed selling and administrative 35,000
Required:
A) Prepare an income statement using the contribution approach.
B) Prepare an income statement using the absorption approach.
Answer:
A)
Sales (100,000 x $12.50) $1,250,000
Variable expenses:
Direct materials 500,000
Variable selling and admin. 25,000
Total variable expenses 925,000
Contribution margin 325,000
Fixed costs:
Manufacturing 80,000
Selling and admin. 35,000
Total fixed expenses 115,000
B)
Sales $1,250,000
Manufacturing cost of goods sold:
Fixed overhead 80,000
Manufacturing cost of goods sold 980,000
Gross margin 270,000
Selling and administrative expense 60,000
LO: 5-3
17
5.4 Questions
1) Which item is usually NOT important to special order decisions?

A) affect of special order on regular business
B) whether idle capacity is available
C) antitrust issues concerning price discrimination
D) all are important
Answer: D
LO: 5-4
AACSB: None
2) Missouri Company has a current production capacity level of 200,000 units per month. At this level of
production, variable costs are $0.50 per unit and fixed costs are $0.50 per unit. Current monthly sales are
173,000 units. Gates Company has contracted Missouri Company about purchasing 20,000 units at $1.00
each. Current sales would not be affected by the special order and no additional fixed costs would be
incurred on the special order. If the order is accepted, what is Missouri Company's change in profits?
A) $20,000 increase
B) $20,000 decrease
C) $10,000 increase
D) $10,000 decrease
Answer: C
LO: 5-4
3) Wisconsin Company has a current production capacity level of 200,000 units per month. At this level of
production, variable costs are $0.90 per unit and fixed costs are $0.50 per unit. Current monthly sales are
164,500 units. Gates Company has contracted Wisconsin Company about purchasing 20,000 units at $2.00
each. Current sales would not be affected by the special order and no additional fixed costs would be
incurred on the special order. If the order is accepted, what is Wisconsin Company's increase in costs?
A) $18,000
B) $20,000
C) $24,000
D) $40,000
Answer: A
LO: 5-4
18
4) Each month Fig Company produces 11,000 units of a product that sells for $18 per unit, and has
variable costs of $12 per unit. Total fixed costs for the month are $77,000. A special order is received for
5,000 units at a price of $14 per unit. Fig Company has adequate capacity for the special order. If Fig
Company accepts the special order, what is the profit to Fig Company?
A) There is no profit; it is loss.
B) $10,000
C) $22,000
D) $99,000
Answer: B
LO: 5-4
5) Each month Newton Company produces 30,000 units of a product that has variable costs of $70 per
unit. Total fixed costs for the month are $990,000. A special order is received for 1,000 units at a price of
$77 per unit. Newton Company has adequate capacity for the special order. If Newton Company accepts
the special order, what is the profit to Newton Company?
A) There is no profit; it is loss.
B) $7,000
C) $21,000
D) $210,000
Answer: B
LO: 5-4
6) Minnesota Company has the following data about its only product:
Fixed manufacturing costs $72,000

Fixed selling and administrative costs 80,000
Variable manufacturing costs 1,030,000
Variable selling and administrative costs 120,000
Assume there is excess capacity. The company has received a special order for 1,000 units at $80.00 per
unit. If the special order is accepted, what will be the effect on net income?
A) net income increases $1,000
B) net income increases $30,000
C) net income decreases $80,000
D) net income decreases $200,000
Answer: B
LO: 5-4
19
7) Dakota Company has been producing and selling 42,000 hats a year. The Dakota Corporation has the
capacity to produce 52,000 hats. The following data is available:

Variable manufacturing costs per unit $13
Variable selling and administrative costs per unit $7
Total fixed manufacturing costs $128,000

Total fixed selling and administrative costs $56,000
If a special order is accepted for 10,000 hats at a price of $25 per unit, net income would ________.
A) increase $90,000
B) increase $50,000
C) increase $120,000
D) decrease $24,000
Answer: B
LO: 5-4
8) Arkansas Company provided the following data for its only product:

Direct materials used 150,000
Variable selling and administrative expenses 60,000
Fixed selling and administrative expenses 30,000
Assume there is excess capacity. There is a special order outstanding for 1,000 units at $40.00 per unit. If
Arkansas Company accepts the special order, net income would ________.
A) increase $40,000
B) increase $11,250
C) decrease $28,750
D) decrease $10,000
Answer: B
LO: 5-4
20
9) Kansas Company produces and sells 20,000 units at $22 per unit. Kansas Company's product cost is
calculated as follows:
Variable unit-based costs $10 per unit

Fixed costs $2 per unit
Setup costs $3 per unit
Total costs $15 per unit
A total of 500 setups at a cost of $120 per setup are required to produce the 20,000 units. Kansas
Company has received a special order to sell 5,000 units at $12 per unit. Kansas Company has excess
capacity available, but these 5,000 units would require 60 setups. If Kansas Company accepts the special
order, what is the increase in costs to them?
A) $7,200
B) $40,000
C) $57,200
D) $65,000
Answer: C
LO: 5-4
10) Nebraska Company produces and sells 20,000 units at $20 per unit. Nebraska Company's product
cost is calculated as follows:
Variable unit-based costs $8 per unit

Fixed costs $2 per unit
Setup costs $3 per unit
Total costs $13 per unit
A total of 500 setups at a cost of $120 per setup are required to produce the 20,000 units. Nebraska
Company has received a special order to sell 5,000 units at $10 per unit. Nebraska Company has excess
capacity available, but these 5,000 units would require 60 setups. If Nebraska Company accepts the
special order, what is Nebraska's increase in net income?
A) decrease $5,000
B) increase $20,000
C) increase $5,000
D) increase $2,800
Answer: D
LO: 5-4
21
11) A small appliance manufacturer is deciding whether to accept or reject a special order for 1,750
appliances. There is sufficient capacity available for the special order. What is relevant information for
the decision whether to accept or reject the special order?
A) the cost of the parts for the 1,750 appliances
B) the supervisor's salary
C) the depreciation on assembly equipment
D) the accountant's salary
Answer: A
LO: 5-4
12) In a special order decision, fixed costs that do not differ between two alternatives are ________.
A) of major importance to the decision
B) opportunity costs
C) irrelevant
D) important if they are a material dollar amount
Answer: C
LO: 5-4
AACSB: None
13) Texas Company produces and sells 22,000 units of a single product. Costs associated with this level of
production are as follows:
Direct materials $15 per unit

Direct manufacturing labor $45 per unit
Variable manufacturing overhead $25 per unit
Fixed manufacturing overhead $40 per unit
The product normally sells for $160 per unit. Texas Company has received a special order to sell 2,000
units at $120 per unit. Texas Company has excess production capacity.
Required:
Compute the amount by which the operating income of Texas Company would change if the special
order was accepted.
Answer:
Additional sales (2,000 x $120) $240,000
Variable costs:
Direct materials (2,000 x $15) $30,000
Direct labor (2,000 x $45) $90,000
Variable manuf. overhead (2,000 x $25) $50,000
Additional operating income $70,000
LO: 5-4
22
14) Stangle Company manufactures ties. When 28,000 ties are produced, the costs per unit are:
Direct materials $0.60
Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Variable selling 0.80
Fixed selling 1.13
The ties normally sell for $22 each. The company has received a special order for 2,000 ties at $10.00 per
tie. The company has excess capacity.
Required:
Compute the amount by which the operating income would change if the order were accepted.
Answer:
Additional sales (2,000 x $10.00) $20,000
Direct materials(2,000 x $0.60) 1,200
Direct labor (2,000 x $3.00) 6,000
Variable manuf. overhead(2,000 x $1.20) 2,400
Variable selling (2,000 x $0.80) 1,600
Additional operating income $8,800
LO: 5-4
5.5 Questions
1) ________ is the additional cost resulting from producing and selling one additional unit.
A) Marginal cost
B) Common cost
C) Opportunity cost
D) Target cost
Answer: A
LO: 5-5
AACSB: None
2) Price elasticity measures the ________.

A) amount customers are willing to pay for a product or service
B) effect of price changes on sales volume
C) number of units a company is willing to sell
D) amount of competition in a given industry
Answer: B
LO: 5-5
AACSB: None
23
3) In perfect competition, the profit-maximizing volume is the quantity at which ________.
A) marginal cost equals marginal revenue
B) contribution margin equals fixed cost
C) marginal revenue equals price
D) price exceeds marginal cost
Answer: A
LO: 5-5
AACSB: None
4) In perfect competition, additional sales will be profitable if ________.

A) the marginal cost is less than marginal revenue
B) sales price exceeds the variable product cost
C) total variable cost is less than sales price
D) the fixed cost equals the contribution margin
Answer: A
LO: 5-5
AACSB: None
5) In imperfect competition, ________.

A) a firm will produce as many units as it can sell
B) the price a firm charges for a unit influences the quantity of units it sells
C) a firm's costs exceeds a competitor's costs
D) a firm's market share is less than a competitor's market share
Answer: B
LO: 5-5
AACSB: None
6) If a small price increase causes large volume declines, demand is highly inelastic.
Answer: FALSE
LO: 5-5
AACSB: None
7) Marginal cost is the additional cost resulting from producing and selling one additional unit.
Answer: TRUE
LO: 5-5
AACSB: None
8) The only decision for a manager to make with perfect competition is how much to produce.
Answer: TRUE
LO: 5-5
AACSB: None
24
9) With perfect competition and a fixed set of production facilities, the marginal cost often increases as
production increases up to a point because of efficiencies created by larger amounts.
Answer: FALSE
LO: 5-5
AACSB: None
10) With perfect competition, at some point marginal costs begin to rise with increases in production
because facilities become inefficient.
Answer: TRUE
LO: 5-5
AACSB: None
11) With perfect competition, marginal revenue is the additional revenue resulting from the sale of an
additional unit.
Answer: TRUE
LO: 5-5
AACSB: None
12) In perfect competition, the marginal revenue curve is a vertical line equal to the price per unit at all
volumes of sales.
Answer: FALSE
LO: 5-5
AACSB: None
13) In perfect competition, the profit-maximizing volume is the quantity at which the difference between
the sales price and marginal cost is at its greatest.
Answer: FALSE
LO: 5-5
AACSB: None
14) In imperfect competition, a firm must increase the sales price to generate additional sales.
Answer: FALSE
LO: 5-5
AACSB: None
15) In imperfect competition, marginal revenue usually increases as volume increases.

Answer: FALSE
LO: 5-5
AACSB: None
25
16) In managerial accounting, variable cost is a reasonable approximation of marginal cost in many
situations.
Answer: TRUE
LO: 5-5
AACSB: None
5.6 Questions
1) Predatory pricing occurs when a firm sets ________.

A) prices below their competitors' prices
B) prices so low that competitors are driven out of the market
C) different prices for different customers for the same product or service
D) uniform prices
Answer: B
LO: 5-6
AACSB: None
2) Discriminatory pricing occurs when a firm sets ________.

A) prices below their competitors' prices
B) prices so low that competitors are driven out of the market
C) different prices for different customers for the same product or service
D) uniform prices
Answer: C
LO: 5-6
AACSB: None
3) Which factor does NOT influence pricing decisions?

A) legal requirements
B) competitors' actions
C) customer demands
D) color of company vehicles
Answer: D
LO: 5-6
AACSB: None
4) In the short run, the minimum selling price should be equal to ________.
A) all variable costs of producing, selling and distributing the good or service
B) all fixed costs of producing, selling and distributing the good or service
C) all fixed and variable costs of producing, selling, and distributing the good or service
D) all manufacturing costs
Answer: A
LO: 5-6
AACSB: None
26
5) Discriminatory pricing is the act of charging different prices to different customers for the same
product or service.
Answer: TRUE
LO: 5-6
AACSB: None
6) According to courts in the United States, pricing is predatory only if companies set prices below their
average total cost and actually lose money in order to drive their competitors out of business.
Answer: FALSE
LO: 5-6
AACSB: None
7) Pricing is not discriminatory if it reflects a cost differential incurred in providing the good or service.
Answer: TRUE
LO: 5-6
AACSB: None
8) Overcapacity is some countries often causes aggressive pricing policies, particularly for a company's
imported goods.
Answer: FALSE
LO: 5-6
AACSB: Dynamics of the Global Economy
9) Markup is the amount by which cost exceeds price.

Answer: FALSE
LO: 5-6
AACSB: None
10) Prices are most directly related to costs in industries where revenue is based on cost reimbursement.
Answer: TRUE
LO: 5-6
AACSB: None
11) In the short run, the sales price of a good or service must be high enough to cover all costs.
Answer: FALSE
LO: 5-6
AACSB: None
27
5.7 Questions
1) The total of all manufacturing costs plus the total of all selling and administrative costs is equal to
________.
A) marginal cost
B) target cost
C) full cost
D) contribution cost
Answer: C
LO: 5-7
AACSB: None
2) Which is NOT a popular markup formula for pricing?

A) as a percentage of total manufacturing costs plus total selling and administrative costs
B) as a percentage of total manufacturing costs
C) as a percentage of variable manufacturing costs
D) as a percentage of total selling and administrative costs
Answer: D
LO: 5-7
AACSB: None
3) Full cost means the total of all variable manufacturing costs and all fixed manufacturing costs.
Answer: FALSE
LO: 5-7
AACSB: None
4) Full cost or fully allocated cost means the total of all manufacturing costs.
Answer: FALSE
LO: 5-7
AACSB: None
5) Managers may use different markup rates for different categories of costs.
Answer: TRUE
LO: 5-7
AACSB: None
6) Prices based on variable costs represent a contribution approach to pricing.

Answer: TRUE
LO: 5-7
AACSB: None
28
7) The total manufacturing cost and full cost approaches to pricing often fail to highlight different cost
behavior patterns.
Answer: TRUE
LO: 5-7
AACSB: None
8) Managers can usually compute the change in total costs by multiplying any change in volume by the
full unit cost.
Answer: FALSE
LO: 5-7
AACSB: None
9) Full-cost pricing is more widely used in practice than the contribution margin approach to pricing.
Answer: TRUE
LO: 5-7
AACSB: None
10) The contribution margin approach to pricing is always the best method.
Answer: FALSE
LO: 5-7
AACSB: None
11) A company will bid near the minimum sales price to establish a presence in new markets or with a
new customer.
Answer: TRUE
LO: 5-7
AACSB: None
29
12) Timmerman Company has budgeted sales of $30,000 with the following budgeted costs:
Direct labor 4,100
Required:
Compute the average target markup percentage for setting prices as a percentage of:
A) Total costs
B) Total variable costs
C) Variable manufacturing costs
D) Total manufacturing costs
Answer:
A) 19%
B) 82%
C) 113%
D) 52%
LO: 5-7
13) Orange Company has budgeted sales of $49,500 with the following budgeted costs:
Direct labor 5,000
Required:
Compute the average target markup percentage for setting prices as a percentage of:
A) Total manufacturing costs
B) Total variable costs
C) Total costs
D) Variable manufacturing costs
Answer:
A) 50%
B) 62%
C) 14%
D) 90%
LO: 5-7
30
5.8 Questions
1) The product strategy in which companies first determine the price at which they can sell a new product
and then design a product that can be produced at a low enough cost to provide an adequate profit
margin is referred to as ________.
A) full costing
B) target costing
C) predatory pricing
D) absorption costing
Answer: B
LO: 5-8
AACSB: None
2) Michigan Company has budgeted the following costs for the production of its only product:
Direct Materials $35,000

Direct Labor 25,000
Variable indirect production costs 30,000
Fixed indirect production costs 15,000
Total Costs $125,000
Michigan Company has a target profit of $50,000. ________ is the target price.
A) $30,000
B) $111,000
C) $125,000
D) $175,000
Answer: D
LO: 5-8
31
3) Illinois Company has budgeted the following costs for the production of its only product:

Direct Labor 25,000
Illinois Company has a target profit of $40,000. What is the average target markup percentage for setting
prices as a percentage of total production costs?
A) 32%
B) 57%
C) 68%
D) 158%
Answer: B
LO: 5-8
4) McEnroe Company has budgeted the following costs for the production of its only product:

Direct Labor 25,000
McEnroe Company has a target profit of $60,000. What is the average target markup percentage for
setting prices as a percentage of total manufacturing costs?
A) 38%
B) 61%
C) 63%
D) 76%
Answer: D
LO: 5-8
32
5) Federer Company has budgeted the following costs for the production of its only product:

Direct Labor 25,000
Federer Company has a target profit of $50,000. What is the average target markup percentage for setting
prices as a percentage of total variable costs?
A) 38%
B) 63%
C) 79%
D) 158%
Answer: C
LO: 5-8
6) Williams Company has budgeted the following costs for the production of its only product:

Direct Labor 25,000
Williams Company has a target profit of $50,000. What is the average target markup percentage for
setting prices as a percentage of total costs?
A) 19%
B) 40%
C) 47%
D) 68%
Answer: B
LO: 5-8
33
7) Serena Company has budgeted the following costs for the production of its only product:

Direct Labor 25,000
Serena Company has a target profit of $50,000. What is the average target markup percentage for setting
prices as a percentage of variable manufacturing costs?
A) 24%
B) 69%
C) 94%
D) 158%
Answer: C
LO: 5-8
8) Chocolate Company is considering the production of a new product. Chocolate Company has the
following data available:
Expected sales(units) over product life 15,000

Variable production costs $42 per unit
Variable selling costs $16 per unit
Annual fixed production costs $15,000
Annual fixed selling costs $5,000
Research and development costs $184,000
What is the total variable cost of the product over the product life cycle?
A) $204,000
B) $716,000
C) $870,000
D) $880,000
Answer: C
LO: 5-8
34
9) Rainbow Company is considering the production of a new product. Rainbow Company has the
following data available:
Expected product life 5 years

What is the total fixed cost of the product over the product life cycle?
A) $20,000
B) $100,000
C) $116,000
D) $464,000
Answer: B
LO: 5-8
10) Bunch Company is considering the production of a new product. Bunch Company has the following
data available:

What is the total cost of the product over the product life cycle?
A) $116,000
B) $196,000
C) $264,000
D) $380,000
Answer: D
LO: 5-8
35
11) Sue Company is considering the production of a new product. Sue Company has the following data
available:

Selling price $200 per unit
What is the expected profit of the product over the product life cycle?
A) $(40,000)
B) $20,000
C) $204,000
D) $880,000
Answer: B
LO: 5-8
12) Target costing sets prices by computing an average cost and then adding a desired markup.
Answer: FALSE
LO: 5-8
AACSB: None
13) Companies use cost-plus pricing for products where management actions can influence the market
price.
Answer: TRUE
LO: 5-8
AACSB: None
14) Target costing is most effective at reducing costs if used during the product design phase.
Answer: TRUE
LO: 5-8
AACSB: None
15) Product design affects a small amount of costs in the value chain.
Answer: FALSE
LO: 5-8
AACSB: None
36
16) Market focus group studies and surveys may be used by a firm to determine the price of a product or
service.
Answer: TRUE
LO: 5-8
AACSB: None
17) The difference between the gross margin and the market price is the target cost for a new product.
Answer: TRUE
LO: 5-8
AACSB: None
18) Marketing plays a limited role in target costing.

Answer: FALSE
LO: 5-8
AACSB: None
19) Factors that are usually important in determining the feasibility of earning the desired target profit
margin include inflation and interest rates.
Answer: TRUE
LO: 5-8
AACSB: None
20) Value engineering is used primarily during the distribution stage of the value chain.
Answer: FALSE
LO: 5-8
AACSB: None
21) With increased global competition in many industries, companies are increasingly limited in
influencing product prices.
Answer: TRUE
LO: 5-8
AACSB: Dynamics of the Global Economy
37

5.1 Questions: Chapter 5 Relevant Information For Decision Making With A Focus On Pricing Decisions

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Introduction to Management Accounting, 15e (Horngren)

Chapter 5 Relevant Information for Decision Making with a Focus

2) In the decision-making process, the accountant's primary role is ________.

4) Information is relevant in business decisions if it is a(n) ________.

Costs Product A Product B

Which product cost is relevant to the decision?

8) Historical data may have a direct bearing on a decision made today.

1) ________ is (are) defined as any method used for making a choice.

3) In determining whether to purchase a labor-saving machine, extreme resistance to the machine by

6) In decision making, relevance is more crucial than ________.

8) What are the qualitative aspects of a decision?

14) Imprecise but relevant information can be useful.

Direct materials used $450,000

Units produced and sold 40,000

Direct materials used $200,000

Units produced and sold 10,000

Direct materials used $300,000

Units produced and sold 12,000

Direct materials used $200,000

Units produced and sold 10,000

Direct materials used $270,000

Units produced and sold 30,000

Direct materials used $270,000

Units produced and sold 30,000

17) The absorption approach separates manufacturing costs from ________.

18) Which of the following statements is correct?

Direct materials used $200,000

Units produced and sold 10,000

Direct materials used $200,000

Units produced and sold 10,000

Direct materials used $500,000

Units produced and sold 20,000

Direct materials used $200,000

Units produced and sold 10,000

Direct materials used $270,000

Units produced and sold 30,000

Direct materials used $9,000

Units produced and sold 10,000

Selling price per unit $12.50

Total fixed overhead costs $80,000

1) Which item is usually NOT important to special order decisions?

Fixed manufacturing costs $72,000

Units produced and sold 23,000

Selling price per unit $30

Total fixed manufacturing costs $128,000

Selling price per unit $65

Units produced and sold 20,000

Variable unit-based costs $10 per unit

Variable unit-based costs $8 per unit

Direct materials $15 per unit

2) Price elasticity measures the ________.

4) In perfect competition, additional sales will be profitable if ________.

5) In imperfect competition, ________.

15) In imperfect competition, marginal revenue usually increases as volume increases.

1) Predatory pricing occurs when a firm sets ________.

2) Discriminatory pricing occurs when a firm sets ________.

3) Which factor does NOT influence pricing decisions?

9) Markup is the amount by which cost exceeds price.

2) Which is NOT a popular markup formula for pricing?