chapter 9 assignment questions

Question 1

Time-and-material pricing is widely used in service industries

True

False

Answer 1

True

Question 2

As more companies “globalize” their operations, fewer transfers are happening between divisions that are in different countries

True

False

Answer 2

False

Question 3

Under the variable cost-plus pricing approach, the cost base consists of all of the variable costs associated with a product except variable selling and administrative costs

True

False

Answer 3

False

Question 4

Differences in tax rates between countries can complicate the determination of the appropriate transfer price

True

False

Answer 4

True

Question 5

A company must price its product to cover its costs and earn a reasonable profit in

a) all cases.
b) its early years.
c) the long run.
d) the short run.

Answer 5

c) the long run.

Question 6

All of the following are correct statements about the target price except it

a) is the price the company believes would place it in the optimal position for its target audience.
b) is used to determine a product’s target cost.
c) is determined after the company has identified its market and does market research.
d) is determined after the company sets its desired profit amount.

Answer 6

d) is determined after the company sets its desired profit amount.

Question 7

Which of the following has the most impact on setting a market-based price?

a) changes in quality of the product or service
b) prices charged by the company’s suppliers
c) the efficiency of the company’s supply chain
d) demand for the service or product

Answer 7

d) demand for the service or product

Question 8

In cost-plus pricing, the target selling price is calculated as

a) variable cost per unit + desired ROI per unit.
b) fixed cost per unit + desired ROI per unit.
c) total unit cost + desired ROI per unit.
d) variable cost per unit + fixed manufacturing cost per unit + desired ROI per unit.

Answer 8

c) total unit cost + desired ROI per unit.

Question 9

What is a critical reason for a company to use cost-plus pricing?

a) The company has significant differences between its variable and fixed costs.
b) The company’s suppliers have recently increased prices.
c) The company operates in a highly competitive market.
d) The company operates in a less competitive market.

Answer 9

d) The company operates in a less competitive market.

Question 10

Which of the following is consistent with generally accepted accounting principles?

a) absorption-cost approach
b) variable cost-plus approach
c) variable-cost approach
d) both absorption cost and variable cost-plus approach

Answer 10

a) absorption-cost approach

Question 11

The first step in the absorption-cost approach is to calculate the

a) desired ROI per unit.
b) markup percentage.
c) target selling price.
d) unit manufacturing cost.

Answer 11

d) unit manufacturing cost.

Question 12

In the absorption-cost approach, the markup percentage covers the

a) desired ROI only.
b) desired ROI and selling and administrative expenses.
c) desired ROI and fixed costs.
d) selling and administrative expenses only.

Answer 12

b) desired ROI and selling and administrative expenses.

Question 13

The markup percentage denominator in the variable cost-plus approach is the

a) desired ROI per unit.
b) fixed costs per unit.
c) manufacturing cost per unit.
d) variable costs per unit.

Answer 13

d) variable costs per unit.

Question 14

The labour charge per hour in time-and-material pricing includes all of the following except

a) an allowance for a desired profit.
b) charges for labour loading.
c) selling and administrative costs.
d) overhead costs.

Answer 14

b) charges for labour loading.

Question 15

The last step in determining the material loading charge percentage is to

a) estimate annual costs for purchasing, receiving, and storing materials.
b) estimate the total cost of parts and materials.
c) divide material charges by the total estimated costs of parts and materials.
d) add a desired profit margin on the materials themselves.

Answer 15

d) add a desired profit margin on the materials themselves.

Question 16

In time-and-material pricing, the charge for a particular job is the sum of the labour charge and the

a) materials charge.
b) material loading charge.
c) materials charge + desired profit.
d) materials charge + the material loading charge.

Answer 16

d) materials charge + the material loading charge.

Question 17

A firm’s transfer pricing policy should accomplish all of the following except

a) promote goal congruence.
b) maintain divisional autonomy.
c) provide accurate performance evaluation.
d) maximize the taxes paid in a foreign country.

Answer 17

d) maximize the taxes paid in a foreign country.

Question 18

The transfer price approach that is often considered the best approach because it generally provides the proper economic incentives is the

a) cost-based approach.
b) market-based approach.
c) negotiated price approach.
d) time-and-material pricing approach.

Answer 18

b) market-based approach.

Question 19

What would be a legitimate reason for upper management to insist on an internal transfer even though the product could be sourced outside the company at a price that is lower than the company’s variable cost?

a) Management is concerned that its manufacturing equipment will soon be obsolete, and it wants to get full use out of it before it happens.
b) Management wants to ensure a secure supply of the product.
c) The company has excess capacity.
d) There is never a legitimate reason that justifies an internal transfer if a product can be sourced outside the company at a price that is lower than the company’s variable cost.

Answer 19

c) The company has excess capacity.

Question 20

What should be the objective(s) of a firm’s transfer pricing policy?

a) Ensure a secure source of inputs at the best price possible.
b) Promote goal congruence, while maintaining divisional autonomy so that accurate performance evaluation can be made.
c) Develop a cooperative relationship between divisions, while maintaining enough competitiveness to ensure the survival of the firm.
d) Develop a pricing system that facilitates good record keeping that is acceptable under GAAP.

Answer 20

b) Promote goal congruence, while maintaining divisional autonomy so that accurate performance evaluation can be made.

Question 21

Generally, a transfer of products between two divisions should take place if it

a) allows one division to benefit from technology developed in another division.
b) results in increased incremental income to the company as a whole.
c) increases awareness within the company of activity in the various divisions.
d) assists the management to evaluate performance of the divisions.

Answer 21

b) results in increased incremental income to the company as a whole.

Question 22

In setting internal transfer prices, the minimum price that the selling division would accept is

a) price that will result in a profit to the selling division.
b) a price that will result in a profit to the purchasing division.
c) its variable cost of the product plus opportunity costs lost by the transfer.
d) its variable cost plus an internal profit margin.

Answer 22

c) its variable cost of the product plus opportunity costs lost by the transfer.

Question 23

n setting internal transfer prices, the maximum price that the purchasing division would accept is

a) a price that will result in a profit to the selling division.
b) a price that will result in a profit to the purchasing division.
c) its variable cost of the product plus opportunity costs gained by the transfer.
d) its external cost to purchase the product.

Answer 23

d) its external cost to purchase the product.