Which of the following are relevant for a special order?
B. Incremental revenues and expenses
Cost plus pricing
B. Is inherently circular for manufacturing firms
Target costing
D. Requires specification of desired level of profit
Customer profitability is measured as
C. Revenues - cost of goods sold - indirect service costs
With activity based pricing
D. All of the above are correct
To determine the profit maximizing price, a manager must
C. Both a and b are correct
Typically, which departments are involved in setting target costs?
D. All of the above
Which of the following is an advantage of cost plus pricing?
B. The method is simple to apply
When is it beneficial for companies to accept an order that is priced at less than the products full cost?
D. When incremental revenue exceeds more incremental cost
"Cost plus" pricing includes which of the following costs?
A. Manufacturing costs
Formula: Profit maximizing price
Profit = ((Price per unit – variable cost per unit) x Quantity Demanded) – Fixed Cost
Formula: Target costing
Price - Desired Profit
Customer profitability
Revenues - cost of goods sold - indirect service costs
According to economic theory, how would a manager determine the profit maximizing price for a product or service?
The manager would estimate the quantity that could be sold at various prices.
Why is cost plus pricing inherently circular for a manufacturing firm?
The cost plus price is based on full cost per unit. But to determine full cost per unit you have to estimate the quantity that can be sold but the quantity sold depends on price
To implement target costing for a new product, companies often set up a cross functional team with members from engineering, marketing, and cost accounting. Why is a cross functional team desirable when implementing the target costing approach?
The target cost depends on price, and marketing staff is needed to determine product features and price. Engineers are needed to determine efficient production methods given the product features. And cost accountants are needed to estimate costs given the production process. A cross functional team helps ensure good communication among these various parties, increasing the likelihood that a product will be put into production that can be produced for the target cost.
How is cost allocation used in customer profitability analysis?
In customer profitability analysis, indirect costs are grouped into cost pools (e.g., the cost pool related to processing fax orders, the cost pool related to processing Internet orders, the cost pool related to shipping, etc.). The costs are then allocated to customers using various cost drivers (allocation bases) to determine customer profitability.
Explain why less profitable customers may become more profitable if a supplier switches to activity based pricing?
With activity-based pricing, customers are charged for various services. For example, there might be separate charges for delivery, for rush orders, and for returns. This way, customers that impose high costs on a supplier will pay for the services they demand.
What is the lowest per unit price on a special order that a company could accept and still not show a loss from the special order?
The lowest special order price should be the incremental cost of the order including opportunity cost
