1. The production cost of a product is CU 32 per unit. Absorbed selling and administration overhead is CU 8 per unit. The price is set at full cost plus a 30% mark-up. What is the selling price?

A) CU 41.60
B) CU 52.00
C) CU 49.60
D) CU 56.00

Correct: B difficult Cost-plus pricing

Full cost = 32 + 8 = CU 40. Price = 40 x 1.30 = CU 52.00. If you answered CU 41.60 you applied the mark-up to production cost only (32 x 1.3). If you answered CU 49.60 you applied it to production cost and then added the overhead (41.60 + 8). If you answered CU 56.00 you added a 40% mark-up.

2. A product is sold at a profit margin of 20% of the selling price. What is the equivalent mark-up on cost?

A) 25%
B) 16.7%
C) 20%
D) 80%

Correct: A difficult Cost-plus pricing

Let the price be CU 100. Margin is CU 20, so cost is CU 80. Mark-up on cost = 20 / 80 = 25%. If you answered 20% you treated margin and mark-up as the same. If you answered 16.7% you divided by 120. If you answered 80% you gave the cost as a percentage of price.

3. Capital employed in a product line is CU 600,000. The required return is 15% a year. Planned sales are 10,000 units and the full cost is CU 70 per unit. What selling price gives the required return?

A) CU 70.00
B) CU 79.00
C) CU 80.50
D) CU 85.00

Correct: B difficult Cost-plus pricing

Required profit = 15% x 600,000 = CU 90,000, or CU 9 per unit. Price = 70 + 9 = CU 79.00. If you answered CU 70.00 you added no profit. If you answered CU 80.50 you added 15% to cost (70 x 1.15). If you answered CU 85.00 you used 15 + 70 as if the return were CU 15 per unit.

4. Variable cost is CU 30 per unit and the price is set at variable cost plus an 80% mark-up. Fixed costs are CU 168,000 and sales are 12,000 units. What is the profit?

A) CU 168,000
B) CU 288,000
C) CU 120,000
D) CU 648,000

Correct: C difficult Cost-plus pricing

Price = 30 x 1.8 = CU 54, so contribution = CU 24 per unit. Profit = 12,000 x 24 - 168,000 = CU 120,000. If you answered CU 288,000 you gave total contribution. If you answered CU 168,000 you gave the fixed costs. If you answered CU 648,000 you gave total revenue.

5. Division A makes a component at a variable cost of CU 20. It sells externally at CU 35 and has surplus capacity. Division B can buy the same component externally for CU 33. Between which prices would an internal transfer benefit both divisions?

A) Between CU 20 and CU 35
B) Between CU 20 and CU 33
C) Between CU 33 and CU 35
D) Between CU 35 and CU 20

Correct: B difficult Transfer pricing

With spare capacity, A gains from any price above its variable cost of CU 20. B will not pay more than the external price of CU 33. Any price in this range benefits both divisions and the group, which saves 33 - 20 = CU 13 per unit.

6. Division A makes a component at a variable cost of CU 20 and sells all it can make externally at CU 35. Internal transfers would save selling costs of CU 3 per unit. What is the minimum transfer price A would accept for transfers to Division B?

A) CU 32
B) CU 20
C) CU 23
D) CU 35

Correct: A difficult Transfer pricing

At full capacity A loses its external contribution if it transfers, so the minimum price is variable cost plus opportunity cost: 20 + (35 - 20 - 3) = CU 32, or market price less the saved selling cost of CU 3. If you answered CU 20 you ignored the lost external sales. If you answered CU 23 you added the saved cost to the variable cost. If you answered CU 35 you ignored the saving.

7. Division A has spare capacity and a variable cost of CU 14 per unit. Its transfer price is set at CU 22 (full cost plus mark-up). Division B can buy externally at CU 19 and therefore does so. What is the effect on the group per unit?

A) The group is better off by CU 3
B) The group is worse off by CU 8
C) The group is better off by CU 5
D) The group is worse off by CU 5

Correct: D difficult Transfer pricing

By buying outside at CU 19, the group incurs CU 19 instead of the CU 14 variable cost of making internally, so it is worse off by CU 5 per unit. Division B sees a saving of CU 3 (22 - 19), but A's fixed costs are unchanged, so the saving is not real for the group. The transfer price causes a sub-optimal decision.

8. The price-demand relationship for a product is: CU 60 gives 800 units, CU 52 gives 1,000 units, CU 46 gives 1,300 units and CU 40 gives 1,600 units. Variable cost is CU 22 per unit and fixed costs are fixed. Which price maximises profit?

A) CU 46
B) CU 40
C) CU 52
D) CU 60

Correct: A difficult Pricing

Contribution at each price: CU 60 = 38 x 800 = 30,400; CU 52 = 30 x 1,000 = 30,000; CU 46 = 24 x 1,300 = 31,200; CU 40 = 18 x 1,600 = 28,800. The highest is at CU 46. Because fixed costs do not change with the price, profit is maximised where contribution is highest.

9. Which of the following are criticisms of full cost-plus pricing? (1) It ignores the effect of price on demand. (2) It guarantees that fixed overheads are recovered whatever the volume sold. (3) The cost per unit depends on a budgeted level of activity.

A) (1) and (2) only
B) (2) and (3) only
C) (1) and (3) only
D) (1), (2) and (3)

Correct: C difficult Cost-plus pricing

Full cost-plus does not consider how demand responds to price (1), and the absorbed overhead per unit depends on budgeted volume (3). It does not guarantee recovery of fixed overheads: if actual sales are below budget, the overhead is under-recovered, so (2) is wrong.

10. Variable cost is CU 20 per unit and fixed costs CU 200,000. Fixed costs were absorbed on a budget of 10,000 units, and the price is full cost plus 25%. Only 8,000 units are sold. What is the profit?

A) CU 80,000
B) CU 100,000
C) CU 240,000
D) CU 40,000

Correct: D difficult Cost-plus pricing

Full cost = 20 + 200,000 / 10,000 = CU 40, so the price is 40 x 1.25 = CU 50. Actual profit = 8,000 x (50 - 20) - 200,000 = CU 40,000. If you answered CU 100,000 you gave the budgeted profit (10,000 x 10). If you answered CU 80,000 you used the mark-up of CU 10 on 8,000 units, ignoring the under-recovery of fixed costs. If you answered CU 240,000 you gave contribution without deducting fixed costs.

11. Product R has a total cost of CU 40 per unit, of which 25% is fixed. It is sold externally in a perfect market at CU 60. Variable distribution costs are 10% of variable cost on external sales and are not incurred on internal transfers. Demand exceeds capacity. What is the optimum transfer price?

A) CU 30.00
B) CU 33.00
C) CU 57.00
D) CU 60.00

Correct: C difficult Transfer pricing

Variable cost = 75% x 40 = CU 30. Distribution costs saved on internal transfer = 10% x 30 = CU 3. With full capacity the transfer price is the market price less the saving: 60 - 3 = CU 57. If you answered CU 30 you gave variable cost. If you answered CU 33 you added the distribution cost to the variable cost. If you answered CU 60 you ignored the saving.

12. A product costs CU 84. The business wants a margin of 30% of the selling price. What is the selling price?

A) CU 120.00
B) CU 58.80
C) CU 109.20
D) CU 117.60

Correct: A difficult Cost-plus pricing

If the margin is 30% of price, cost is 70% of price, so price = 84 / 0.7 = CU 120. If you answered CU 109.20 you applied a mark-up of 30% to cost. If you answered CU 117.60 you applied a 40% mark-up. If you answered CU 58.80 you took 70% of cost.

13. A consultancy's staff and overhead cost is CU 75 per paid hour, but only 75% of paid hours are chargeable. The firm wants a 25% margin on its charge-out rate. What is the hourly rate?

A) CU 93.75
B) CU 100.00
C) CU 133.33
D) CU 125.00

Correct: C difficult Cost-plus pricing

Cost per chargeable hour = 75 / 0.75 = CU 100. A 25% margin on price means cost is 75% of the rate: 100 / 0.75 = CU 133.33. If you answered CU 125.00 you used a 25% mark-up on cost. If you answered CU 100.00 you added no profit. If you answered CU 93.75 you applied the mark-up to the cost per paid hour.

14. Which of the following statements about transfer pricing are correct? (1) A market-based transfer price is usually appropriate in a competitive external market. (2) A transfer price at full cost plus mark-up always leads to the best decision for the group. (3) Where a supplying division has spare capacity, the lowest acceptable price is its variable cost.

A) (1) and (2) only
B) (2) and (3) only
C) (3) only
D) (1) and (3) only

Correct: D difficult Transfer pricing

A competitive market price shows the true value of the item (1). With spare capacity the opportunity cost is nil, so only the variable cost must be covered (3). A full cost-plus price can lead managers to reject transfers that benefit the group, so (2) is incorrect.

15. A special order for 500 units needs a material in regular use. The stock was bought at CU 8, can be replaced at CU 9 or sold for CU 5 per unit. Direct labour is CU 6 per unit from spare capacity already paid for in the contract, and fixed overhead is absorbed at CU 4. What is the minimum price for the order?

A) CU 5,500
B) CU 7,000
C) CU 9,000
D) CU 7,500

Correct: D difficult Relevant costing

The material is in regular use, so the relevant cost is the replacement cost of CU 9. The labour is variable at CU 6. Relevant cost = (9 + 6) x 500 = CU 7,500. Absorbed overhead and historical cost are not relevant. If you answered CU 9,000 you used the historical cost of 8 plus labour of 6 and absorbed overhead of 4 (18 x 500). If you answered CU 7,000 you used the historical cost of 8. If you answered CU 5,500 you used the sale value of 5.

16. A product costs CU 12 per unit. The company wants a gross margin of 40% on the selling price. What is the selling price?

A) CU 16.80
B) CU 17.14
C) CU 30.00
D) CU 20.00

Correct: D difficult Cost-plus pricing

Cost is 60% of price, so price = 12 / 0.60 = CU 20.00. If you answered CU 16.80 you added a 40% mark-up to cost. If you answered CU 17.14 you divided by 0.70. If you answered CU 30.00 you divided by 0.40.

17. A retailer prices goods at cost plus 25%. What is the gross margin on selling price?

A) 25%
B) 20%
C) 33.3%
D) 80%

Correct: B difficult Cost-plus pricing

Cost 100 gives price 125, so margin = 25 / 125 = 20%. If you answered 25% you confused mark-up with margin. If you answered 33.3% you divided the profit by 75. If you answered 80% you gave cost as a percentage of price.

18. Division S makes a component with variable cost CU 9 and full cost CU 14. Division B can buy the same component externally at CU 13. S has spare capacity. What is the range of transfer prices acceptable to both divisions?

A) CU 13 to CU 14
B) CU 9 to CU 14
C) CU 14 only
D) CU 9 to CU 13

Correct: D difficult Transfer pricing

With spare capacity S's minimum is variable cost (CU 9). B's maximum is the external price (CU 13). Full cost of CU 14 is above B's maximum. If you answered CU 13 to CU 14 or CU 9 to CU 14 you let full cost set the ceiling. If you answered CU 14 only you assumed full cost must be recovered.

19. Division S makes a component at variable cost CU 9 and sells every unit it can make externally at CU 15 (it is at full capacity). B can buy externally at CU 16. What is the minimum transfer price S should accept?

A) CU 9
B) CU 15
C) CU 16
D) CU 6

Correct: B difficult Transfer pricing

At full capacity S gives up the external contribution, so minimum = variable cost + opportunity cost = 9 + (15 - 9) = CU 15. If you answered CU 9 you applied the spare capacity rule. If you answered CU 16 you used B's maximum. If you answered CU 6 you gave the lost contribution only.

20. A job's production cost is CU 40. Selling and administration costs are 10% of production cost and a 25% mark-up is applied to total cost. What is the price?

A) CU 50.00
B) CU 54.00
C) CU 55.00
D) CU 44.00

Correct: C difficult Cost-plus pricing

Total cost = 40 x 1.10 = CU 44. Price = 44 x 1.25 = CU 55. If you answered CU 50 you applied the mark-up to production cost only. If you answered CU 54 you added 10% and 25% to production cost together (40 x 1.35). If you answered CU 44 you omitted the mark-up.

21. A company requires a 20% return on capital employed of CU 500,000. The annual cost of making 40,000 units is CU 600,000. What price per unit gives the required return?

A) CU 17.50
B) CU 15.00
C) CU 18.00
D) CU 2.50

Correct: A difficult Cost-plus pricing

Required profit = 20% x 500,000 = CU 100,000. Revenue = 700,000, so price = 700,000 / 40,000 = CU 17.50. If you answered CU 15.00 you gave unit cost. If you answered CU 18.00 you added 20% to unit cost. If you answered CU 2.50 you gave the required profit per unit only.

22. Demand is 10,000 units at CU 20. Each CU 1 price rise cuts demand by 500 units. Variable cost is CU 8 per unit. What is the effect on total contribution of raising the price to CU 22?

A) Rises by CU 6,000
B) Falls by CU 2,000
C) Rises by CU 18,000
D) No change

Correct: A difficult Pricing decisions

At CU 22 demand is 9,000 and unit contribution is CU 14: 9,000 x 14 = CU 126,000 against 10,000 x 12 = CU 120,000, a rise of CU 6,000. If you answered 'falls by CU 2,000' you used the change in revenue (198,000 - 200,000). If you answered 'rises by CU 18,000' you applied the CU 2 rise to the 9,000 units sold and ignored the lost demand and variable cost saving. If you answered 'no change' you assumed demand is fixed.

23. Which TWO of the following statements about transfer pricing are correct? (1) A market-based transfer price is generally appropriate where a perfect external market exists. (2) A transfer price based on full cost can lead to decisions that are not in the group's interest. (3) Transfer prices have no effect on divisional profit.

A) (1) and (3)
B) (1) and (2)
C) (2) and (3)
D) (2) only

Correct: B difficult Transfer pricing

The external price reflects opportunity cost where the market is perfect, and full cost transfers can make a buying division reject internal supply that would benefit the group. Transfer prices move profit between divisions, so statement 3 is false.

24. S has spare capacity, variable cost CU 9 and full cost CU 14, and transfers at full cost plus 20% (CU 16.80). B can buy the component externally at CU 16 and does so, rejecting 10,000 units of internal supply. What is the effect on group profit?

A) CU 70,000 lower
B) CU 8,000 lower
C) CU 70,000 higher
D) CU 8,000 higher

Correct: A difficult Transfer pricing

B saves CU 0.80 per unit by buying externally, but the group pays CU 16 for units it could have made for CU 9 using spare capacity: loss = 7 x 10,000 = CU 70,000. If you answered CU 8,000 you gave B's divisional saving (0.80 x 10,000). If you answered 'higher' you reversed the direction.

25. A product has variable cost CU 8 and fixed cost CU 4 per unit at 10,000 units (fixed costs CU 40,000). The price is set at variable cost plus 100%. What is the profit at 10,000 units?

A) CU 40,000
B) CU 80,000
C) CU 20,000
D) CU 120,000

Correct: A difficult Cost-plus pricing

Price = CU 16. Contribution = 8 x 10,000 = CU 80,000. Profit = 80,000 - 40,000 = CU 40,000. If you answered CU 80,000 you ignored the fixed costs. If you answered CU 20,000 you used a price of CU 14. If you answered CU 120,000 you added the fixed costs to the contribution.