26. A product is listed at CU 100. A trade discount of 10% is given, and a settlement discount of 2% on the discounted price is taken by the customer. What cash is received per unit?

A) CU 88.00
B) CU 90.00
C) CU 88.20
D) CU 98.00

Correct: C difficult Cost-plus pricing

After trade discount, 100 x 0.90 = CU 90. The 2% settlement discount applies to CU 90: 90 x 0.98 = CU 88.20. If you answered CU 88.00 you took 2% of the list price. If you answered CU 90.00 you ignored the settlement discount. If you answered CU 98.00 you ignored the trade discount.

27. Variable cost is CU 6 per unit and fixed costs are CU 100,000 on 20,000 units. A profit of CU 2 per unit is required. What mark-up on variable cost is needed?

A) 33.3%
B) 83.3%
C) 116.7%
D) 200%

Correct: C difficult Cost-plus pricing

Fixed cost per unit = CU 5. Price = 6 + 5 + 2 = CU 13. Mark-up on variable cost = 7 / 6 = 116.7%. If you answered 33.3% you included profit only. If you answered 83.3% you included fixed costs only. If you answered 200% you used a price of CU 18.

28. Demand is 4,000 units at CU 30, 5,500 units at CU 26 and 7,000 units at CU 22. Variable cost is CU 12 per unit and fixed costs CU 30,000. Which price maximises profit and what is that profit?

A) CU 30; CU 42,000
B) CU 22; CU 40,000
C) CU 26; CU 47,000
D) CU 26; CU 77,000

Correct: C difficult Pricing decisions

Profits: CU 30 gives 18 x 4,000 - 30,000 = 42,000; CU 26 gives 14 x 5,500 - 30,000 = 47,000; CU 22 gives 10 x 7,000 - 30,000 = 40,000. If you answered CU 26 with CU 77,000 you gave contribution, not profit. The other two options are valid profits at other prices.

29. S has capacity of 20,000 units, variable cost CU 9, and sells 15,000 units externally at CU 15. B asks for 8,000 units. What is the minimum average transfer price per unit S should accept?

A) CU 9.00
B) CU 12.00
C) CU 15.00
D) CU 11.25

Correct: D difficult Transfer pricing

S has 5,000 units of spare capacity (opportunity cost nil) and must give up 3,000 external sales (contribution CU 6 each). Minimum total = 5,000 x 9 + 3,000 x 15 = CU 90,000, so CU 11.25 per unit. If you answered CU 9.00 you assumed all spare capacity. If you answered CU 15.00 you assumed full capacity. If you answered CU 12.00 you averaged the two figures without weighting.

30. A business earns a gross margin of 30% on selling price. What mark-up on cost is this equivalent to?

A) 30.0%
B) 42.9%
C) 23.1%
D) 70.0%

Correct: B difficult Cost-plus pricing

Cost is 70% of price, so mark-up = 30 / 70 = 42.9%. If you answered 30% you treated margin as mark-up. If you answered 23.1% you divided by 130. If you answered 70% you gave cost as a percentage of price.

31. SCENARIO: Pinnacle Print is pricing a job: materials CU 4,200; labour 60 hours at CU 18; machine time 40 hours at an overhead rate of CU 25; direct delivery cost CU 300. Administration overhead is 12% of production cost. The company wants a margin of 25% on selling price. QUESTION: What is the production cost of the job?

A) CU 6,280
B) CU 5,580
C) CU 7,580
D) CU 6,580

Correct: D difficult Cost-plus pricing

Materials 4,200 + labour 1,080 + machine overhead 1,000 + delivery 300 = CU 6,580. If you answered CU 6,280 you omitted the delivery cost. If you answered CU 5,580 you omitted the machine overhead. If you answered CU 7,580 you counted the machine overhead twice.

32. SCENARIO: Pinnacle Print is pricing a job: materials CU 4,200; labour 60 hours at CU 18; machine time 40 hours at an overhead rate of CU 25; direct delivery cost CU 300. Administration overhead is 12% of production cost. The company wants a margin of 25% on selling price. QUESTION: What is the total cost of the job including administration overhead?

A) CU 6,580.00
B) CU 7,249.60
C) CU 7,369.60
D) CU 7,084.00

Correct: C difficult Cost-plus pricing

Administration = 12% x 6,580 = CU 789.60. Total cost = CU 7,369.60. If you answered CU 6,580 you omitted the administration overhead. If you answered CU 7,249.60 you applied 12% to prime cost (5,580). If you answered CU 7,084 you applied 12% to materials only.

33. SCENARIO: Pinnacle Print is pricing a job: materials CU 4,200; labour 60 hours at CU 18; machine time 40 hours at an overhead rate of CU 25; direct delivery cost CU 300. Administration overhead is 12% of production cost. The company wants a margin of 25% on selling price. QUESTION: What selling price gives a margin of 25% on selling price?

A) CU 9,212.00
B) CU 9,826.13
C) CU 8,225.00
D) CU 7,369.60

Correct: B difficult Cost-plus pricing

Cost is 75% of price: 7,369.60 / 0.75 = CU 9,826.13. If you answered CU 9,212 you added a 25% mark-up to cost. If you answered CU 8,225 you applied the margin to production cost. If you answered CU 7,369.60 you gave the cost.

34. SCENARIO: Pinnacle Print is pricing a job: materials CU 4,200; labour 60 hours at CU 18; machine time 40 hours at an overhead rate of CU 25; direct delivery cost CU 300. Administration overhead is 12% of production cost. The company wants a margin of 25% on selling price. QUESTION: What mark-up on total cost is equivalent to a 25% margin on selling price?

A) 25.0%
B) 30.0%
C) 75.0%
D) 33.3%

Correct: D difficult Cost-plus pricing

Margin 25% means profit is one-quarter of price and cost three-quarters, so mark-up = 25/75 = 33.3%. If you answered 25% you confused margin with mark-up. If you answered 30% you added 5% for no reason. If you answered 75% you gave cost as a percentage of price.

35. SCENARIO: Pinnacle Print is pricing a job: materials CU 4,200; labour 60 hours at CU 18; machine time 40 hours at an overhead rate of CU 25; direct delivery cost CU 300. Administration overhead is 12% of production cost. The company wants a margin of 25% on selling price. QUESTION: The customer negotiates an 8% discount on the price. What is the margin on the discounted selling price?

A) 18.5%
B) 17.0%
C) 23.0%
D) 20.0%

Correct: A difficult Cost-plus pricing

Discounted price = 9,826.13 x 0.92 = CU 9,040. Profit = 9,040 - 7,369.60 = CU 1,670. Margin = 1,670 / 9,040 = 18.5%. If you answered 17.0% you deducted 8 points from 25%. If you answered 23.0% you reduced the margin by 8% of itself. If you answered 20.0% you assumed the margin stays at 20%.

36. SCENARIO: Division A makes component K with variable cost CU 14 and full cost CU 20. Its capacity is 50,000 units; it sells 35,000 externally at CU 26. Division B needs 10,000 units and can buy externally at CU 24. QUESTION: What is the minimum transfer price A should accept for 10,000 units?

A) CU 20
B) CU 24
C) CU 14
D) CU 26

Correct: C difficult Transfer pricing

A has 15,000 units of spare capacity, so no external sales are lost and the minimum price is variable cost, CU 14. If you answered CU 20 you used full cost. If you answered CU 24 you used B's external price. If you answered CU 26 you used A's external selling price.

37. SCENARIO: Division A makes component K with variable cost CU 14 and full cost CU 20. Its capacity is 50,000 units; it sells 35,000 externally at CU 26. Division B needs 10,000 units and can buy externally at CU 24. QUESTION: What is the maximum transfer price B should pay?

A) CU 24
B) CU 14
C) CU 20
D) CU 26

Correct: A difficult Transfer pricing

B can buy externally at CU 24, so it will not pay more. If you answered CU 14 or CU 20 you gave A's costs. If you answered CU 26 you gave A's external price.

38. SCENARIO: Division A makes component K with variable cost CU 14 and full cost CU 20. Its capacity is 50,000 units; it sells 35,000 externally at CU 26. Division B needs 10,000 units and can buy externally at CU 24. QUESTION: What is the gain to the group if the transfer takes place instead of B buying externally?

A) CU 40,000
B) CU 120,000
C) CU 240,000
D) CU 100,000

Correct: D difficult Transfer pricing

The group saves the external cost of CU 24 and incurs only CU 14 variable cost: (24 - 14) x 10,000 = CU 100,000. If you answered CU 40,000 you used A's full cost. If you answered CU 120,000 you used A's external price. If you answered CU 240,000 you gave the external purchase cost.

39. SCENARIO: Division A makes component K with variable cost CU 14 and full cost CU 20. Its capacity is 50,000 units; it sells 35,000 externally at CU 26. Division B needs 10,000 units and can buy externally at CU 24. QUESTION: B now needs 20,000 units. A has 15,000 units of spare capacity; supplying the remaining 5,000 means giving up external sales. What is the minimum average transfer price per unit?

A) CU 17.00
B) CU 14.00
C) CU 20.00
D) CU 26.00

Correct: A difficult Transfer pricing

Minimum total = 15,000 x 14 + 5,000 x 26 = CU 340,000 (the last 5,000 units cost the external price, being variable cost plus lost contribution). Average = 340,000 / 20,000 = CU 17.00. If you answered CU 14 you ignored the lost sales. If you answered CU 20 you used full cost. If you answered CU 26 you applied the external price to all units.

40. SCENARIO: Division A makes component K with variable cost CU 14 and full cost CU 20. Its capacity is 50,000 units; it sells 35,000 externally at CU 26. Division B needs 10,000 units and can buy externally at CU 24. QUESTION: A transfers 10,000 units at full cost plus 10% (CU 22). What is the saving to B compared with buying externally?

A) CU 80,000
B) CU 100,000
C) CU 10,000
D) CU 20,000

Correct: D difficult Transfer pricing

B saves 24 - 22 = CU 2 per unit x 10,000 = CU 20,000. A earns a contribution of 22 - 14 = CU 8 per unit = CU 80,000. The group gain is CU 100,000. If you answered CU 80,000 you gave A's gain. If you answered CU 100,000 you gave the group's gain. If you answered CU 10,000 you used CU 1 per unit.

41. SCENARIO: Vista Ltd faces this demand schedule: CU 50 per unit - 8,000 units; CU 46 - 9,500; CU 42 - 11,000; CU 38 - 13,000. Variable cost is CU 24 per unit. Fixed costs are CU 90,000, rising by CU 20,000 if output exceeds 12,000 units. QUESTION: Which price maximises profit?

A) CU 50
B) CU 46
C) CU 42
D) CU 38

Correct: B difficult Pricing decisions

Profits: CU 50 gives 26 x 8,000 - 90,000 = 118,000; CU 46 gives 22 x 9,500 - 90,000 = 119,000; CU 42 gives 108,000; CU 38 gives 14 x 13,000 - 110,000 = 72,000. The highest profit is at CU 46. The other options give lower profit.

42. SCENARIO: Vista Ltd faces this demand schedule: CU 50 per unit - 8,000 units; CU 46 - 9,500; CU 42 - 11,000; CU 38 - 13,000. Variable cost is CU 24 per unit. Fixed costs are CU 90,000, rising by CU 20,000 if output exceeds 12,000 units. QUESTION: What is the profit at a price of CU 42?

A) CU 198,000
B) CU 108,000
C) CU 88,000
D) CU 90,000

Correct: B difficult Pricing decisions

Contribution = 18 x 11,000 = 198,000; less fixed costs of 90,000 (output is below 12,000) = CU 108,000. If you answered CU 198,000 you gave contribution. If you answered CU 88,000 you applied the step cost although output is below 12,000. If you answered CU 90,000 you gave the fixed costs.

43. SCENARIO: Vista Ltd faces this demand schedule: CU 50 per unit - 8,000 units; CU 46 - 9,500; CU 42 - 11,000; CU 38 - 13,000. Variable cost is CU 24 per unit. Fixed costs are CU 90,000, rising by CU 20,000 if output exceeds 12,000 units. QUESTION: What is the profit at a price of CU 38?

A) CU 182,000
B) CU 92,000
C) CU 72,000
D) CU 52,000

Correct: C difficult Pricing decisions

Contribution = 14 x 13,000 = 182,000. Output exceeds 12,000 units, so fixed costs are 110,000. Profit = CU 72,000. If you answered CU 182,000 you gave contribution. If you answered CU 92,000 you ignored the step in fixed costs. If you answered CU 52,000 you deducted the step twice.

44. SCENARIO: Vista Ltd faces this demand schedule: CU 50 per unit - 8,000 units; CU 46 - 9,500; CU 42 - 11,000; CU 38 - 13,000. Variable cost is CU 24 per unit. Fixed costs are CU 90,000, rising by CU 20,000 if output exceeds 12,000 units. QUESTION: What is the contribution/sales ratio at a price of CU 46?

A) 52.2%
B) 47.8%
C) 44.0%
D) 22.0%

Correct: B difficult Pricing decisions

Contribution per unit = 46 - 24 = CU 22. Ratio = 22 / 46 = 47.8%. If you answered 52.2% you gave the variable cost ratio. If you answered 44.0% you divided by the highest price of CU 50 (22 / 50). If you answered 22.0% you gave the contribution per unit as a percentage.

45. SCENARIO: Vista Ltd faces this demand schedule: CU 50 per unit - 8,000 units; CU 46 - 9,500; CU 42 - 11,000; CU 38 - 13,000. Variable cost is CU 24 per unit. Fixed costs are CU 90,000, rising by CU 20,000 if output exceeds 12,000 units. QUESTION: What is the breakeven volume at a price of CU 46 (rounded up to a whole unit)?

A) 3,750 units
B) 3,462 units
C) 4,091 units
D) 4,090 units

Correct: C difficult Pricing decisions

Breakeven = fixed costs / contribution per unit = 90,000 / 22 = 4,090.9, rounded up to 4,091 units. If you answered 3,750 you divided by the variable cost (24). If you answered 3,462 you used the contribution at CU 50 (26). If you answered 4,090 you rounded down, which leaves a small loss.

46. A product sells for CU 160 and is priced at a mark-up of 60% on cost. What is the gross margin on selling price?

A) 60.0%
B) 62.5%
C) 40.0%
D) 37.5%

Correct: D difficult Cost-plus pricing

Cost = 160 / 1.60 = CU 100; profit CU 60; margin = 60 / 160 = 37.5%. If you answered 60% you gave the mark-up. If you answered 62.5% you gave cost as a percentage of price. If you answered 40% you subtracted the mark-up from 100%.

47. Annual costs for 30,000 units are CU 360,000. Capital employed is CU 800,000 and the target return is 15%. What price per unit is needed?

A) CU 12.00
B) CU 13.80
C) CU 16.00
D) CU 4.00

Correct: C difficult Cost-plus pricing

Required profit = 15% x 800,000 = CU 120,000. Revenue = 480,000, so price = CU 16.00. If you answered CU 12.00 you gave unit cost. If you answered CU 13.80 you added 15% to unit cost. If you answered CU 4.00 you gave the profit per unit only.

48. The list price is CU 25. A 10% discount applies only to units ordered above 500. What is the price for an order of 600 units?

A) CU 14,750
B) CU 13,500
C) CU 15,000
D) CU 13,750

Correct: A difficult Cost-plus pricing

First 500 units at CU 25 = 12,500; the other 100 at CU 22.50 = 2,250. Total = CU 14,750. If you answered CU 13,500 you gave the discount on all 600 units. If you answered CU 15,000 you gave no discount. If you answered CU 13,750 you gave the discount on the first 500 units instead of the units above 500.

49. The market price of a component is CU 50. Selling and packaging costs of CU 4 per unit are saved when the component is transferred internally. What is the appropriate market-based transfer price?

A) CU 50
B) CU 54
C) CU 46
D) CU 42

Correct: C difficult Transfer pricing

A market-based transfer price is adjusted for costs that are not incurred on internal sales: 50 - 4 = CU 46. If you answered CU 50 you used the unadjusted market price. If you answered CU 54 you added the saving. If you answered CU 42 you deducted the saving twice.

50. Division S makes a component with variable cost CU 14 using 2 scarce machine hours. Each machine hour could instead earn a contribution of CU 18 on external sales. What is the minimum transfer price?

A) CU 50
B) CU 14
C) CU 36
D) CU 32

Correct: A difficult Transfer pricing

Minimum price = variable cost + opportunity cost = 14 + 2 x 18 = CU 50. If you answered CU 14 you ignored the opportunity cost. If you answered CU 36 you gave the opportunity cost only. If you answered CU 32 you added the CU 18 for one hour rather than two.