51. Variable cost is CU 14 and fixed production overhead CU 4 per unit. Development costs of CU 120,000 are to be recovered over 4 years at 5,000 units a year. What price recovers all costs, with no profit?

A) CU 24
B) CU 18
C) CU 20
D) CU 42

Correct: A difficult Cost-plus pricing

Development cost per unit = 120,000 / 20,000 = CU 6. Price = 14 + 4 + 6 = CU 24. If you answered CU 18 you ignored the development cost. If you answered CU 20 you included variable cost and development costs but omitted the fixed overhead (14 + 6). If you answered CU 42 you recovered the whole development cost in the first year.

52. A job needs materials CU 500, 40 labour hours at CU 11, and overhead absorbed at CU 90,000 / 15,000 labour hours. The price is cost plus a 30% mark-up. What is the price?

A) CU 1,686
B) CU 1,222
C) CU 1,534
D) CU 1,180

Correct: C difficult Cost-plus pricing

Overhead rate = CU 6 per hour, so overhead = 240. Cost = 500 + 440 + 240 = CU 1,180. Price = 1,180 x 1.30 = CU 1,534. If you answered CU 1,686 you applied a 30% margin on price. If you answered CU 1,222 you applied the mark-up to prime cost only. If you answered CU 1,180 you gave the cost.

53. Which TWO of the following statements about pricing strategies are correct? (1) Price skimming sets a high initial price, often to recover development costs quickly. (2) Penetration pricing sets a low initial price to win market share. (3) Cost-plus pricing takes no account of costs.

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

Correct: D difficult Pricing decisions

Skimming and penetration are as described. Cost-plus pricing is based on costs, though it ignores demand.

54. Variable cost is CU 18 per unit and fixed costs CU 160,000. At 20,000 units, what price gives a target profit of CU 80,000?

A) CU 26
B) CU 22
C) CU 30
D) CU 18

Correct: C difficult Cost-plus pricing

Required contribution = 160,000 + 80,000 = 240,000; per unit CU 12. Price = 18 + 12 = CU 30. If you answered CU 26 you omitted the profit. If you answered CU 22 you omitted the fixed costs. If you answered CU 18 you gave variable cost.

55. S has spare capacity: variable cost CU 11, full cost CU 15, external price CU 20. B can buy externally at CU 18 and needs 8,000 units. What is the gain to the group if S supplies B?

A) CU 24,000
B) CU 72,000
C) CU 144,000
D) CU 56,000

Correct: D difficult Transfer pricing

The group saves B's external cost of CU 18 and incurs only the CU 11 variable cost: 7 x 8,000 = CU 56,000. If you answered CU 24,000 you used full cost. If you answered CU 72,000 you used S's external price. If you answered CU 144,000 you gave B's external purchase cost.

56. A 3% settlement discount is offered for payment in 14 days instead of 60 days. What is the annualised cost of not taking it, using simple annualisation (365 days)?

A) 3.1%
B) 24.5%
C) 23.8%
D) 27.3%

Correct: B difficult Trade credit

The cost over 46 days is 3 / 97 = 3.09%. Simple annualised = 3.09% x 365/46 = 24.5%. If you answered 3.1% you did not annualise. If you answered 23.8% you divided by 100 instead of 97. If you answered 27.3% you used compound annualisation.

57. Cost excluding VAT is CU 400. A mark-up of 25% is added and VAT of 20% is charged to the customer. What is the price including VAT?

A) CU 500
B) CU 600
C) CU 580
D) CU 625

Correct: B difficult Cost-plus pricing

Price before VAT = 400 x 1.25 = 500. Including VAT = 500 x 1.20 = CU 600. If you answered CU 500 you omitted VAT. If you answered CU 580 you added 25% and 20% to cost together (400 x 1.45). If you answered CU 625 you applied the mark-up to the price before VAT again.

58. The list price is CU 100 with a trade discount of 15%. The cost is CU 60. What is the gross margin on the net selling price?

A) 29.4%
B) 40.0%
C) 25.0%
D) 41.7%

Correct: A difficult Cost-plus pricing

Net price = 85. Profit = 85 - 60 = 25. Margin = 25 / 85 = 29.4%. If you answered 40% you used the list price (40 / 100). If you answered 25% you gave the profit in currency as a percentage. If you answered 41.7% you gave the mark-up on cost (25 / 60).

59. Which TWO of the following statements about transfer pricing are correct? (1) Cost-based transfer prices may give the supplying division no incentive to be efficient. (2) Negotiated transfer prices may reflect the bargaining power of the divisions. (3) A market price is always the correct transfer price whatever the market.

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

Correct: B difficult Transfer pricing

Cost-plus transfers can pass on inefficiencies, and negotiated prices reflect bargaining. A market price is suitable only where there is a competitive external market.

60. Variable cost is CU 10 per unit and fixed costs CU 90,000. At sales of 6,000 units, what price gives breakeven?

A) CU 15
B) CU 10
C) CU 35
D) CU 25

Correct: D difficult Pricing decisions

Price = variable cost + fixed cost per unit = 10 + 90,000 / 6,000 = CU 25. If you answered CU 15 you gave the fixed cost per unit. If you answered CU 10 you gave variable cost. If you answered CU 35 you added variable cost twice.

61. A product is priced at a mark-up of 45% on cost. What is the gross profit margin on selling price?

A) 45.0%
B) 31.0%
C) 69.0%
D) 55.0%

Correct: B difficult Pricing: margin and mark-up

Take cost as 100: price = 145, profit = 45. Margin = 45 / 145 = 31.0%. If you answered 45% you gave the mark-up. If you answered 69% you gave cost as a percentage of price (100 / 145). If you answered 55% you deducted the mark-up from 100.

62. A product costs CU 62. The selling price must give a profit margin of 20% of price after paying a sales commission of 5% of price. What is the selling price?

A) CU 77.50
B) CU 81.38
C) CU 72.94
D) CU 82.67

Correct: D difficult Pricing: target margin

Cost is 100% - 20% - 5% = 75% of price. Price = 62 / 0.75 = CU 82.67. If you answered CU 77.50 you ignored the commission. If you answered CU 81.38 you added 5% to a price of CU 77.50. If you answered CU 72.94 you added the commission to the cost percentage (80% + 5%).

63. A new product has a unit cost of CU 21. Capital employed is CU 450,000 and the required return is 12% on 30,000 units a year. What price gives the required return?

A) CU 23.52
B) CU 22.80
C) CU 36.00
D) CU 21.00

Correct: B difficult Pricing: target return

Required profit = 450,000 x 12% = 54,000, or CU 1.80 a unit. Price = 21 + 1.80 = CU 22.80. If you answered CU 23.52 you added 12% to cost. If you answered CU 36.00 you added capital per unit (15) with no return calculation. If you answered CU 21 you priced at cost.

64. Variable cost is CU 14 a unit and fixed costs are CU 160,000. Price is full cost plus 25%. Expected volume falls from 20,000 to 16,000 units and the price is recalculated. What is the new price?

A) CU 30.00
B) CU 27.50
C) CU 17.50
D) CU 37.50

Correct: A difficult Pricing: cost-plus

New full cost = 14 + 160,000 / 16,000 = CU 24. Price = 24 x 1.25 = CU 30. The price rises as volume falls, which can reduce demand further. If you answered CU 27.50 you used the old volume. If you answered CU 17.50 you applied the mark-up to variable cost only. If you answered CU 37.50 you applied the 25% twice.

65. Division S makes a component at a variable cost of CU 24 and can sell all it makes externally at CU 40. Division R can finish it for a further CU 28 and sell the product for CU 70. S is working at full capacity. What is the transfer price range acceptable to both divisions?

A) CU 40 to CU 42
B) CU 24 to CU 42
C) CU 24 to CU 40
D) CU 28 to CU 42

Correct: A difficult Transfer pricing

Minimum for S = variable cost + opportunity cost = the external price of CU 40 at full capacity. Maximum for R = 70 - 28 = CU 42. If you answered CU 24 as the minimum you assumed S had spare capacity. If you answered CU 40 as the maximum you used S's external price rather than R's net marginal revenue. If you answered CU 28 you used R's conversion cost as the minimum.

66. A division makes component K at a variable cost of CU 14. Each unit uses 2 hours of a scarce resource that would otherwise earn a contribution of CU 8 an hour in another product. What is the minimum transfer price of K?

A) CU 14
B) CU 16
C) CU 22
D) CU 30

Correct: D difficult Transfer pricing

Minimum transfer price = variable cost + opportunity cost = 14 + 2 x 8 = CU 30. If you answered CU 14 you ignored the opportunity cost. If you answered CU 16 you gave the lost contribution only. If you answered CU 22 you added the contribution for one hour only.

67. Division A has spare capacity and variable costs of CU 15 a unit. It offers units to Division B at its full cost of CU 22. B can buy externally at CU 19 and buys 8,000 units externally. What is the effect on group profit?

A) CU 24,000 lower
B) CU 32,000 lower
C) CU 56,000 lower
D) No change

Correct: B difficult Transfer pricing

Buying externally costs the group CU 19 a unit against CU 15 of variable cost internally: (19 - 15) x 8,000 = CU 32,000 lower. If you answered CU 24,000 you used B's saving at the divisional level ((22 - 19) x 8,000) and treated it as the group effect. If you answered CU 56,000 you used A's margin on transfers ((22 - 15) x 8,000). If you answered no change you assumed the transfer price does not affect decisions, whereas it caused B to reject the internal supply.

68. A product sells for CU 40 with a variable cost of CU 26. Sales are 800 units. An 8% discount on all units would raise sales to 1,200 units. By how much does profit change?

A) Rises by CU 5,600
B) Rises by CU 4,320
C) Falls by CU 1,760
D) Rises by CU 1,760

Correct: D difficult Pricing: discounts

Current contribution = 800 x 14 = 11,200. New contribution = 1,200 x (36.80 - 26) = 12,960. Profit rises by CU 1,760. If you answered CU 5,600 you valued the extra 400 units at the old margin and ignored the discount on the first 800. If you answered CU 4,320 you valued the extra units at the new margin and ignored the discount on the first 800. If you answered a fall you reversed the comparison.

69. A product sells for CU 50 with a variable cost of CU 30, a contribution margin of 40%. A 10% discount is offered. What is the contribution margin on the discounted price?

A) 33.3%
B) 30.0%
C) 37.5%
D) 40.0%

Correct: A difficult Pricing: discounts

Discounted price = CU 45, contribution = 15, margin = 15 / 45 = 33.3%. If you answered 30% you deducted the discount percentage from the margin. If you answered 37.5% you divided the new contribution by the old price. If you answered 40% you ignored the effect of the discount on the margin.

70. Which TWO of the following are correct? (1) Penetration pricing sets a low initial price to gain market share. (2) Price skimming sets a high initial price for a new product when buyers are not very price sensitive. (3) Cost-plus pricing takes full account of customer demand. (4) Marginal cost pricing always recovers fixed costs.

A) (1) and (3) only
B) (1) and (2) only
C) (2) and (4) only
D) (3) and (4) only

Correct: B difficult Pricing strategies

Penetration and skimming are the two standard strategies for new products. Cost-plus starts from cost, not demand, and marginal cost pricing covers fixed costs only if volume is high enough. If you chose (3) you credited cost-plus with demand analysis. If you chose (4) you assumed a price above marginal cost always recovers fixed costs.

71. A product is sold for CU 114 including VAT at 20%. Its cost is CU 70. What is the mark-up on cost earned by the seller?

A) 26.3%
B) 62.9%
C) 35.7%
D) 13.1%

Correct: C difficult Pricing and VAT

Net price = 114 / 1.2 = CU 95. Profit = 95 - 70 = 25. Mark-up = 25 / 70 = 35.7%. If you answered 26.3% you gave the margin on selling price (25 / 95). If you answered 62.9% you compared the VAT-inclusive price with cost. If you answered 13.1% you also added VAT to the cost.

72. A firm's annual staff cost is CU 90,000 and overhead is CU 45,000. Each member of staff has 1,800 working hours, of which 60% are chargeable. Fees are set at cost plus 30%. What is the fee per chargeable hour?

A) CU 97.50
B) CU 125.00
C) CU 162.50
D) CU 150.00

Correct: C difficult Pricing: services

Chargeable hours = 1,800 x 60% = 1,080. Cost per chargeable hour = 135,000 / 1,080 = CU 125. Fee = 125 x 1.3 = CU 162.50. If you answered CU 97.50 you divided by all 1,800 hours. If you answered CU 125 you omitted the mark-up. If you answered CU 150 you added 20% instead of 30%.

73. Variable cost is CU 15 a unit, fixed costs are CU 120,000 and sales are 20,000 units. Tax is 20% of profit. What price gives an after-tax profit of CU 48,000?

A) CU 24.00
B) CU 23.40
C) CU 23.88
D) CU 18.00

Correct: A difficult Pricing: target profit

Pre-tax profit = 48,000 / 0.8 = 60,000. Price = 15 + (120,000 + 60,000) / 20,000 = CU 24. If you answered CU 23.40 you ignored tax. If you answered CU 23.88 you grossed up the profit by multiplying by 1.2. If you answered CU 18 you forgot the fixed costs.

74. Division A has a full cost of CU 30 a unit and transfers 5,000 units to Division B at full cost plus 20%. B adds CU 20 of cost and sells the product for CU 60. What is B's profit?

A) CU 30,000
B) CU 50,000
C) CU 20,000
D) CU 120,000

Correct: C difficult Transfer pricing

Transfer price = 30 x 1.2 = CU 36. B's profit = 5,000 x (60 - 36 - 20) = CU 20,000. If you answered CU 30,000 you gave A's profit. If you answered CU 50,000 you gave the group profit. If you answered CU 120,000 you omitted B's own conversion cost of CU 20.

75. Which TWO of the following are correct? (1) A transfer price is income for the supplying division and a cost for the receiving division. (2) Where there is a perfect external market, the market price is a suitable transfer price. (3) A transfer price above the market price always benefits the group. (4) A cost-plus transfer price always leads to decisions that maximise group profit.

A) (1) and (3) only
B) (2) and (4) only
C) (3) and (4) only
D) (1) and (2) only

Correct: D difficult Transfer pricing

The transfer price moves profit between divisions and cancels out for the group, but it can distort decisions. A market price is suitable where a perfect external market exists. If you chose (3) you forgot that the effect cancels out at group level. If you chose (4) you overlooked that cost-plus can lead to sub-optimal decisions.