101. A price rise from CU 40 to CU 44 reduces demand from 10,000 to 9,200 units. What is the price elasticity of demand (ignoring the sign)?

A) 1.25
B) 0.80
C) 0.08
D) 0.10

Correct: B difficult Pricing: elasticity

% change in demand = 800 / 10,000 = 8%. % change in price = 4 / 40 = 10%. Elasticity = 8 / 10 = 0.80, so demand is inelastic. If you answered 1.25 you inverted the ratio. If you answered 0.08 you gave the change in demand. If you answered 0.10 you gave the change in price.

102. Marginal cost is CU 24 a unit. Fixed costs are CU 180,000 and the target profit is CU 120,000 on expected sales of 15,000 units. What price achieves the target?

A) CU 36
B) CU 32
C) CU 44
D) CU 20

Correct: C difficult Pricing: target profit

Contribution needed = 180,000 + 120,000 = 300,000, so CU 20 a unit. Price = 24 + 20 = CU 44. If you answered CU 36 you covered fixed costs only. If you answered CU 32 you covered the profit only. If you answered CU 20 you gave the required contribution per unit without the marginal cost.

103. Which TWO statements about transfer pricing are correct? (1) The minimum transfer price is the marginal cost plus the opportunity cost to the selling division. (2) Market price is often appropriate where there is a perfectly competitive external market. (3) A full-cost transfer price always leads to decisions in the company's best interest. (4) The buying division's maximum price is its marginal cost.

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

Correct: A difficult Transfer pricing: principles

The seller needs at least marginal cost plus any contribution lost, and a competitive market price is a sound benchmark. A full-cost price can distort decisions and the buyer's maximum is its net marginal revenue. If you chose (3) you assumed full cost is always best for the group. If you chose (4) you gave the buyer's cost as its maximum.

104. A manufacturer's cost is CU 48 and it requires a 25% margin on its selling price. The retailer needs a 30% margin on the retail price. What is the retail price, to the nearest cent?

A) CU 64.00
B) CU 91.43
C) CU 78.00
D) CU 83.20

Correct: B difficult Pricing: margins

Manufacturer's price = 48 / 0.75 = CU 64. Retail price = 64 / 0.70 = CU 91.43. If you answered CU 64 you gave the manufacturer's price. If you answered CU 78 you applied mark-ups of 25% and 30%. If you answered CU 83.20 you applied a 30% mark-up to the wholesale price.

105. At CU 30 a unit demand is 8,000 units; at CU 27 it is 10,000 units. Variable cost is CU 14 and fixed costs are CU 90,000 at both levels. What is the effect on profit of cutting the price to CU 27?

A) Increase of CU 30,000
B) Increase of CU 40,000
C) Decrease of CU 2,000
D) Increase of CU 2,000

Correct: D difficult Pricing: price and volume

Contribution at CU 30 = 8,000 x 16 = 128,000. At CU 27 = 10,000 x 13 = 130,000. Profit rises by CU 2,000. If you answered CU 30,000 you gave the increase in revenue. If you answered CU 40,000 you gave the profit at the lower price. If you answered a decrease you assumed that a lower price must reduce profit.

106. A product costs CU 72 and the required profit margin is 36% of selling price. What is the selling price?

A) CU 97.92
B) CU 25.92
C) CU 112.50
D) CU 200.00

Correct: C difficult Pricing: margin and mark-up

Price = 72 / (1 - 0.36) = CU 112.50, because cost is 64% of price. If you answered CU 97.92 you applied a 36% mark-up on cost. If you answered CU 25.92 you calculated 36% of cost. If you answered CU 200.00 you divided the cost by the margin percentage.

107. Total cost is CU 14 a unit at 30,000 units. The capital employed is CU 900,000 and the required return is 12%. What price gives the required return on capital employed?

A) CU 15.68
B) CU 3.60
C) CU 26.00
D) CU 17.60

Correct: D difficult Pricing: return on capital employed

Required profit = 12% x 900,000 = 108,000, or CU 3.60 a unit. Price = 14 + 3.60 = CU 17.60. If you answered CU 15.68 you applied a 12% mark-up to cost. If you answered CU 3.60 you gave the profit per unit only. If you answered CU 26.00 you added 12 currency units, not 12% of the capital employed.

108. Division A makes a component with variable production cost CU 22 and fixed cost CU 9 a unit. It is at full capacity selling externally at CU 40, but internal sales would save variable selling costs of CU 4 a unit. What is the minimum transfer price?

A) CU 40
B) CU 36
C) CU 22
D) CU 31

Correct: B difficult Transfer pricing: minimum price

At full capacity the minimum is marginal cost plus the contribution lost: 22 + (40 - 22 - 4) = CU 36, which is the external price less the selling cost saved. If you answered CU 40 you ignored the saving on internal sales. If you answered CU 22 you assumed spare capacity. If you answered CU 31 you used full cost.

109. Division B can sell its final product for CU 95. Further processing costs CU 31 and variable selling costs CU 6 a unit. What is the maximum price B would pay for the component from Division A?

A) CU 64
B) CU 58
C) CU 89
D) CU 95

Correct: B difficult Transfer pricing: maximum price

The maximum is B's net marginal revenue: 95 - 31 - 6 = CU 58. If you answered CU 64 you ignored selling costs. If you answered CU 89 you ignored processing costs. If you answered CU 95 you gave the final selling price.

110. A product has a list price of CU 250. A trade discount of 20% is given, and a further 2.5% settlement discount applies to the discounted price if paid within 14 days. What does the seller receive if the customer pays within 14 days?

A) CU 193.75
B) CU 200.00
C) CU 195.00
D) CU 243.75

Correct: C difficult Pricing: discounts

Net price = 250 x 0.80 = 200.00, then x 0.975 = CU 195.00. The settlement discount is on the discounted price. If you answered CU 193.75 you added the discounts (22.5%). If you answered CU 200.00 you ignored the settlement discount. If you answered CU 243.75 you ignored the trade discount.

111. Demand is P = 220 - 0.04Q, where Q is the quantity. Marginal cost is a constant CU 60. What price maximises profit?

A) CU 60
B) CU 180
C) CU 140
D) CU 100

Correct: C difficult Pricing: marginal revenue and cost

MR = 220 - 0.08Q. Setting MR = MC: 220 - 0.08Q = 60, so Q = 2,000 and P = 220 - 80 = CU 140. If you answered CU 60 you set price equal to marginal cost. If you answered CU 180 you used a marginal revenue slope of 0.04, not 0.08, for the price. If you answered CU 100 you averaged the price and the marginal cost.

112. Direct materials are CU 18, direct labour CU 11 and variable overhead CU 4 a unit. Fixed overhead of CU 150,000 is absorbed over 30,000 units. Price is full cost plus a 40% mark-up. What is the price?

A) CU 53.20
B) CU 46.20
C) CU 63.33
D) CU 40.60

Correct: A difficult Pricing: cost-plus

Full cost = 18 + 11 + 4 + 5 = CU 38. Price = 38 x 1.40 = CU 53.20. If you answered CU 46.20 you applied the mark-up to variable cost (33). If you answered CU 63.33 you treated 40% as a margin on selling price. If you answered CU 40.60 you applied the mark-up to prime cost (29).

113. Which TWO statements about pricing are correct? (1) Cost-plus pricing takes no direct account of demand. (2) Penetration pricing aims to win market share quickly. (3) Price skimming suits a product with many close substitutes and elastic demand. (4) Premium pricing works best when the product has a low-quality image.

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

Correct: D difficult Pricing: market-based strategies

Cost-plus is cost-driven and penetration pricing uses low prices to gain share. Skimming needs a distinctive product, and premium pricing needs a quality image. If you chose (3) you applied skimming to elastic demand. If you chose (4) you gave premium pricing a low-quality image.

114. A trainer's annual salary is CU 54,000 and overheads CU 36,000. She is expected to charge 150 days a year and the firm wants a profit of 25% of fees. What is the day rate?

A) CU 750
B) CU 600
C) CU 1,000
D) CU 800

Correct: D difficult Pricing: services

Fees needed = 90,000 / 0.75 = 120,000. Day rate = 120,000 / 150 = CU 800. If you answered CU 750 you used a 25% mark-up. If you answered CU 600 you ignored the profit. If you answered CU 1,000 you applied the 25% to the fee rate after the margin calculation.

115. A customer buys 600 units at CU 40. Variable cost is CU 26. A 5% discount on all units is offered on orders of 700 units or more, and the customer says it will then order 720 units. What is the effect on contribution?

A) Increase of CU 240
B) Increase of CU 1,680
C) Increase of CU 1,440
D) Increase of CU 8,640

Correct: A difficult Pricing: discounts

Current contribution = 600 x 14 = 8,400. New price = 38, contribution 12, so 720 x 12 = 8,640. Increase = CU 240. If you answered CU 1,680 you valued the extra 120 units at the old contribution and ignored the discount. If you answered CU 1,440 you gave the discount only on the extra units. If you answered CU 8,640 you gave the new contribution rather than the increase.

116. A price rise from CU 50 to CU 53 reduces demand from 8,000 to 7,360 units. What is the price elasticity of demand (ignoring the sign)?

A) 1.33
B) 0.75
C) 0.08
D) 0.06

Correct: A difficult Pricing: elasticity

% change in demand = 640 / 8,000 = 8%. % change in price = 3 / 50 = 6%. Elasticity = 8 / 6 = 1.33, so demand is elastic. If you answered 0.75 you inverted the ratio. If you answered 0.08 you gave the change in demand. If you answered 0.06 you gave the change in price.

117. Marginal cost is CU 31 a unit. Fixed costs are CU 240,000 and the target profit is CU 160,000 on expected sales of 20,000 units. What price achieves the target?

A) CU 43
B) CU 51
C) CU 39
D) CU 20

Correct: B difficult Pricing: target profit

Contribution needed = 240,000 + 160,000 = 400,000, so CU 20 a unit. Price = 31 + 20 = CU 51. If you answered CU 43 you covered fixed costs only. If you answered CU 39 you covered the profit only. If you answered CU 20 you gave the required contribution per unit without the marginal cost.

118. Which TWO statements about transfer pricing are correct? (1) Where the external market is perfectly competitive, market price is often appropriate. (2) Where the seller has spare capacity, the minimum price is its marginal cost. (3) A full-cost transfer price always leads to decisions in the company's best interest. (4) The buyer's maximum price is the seller's total cost.

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: principles

A competitive market price is a sound benchmark, and with spare capacity the seller loses nothing beyond marginal cost. Full cost can distort decisions, and the buyer's maximum is its net marginal revenue. If you chose (3) you assumed full cost is always best for the group. If you chose (4) you gave the seller's cost as the buyer's maximum.

119. A manufacturer's cost is CU 60 and it requires a 20% margin on its selling price. The retailer adds a 40% mark-up on the price it pays. What is the retail price?

A) CU 105
B) CU 75
C) CU 84
D) CU 125

Correct: A difficult Pricing: margins

Manufacturer's price = 60 / 0.80 = CU 75. Retail price = 75 x 1.40 = CU 105. If you answered CU 75 you gave the manufacturer's price. If you answered CU 84 you applied the 40% mark-up to the manufacturer's cost. If you answered CU 125 you treated the 40% as a margin on the retail price.

120. At CU 24 a unit demand is 12,000 units; at CU 21 it is 15,000 units. Variable cost is CU 12 and fixed costs are CU 80,000 at both levels. What is the effect on profit of cutting the price to CU 21?

A) Increase of CU 27,000
B) Increase of CU 55,000
C) Decrease of CU 9,000
D) Increase of CU 9,000

Correct: C difficult Pricing: price and volume

Contribution at CU 24 = 12,000 x 12 = 144,000. At CU 21 = 15,000 x 9 = 135,000. Profit falls by CU 9,000. If you answered CU 27,000 you gave the increase in revenue. If you answered CU 55,000 you gave the profit at the lower price. If you answered an increase of CU 9,000 you reversed the direction.

121. A product costs CU 84 and the required profit margin is 30% of selling price. What is the selling price?

A) CU 109.20
B) CU 120.00
C) CU 25.20
D) CU 280.00

Correct: B difficult Pricing: margin and mark-up

Price = 84 / (1 - 0.30) = CU 120.00, because cost is 70% of price. If you answered CU 109.20 you applied a 30% mark-up on cost. If you answered CU 25.20 you calculated 30% of cost. If you answered CU 280.00 you divided the cost by the margin percentage.

122. Total cost is CU 18 a unit at 25,000 units. The capital employed is CU 750,000 and the required return is 14%. What price gives the required return on capital employed?

A) CU 20.52
B) CU 22.20
C) CU 4.20
D) CU 32.00

Correct: B difficult Pricing: return on capital employed

Required profit = 14% x 750,000 = 105,000, or CU 4.20 a unit. Price = 18 + 4.20 = CU 22.20. If you answered CU 20.52 you applied a 14% mark-up to cost. If you answered CU 4.20 you gave the profit per unit only. If you answered CU 32.00 you added 14 currency units, not 14% of the capital employed.

123. Division A makes a component with variable production cost CU 26 and fixed cost CU 10 a unit. It is at full capacity selling externally at CU 45, but internal sales would save variable selling costs of CU 5 a unit. What is the minimum transfer price?

A) CU 45
B) CU 26
C) CU 36
D) CU 40

Correct: D difficult Transfer pricing: minimum price

At full capacity the minimum is marginal cost plus the contribution lost: 26 + (45 - 26 - 5) = CU 40, which is the external price less the selling cost saved. If you answered CU 45 you ignored the saving on internal sales. If you answered CU 26 you assumed spare capacity. If you answered CU 36 you used full cost.

124. Division B can sell its final product for CU 110. Further processing costs CU 38 and variable selling costs CU 7 a unit. What is the maximum price B would pay for the component from Division A?

A) CU 72
B) CU 103
C) CU 65
D) CU 110

Correct: C difficult Transfer pricing: maximum price

The maximum is B's net marginal revenue: 110 - 38 - 7 = CU 65. If you answered CU 72 you ignored selling costs. If you answered CU 103 you ignored processing costs. If you answered CU 110 you gave the final selling price.

125. A product has a list price of CU 400. A trade discount of 25% is given, and a further 2% settlement discount applies to the discounted price if paid within 7 days. What does the seller receive if the customer pays within 7 days?

A) CU 292.00
B) CU 294.00
C) CU 300.00
D) CU 392.00

Correct: B difficult Pricing: discounts

Net price = 400 x 0.75 = 300.00, then x 0.98 = CU 294.00. The settlement discount is on the discounted price. If you answered CU 292.00 you added the discounts (27%). If you answered CU 300.00 you ignored the settlement discount. If you answered CU 392.00 you ignored the trade discount.