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Multiple choice

The pricing objective of maximizing profits:
1 has not been affected by other, more socially focused concerns.
2 is to be implemented under any and all circumstances.
3 has not always been considered the underlying objective of any pricing policy.
4 must be considered when determining the price needed to increase market share.

To stay in business, a company must have a selling price that is:
1 acceptable to the customer.
2 able to recover the variable costs of production.
3 the highest in the marketplace.
4 equal to or lower than the company's costs per unit.

An internal issue to be considered when setting a price is:
1 whether the process is labor-intensive or automated.
2 the customer's preferences for quality versus price.
3 current prices of competing products or services.
4 the life of the product or service.

An external issue to be considered when setting a price is:
1 the variable costs of the product or service.
2 the desired rate of return.
3 the quality of materials and labor.
4 the number of competing products or services.

Fixed costs that change for activity outside the relevant range would include:
1 supervision costs.
2 electricity costs.
3 production supplies costs.
4 raw materials costs.

When gross margin pricing is used, the markup percentage includes:
1 desired profits plus total selling, general, and administrative expenses.
2 only the desired profit factor.
3 total costs and expenses.
4 desired profits plus total fixed production costs plus total selling, general, and administrative expenses.

The return on assets pricing method:
1 has very little appeal and support.
2 has a primary objective of earning a minimum rate of return on assets.
3 is a crude approach to pricing and should be used as a last resort.
4 replaces the desired rate of return used in cost-based pricing methods with a desired profit objective.

The pricing method that establishes selling prices based on a stipulated rate above total production costs is:
1 return on assets pricing.
2 target cost pricing.
3 gross margin pricing.
4 time and materials pricing.

A major advantage of the target costing approach to pricing is that target costing:
1 allows a company to analyze the potential profit of a product before spending money to produce the product.
2 is not dependent on customers' quality versus price decisions.
3 identifies unproductive assets.
4 anticipates the product's profitability midway through its life cycle.

Use of market transfer prices:
1 is the only acceptable approach in a free enterprise economy.
2 usually does not cause the selling division to ignore negotiating attempts by the buying division.
3 may cause an internal shortage of materials.
4 usually does not work against the operating objectives of the company as a whole.

The variables to be considered in the capital investment decision are:
1 expected life, estimated cash flow, and investment cost.
2 expected life, estimated cost, and projected capital budget.
3 estimated cash flow, investment cost, and corporate objectives.
4 economic conditions, economic policies, and corporate objectives.

Another term for the minimum rate of return is the:
1 payback rate.
2 discounted rate.
3 capital rate.
4 hurdle rate.

The after-tax amount is used for which of the following components of the cost of capital?
1 Cost of debt
2 Cost of common stock
3 Cost of preferred stock
4 Cost of retained earnings

Capital investment proposals should be ranked in decreasing order of:
1 length in years.
2 dollar amount required.
3 residual value expected.
4 rate of return.

Which of the following items is irrelevant to capital investment analysis?
1 Investment cost
2 Residual value
3 Carrying value
4 Net cash flows

The carrying value of a fixed asset is equal to its:
1 current disposal value.
2 current replacement cost.
3 original cost.
4 undepreciated balance.

Which of the following items can be described as a noncash expense?
1 Wages
2 Advertising
3 Income taxes
4 Depreciation

The time value of money concept is given consideration in long-range investment decisions by:
1 assuming equal annual cash flow patterns.
2 assigning greater value to more immediate cash flows.
3 weighting cash flows with subjective probabilities.
4 investing only in short-term projects.

The net present value method of evaluating proposed investments:
1 discounts cash flows at the minimum rate of return.
2 ignores cash flows beyond the payback period.
3 applies only to mutually exclusive investment proposals.
4 measures a project's time-adjusted rate of return.

The payback period is defined as the amount of time in years for the sum of:
1 future net incomes to equal the original investment.
2 net future cash inflows to equal the original investment.
3 net present value of future cash inflows to equal the original investment.
4 net future cash outflows to equal the original investment.

Solution Summary

The solution explains some multiple choice questions relating to pricing methods, objectives, relevant range, markup percent and market