Chapter 12 Pricing Decisions and Cost Management
Objective 12.1
1) Companies should only produce and sell units as long as:
A) there is customer demand for the product
B) the competition allows it
C) the revenue from an additional unit exceeds the cost of producing it
D) there is a generous supply of low-cost direct materials
Answer: C
Diff: 2
Terms: target price
Objective: 1
AACSB: Ethical reasoning
2) Too high a price may:
A) deter a customer from purchasing a product
B) increase demand for the product
C) indicate supply is too plentiful
D) decrease a competitor's market share
Answer: A
Diff: 1
Terms: target price
Objective: 1
AACSB: Reflective thinking
3) Companies must always examine their pricing:
A) based on the supply of the product
B) based on the cost of producing the product
C) through the eyes of their customers
D) through the eyes of their competitors
Answer: C
Diff: 3
Terms: target price
Objective: 1
AACSB: Ethical reasoning
4) Competitors:
A) with alternative products can force a company to lower its prices
B) can gain a competitive pricing advantage with knowledge of your costs and operating policies
C) may span international borders
D) All of these answers are correct.
Answer: D
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
1
Copyright © 2012 Pearson Education, Inc.
,5) Fluctuations in exchange rates between different currencies can influence the:
A) cost of products using foreign suppliers
B) pricing of alternative products offered by foreign competitors
C) demand for products of foreign competitors
D) All of these answers are correct.
Answer: D
Diff: 2
Terms: target price
Objective: 1
AACSB: Multiculturalism and diversity
6) The cost of producing a product:
A) in highly competitive markets controls pricing
B) affects the willingness of a company to supply a product
C) for pricing decisions includes manufacturing costs, but not product design costs
D) None of these answers are correct.
Answer: B
Diff: 3
Terms: cost incurrence
Objective: 1
AACSB: Reflective thinking
7) In a noncompetitive environment, the key factor affecting pricing decisions is the:
A) customer's willingness to pay
B) price charged for alternative products
C) cost of producing and delivering the product
D) All of these answers are correct.
Answer: A
Diff: 3
Terms: target price
Objective: 1
AACSB: Reflective thinking
8) In a competitive market with differentiated products like cameras, the key factor(s) affecting pricing
decisions is/are the:
A) customer's willingness to pay
B) price charged for alternative products
C) cost of producing and delivering the product
D) All of these answers are correct.
Answer: D
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
2
Copyright © 2012 Pearson Education, Inc.
,9) Three major influences on pricing decisions are:
A) competition, costs, and customers
B) competition, demand, and production efficiency
C) continuous improvement, customer satisfaction, and supply
D) variable costs, fixed costs, and mixed costs
Answer: A
Diff: 1
Terms: target price
Objective: 1
AACSB: Reflective thinking
10) Companies must always examine pricing decisions through the eyes of their customers.
Answer: TRUE
Diff: 2
Terms: target price
Objective: 1
AACSB: Ethical reasoning
11) Companies that produce high quality products do NOT have to pay attention to the actions of their
competitors.
Answer: FALSE
Explanation: No business operates in a vacuum. Companies must always be aware of the actions of
their competitors.
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
12) Relevant costs for pricing decisions include manufacturing costs, but NOT costs from other value-
chain functions.
Answer: FALSE
Explanation: Relevant costs for pricing decisions include costs from all value-chain functions, from
R&D to customer service.
Diff: 2
Terms: value-added cost
Objective: 1
AACSB: Reflective thinking
13) Prices are decreased when demand is weak and competition is strong and increased when demand is
strong and competition is weak.
Answer: TRUE
Diff: 3
Terms: cost
Objective: 1
AACSB: Reflective thinking
3
Copyright © 2012 Pearson Education, Inc.
, 14) In markets with little or no competition, the key factor affecting price is the customers' willingness
to pay, not costs or competitors.
Answer: TRUE
Diff: 2
Terms: value-added cost
Objective: 1
AACSB: Reflective thinking
15) When prices are set in a competitive marketplace, product costs are the most important influence on
pricing decisions.
Answer: FALSE
Explanation: When prices are set in a competitive marketplace, companies have no control over setting
prices and must accept the price determined by the market.
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
16) The only competition a firm must be concerned about when setting prices are those in the local
market.
Answer: FALSE
Explanation: A firm must be concerned with local, national and even international competition when
setting a price.
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
17) Claudia Geer, controller, discusses the pricing of a new product with the sales manager, James
Nolan. What major influences must Claudia and James consider in pricing the new product? Discuss
each briefly.
Answer: The major influences are customers, competitors, and costs.
Customers: Managers must always examine pricing problems through the eyes of their customers. A
price increase may cause customers to reject a company's product and choose a competing or substitute
product.
Competitors: Competitors' reactions influence pricing decisions. At one extreme, a rival's prices and
products may force a business to lower its prices to be competitive. At the other extreme, a business
without a rival in a given situation can set higher prices. A business with knowledge of its rivals'
technology, plant capacity, and operating policies is able to estimate its rivals' costs, which is valuable
information in setting competitive prices.
Costs: Companies price products to exceed the costs of making them. The study of cost-behavior
patterns gives insight into the income that results from different combinations of price and output
quantities sold for a particular product.
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
4
Copyright © 2012 Pearson Education, Inc.
Objective 12.1
1) Companies should only produce and sell units as long as:
A) there is customer demand for the product
B) the competition allows it
C) the revenue from an additional unit exceeds the cost of producing it
D) there is a generous supply of low-cost direct materials
Answer: C
Diff: 2
Terms: target price
Objective: 1
AACSB: Ethical reasoning
2) Too high a price may:
A) deter a customer from purchasing a product
B) increase demand for the product
C) indicate supply is too plentiful
D) decrease a competitor's market share
Answer: A
Diff: 1
Terms: target price
Objective: 1
AACSB: Reflective thinking
3) Companies must always examine their pricing:
A) based on the supply of the product
B) based on the cost of producing the product
C) through the eyes of their customers
D) through the eyes of their competitors
Answer: C
Diff: 3
Terms: target price
Objective: 1
AACSB: Ethical reasoning
4) Competitors:
A) with alternative products can force a company to lower its prices
B) can gain a competitive pricing advantage with knowledge of your costs and operating policies
C) may span international borders
D) All of these answers are correct.
Answer: D
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
1
Copyright © 2012 Pearson Education, Inc.
,5) Fluctuations in exchange rates between different currencies can influence the:
A) cost of products using foreign suppliers
B) pricing of alternative products offered by foreign competitors
C) demand for products of foreign competitors
D) All of these answers are correct.
Answer: D
Diff: 2
Terms: target price
Objective: 1
AACSB: Multiculturalism and diversity
6) The cost of producing a product:
A) in highly competitive markets controls pricing
B) affects the willingness of a company to supply a product
C) for pricing decisions includes manufacturing costs, but not product design costs
D) None of these answers are correct.
Answer: B
Diff: 3
Terms: cost incurrence
Objective: 1
AACSB: Reflective thinking
7) In a noncompetitive environment, the key factor affecting pricing decisions is the:
A) customer's willingness to pay
B) price charged for alternative products
C) cost of producing and delivering the product
D) All of these answers are correct.
Answer: A
Diff: 3
Terms: target price
Objective: 1
AACSB: Reflective thinking
8) In a competitive market with differentiated products like cameras, the key factor(s) affecting pricing
decisions is/are the:
A) customer's willingness to pay
B) price charged for alternative products
C) cost of producing and delivering the product
D) All of these answers are correct.
Answer: D
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
2
Copyright © 2012 Pearson Education, Inc.
,9) Three major influences on pricing decisions are:
A) competition, costs, and customers
B) competition, demand, and production efficiency
C) continuous improvement, customer satisfaction, and supply
D) variable costs, fixed costs, and mixed costs
Answer: A
Diff: 1
Terms: target price
Objective: 1
AACSB: Reflective thinking
10) Companies must always examine pricing decisions through the eyes of their customers.
Answer: TRUE
Diff: 2
Terms: target price
Objective: 1
AACSB: Ethical reasoning
11) Companies that produce high quality products do NOT have to pay attention to the actions of their
competitors.
Answer: FALSE
Explanation: No business operates in a vacuum. Companies must always be aware of the actions of
their competitors.
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
12) Relevant costs for pricing decisions include manufacturing costs, but NOT costs from other value-
chain functions.
Answer: FALSE
Explanation: Relevant costs for pricing decisions include costs from all value-chain functions, from
R&D to customer service.
Diff: 2
Terms: value-added cost
Objective: 1
AACSB: Reflective thinking
13) Prices are decreased when demand is weak and competition is strong and increased when demand is
strong and competition is weak.
Answer: TRUE
Diff: 3
Terms: cost
Objective: 1
AACSB: Reflective thinking
3
Copyright © 2012 Pearson Education, Inc.
, 14) In markets with little or no competition, the key factor affecting price is the customers' willingness
to pay, not costs or competitors.
Answer: TRUE
Diff: 2
Terms: value-added cost
Objective: 1
AACSB: Reflective thinking
15) When prices are set in a competitive marketplace, product costs are the most important influence on
pricing decisions.
Answer: FALSE
Explanation: When prices are set in a competitive marketplace, companies have no control over setting
prices and must accept the price determined by the market.
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
16) The only competition a firm must be concerned about when setting prices are those in the local
market.
Answer: FALSE
Explanation: A firm must be concerned with local, national and even international competition when
setting a price.
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
17) Claudia Geer, controller, discusses the pricing of a new product with the sales manager, James
Nolan. What major influences must Claudia and James consider in pricing the new product? Discuss
each briefly.
Answer: The major influences are customers, competitors, and costs.
Customers: Managers must always examine pricing problems through the eyes of their customers. A
price increase may cause customers to reject a company's product and choose a competing or substitute
product.
Competitors: Competitors' reactions influence pricing decisions. At one extreme, a rival's prices and
products may force a business to lower its prices to be competitive. At the other extreme, a business
without a rival in a given situation can set higher prices. A business with knowledge of its rivals'
technology, plant capacity, and operating policies is able to estimate its rivals' costs, which is valuable
information in setting competitive prices.
Costs: Companies price products to exceed the costs of making them. The study of cost-behavior
patterns gives insight into the income that results from different combinations of price and output
quantities sold for a particular product.
Diff: 2
Terms: target price
Objective: 1
AACSB: Reflective thinking
4
Copyright © 2012 Pearson Education, Inc.
