Ch. 14

Question 1

demand and supply have 3 influences

Answer 1

1. Customers
2. Competitors
3. Costs

Question 2

_____ pricing decisions have a time horizon of less than one year and including
- pricing a one-time-only special order with no long-run implications
- adjusting product mix and output volume in a competitive market

Answer 2

short run pricing decisions

Question 3

______ pricing decisions have a time horizon of more than one year and are intended to build long run relationships with customers based on stable and predictable prices

Answer 3

long run pricing decisions
(Managers like this bc it:
- reduces need for continuous updating of prices
- improves planning accuracy
- builds stable relationship with customer base)

Question 4

for long run pricing, companies must consider all costs along the

Answer 4

value chain

Question 5

typically _____ costs comprise a substantial portion of the total cost associated with a cost object

Answer 5

indirect costs

Question 6

indirect costs are ______ using a methodology which must be sound and free from material error in order to be useful to decision making

Answer 6

allocated

Question 7

(what are these)
- to motivate managers and other employees
- to justify costs or compute reimbursement amounts
- to measure income and assets
- to provide information for economic decisions

Answer 7

purposes of cost allocation

Question 8

2 long run pricing approaches

Answer 8

1. market based approach
2. the cost based approach

Question 9

(which long run pricing approach is this)
given what our customers want and how competitors will react to what we do, what price should we charge, “target price”

Answer 9

market based approach

Question 10

(which long run pricing approach is this)
given what it costs us to make this product, what price should we charge that will recoup our costs and achieve a target return on investment? (also known as cost-plus)

Answer 10

the cost based approach

Question 11

4 steps to the market based approach

Answer 11

1. Develop a product that satisfies a customers need
2. Set target price
3. Calculate target cost
4. Value engineering

Question 12

this is estimated based on:
- an understanding of customers perceived value for a product or service , and
- how competitors will price competing products or services

Answer 12

target price

Question 13

a systematic evaluation of all aspects of the value chain, with the objective of reducing costs and achieving a quality level that satisfies customers

Answer 13

value engineering
- improvements in product designs,
- changes in materials specifications, and
- modification in process methods

Question 14

to implement value engineering, managers must distinguish

Answer 14

value added activities and costs from non-value added activities

Question 15

a cost that, if eliminated, would reduce the actual or perceived value or utility (usefulness) customers experience from using the product or service

Answer 15

value added costs

Question 16

costs that, if eliminated would not reduce the actual or perceived value or utility (usefulness) customers gain from using the product or service. it is a cost the customer is unwilling to pay for

Answer 16

non-value added cost

Question 17

when a resource is consumed (or benefit forgone) to meet a specific objective

Answer 17

cost incurrence

Question 18

costs that, have not yet been incurred but will be incurred in the future based on decisions that have already been made

Answer 18

locked-in (designed-in) costs

Question 19

most costs are locked in in pre-production stages
- primarily, direct and indirect manufacturing costs
- marketing, distribution, and customer service-oriented costs aren’t usually locking in until incurred

Question 20

the best opportunity to manage costs is

Answer 20

before they are locked in

Question 21

1. understand customer requirements and value added and non value added costs
2. anticipate how costs are locked in before they are incurred
3. use cross functional teams to redesign products and processes to reduce costs while meeting customer needs
   (what are these)

Answer 21

key steps in value engineering

Question 22

a ___ is oftentimes expressed as a percentage of the cost base

Answer 22

markup

Question 23

select a markup to earn a ______ based on entire business

Answer 23

target rate of return on investment

Question 24

reduces the need to go back and forth among prospective cost-plus prices, customer reactions, and design modifications

Answer 24

target price (market approach)

Question 25

many managers use ______ for their cost based pricing decisions

Answer 25

full cost

Question 26

estimating revenues and business function costs across the entire value chain for the entire product life cycle

Answer 26

life-cycle budgeting

Question 27

tracking and accumulating business function costs across the entire value chain for the entire product life cycle

Answer 27

life cycle costing

Question 28

focus on the total costs incurred by a customer to acquires, use maintain, and dispose of a product or service

Answer 28

customer life cycle costs (influence the prices a company can charge for its products)

Question 29

the practice of charging different customers different prices for the same product or service

Answer 29

price discrimination

Question 30

a form of price discrimination where prices charged in different countries may vary much more than the costs of delivering the product because of differences in customers purchasing power in those different countries

Answer 30

international pricing

Question 31

the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service

Answer 31

peak load pricing

Question 32

2 key features of price discrimination laws are: 1. price discrimination is permissible if differences in prices can be justified by differences in costs 2. the price discrimination is illegal only if the intent is to lessen or prevent competition

Question 33

when a company deliberately prices below its costs in an effort to drive out competitors and restrict supply and then raises prices rather than enlarge demand

Answer 33

predatory pricing

Question 34

the short run marginal or average variable vosts

Answer 34

appropriate measure of costs

Question 35

when a foreign company sells a product domestically at a price below the market value in the country where it is produced, and this lower price materially injures or threatens to materially injure the domestic industry

Answer 35

dumping

Question 36

when companies in an industry conspire in their pricing and production decisions to achieve a price about the competitive price and so restrain trade

Answer 36

collusive pricing