Accounting Q&A · Cost and Management Accounting · Topic 15
Work through the questions, then reveal the answers to check your reasoning.
25 short-answer questions. Try each question before revealing its answer.
Worked example
A product costs 80. A 25% markup gives a price of 100 and a margin of 20%. A 25% margin on sales requires a price of about 106.67.
Core concepts
1. What is cost-plus pricing?
Add an agreed markup to a specified cost base.
2. Why define the cost base first?
Different bases, such as variable or full cost, produce different prices at the same markup.
3. What is markup percentage?
The amount added to cost divided by that cost.
4. What is profit margin percentage?
Profit divided by selling price or sales revenue, using the stated profit measure.
5. How do you set price from cost and markup?
Multiply cost by one plus the markup rate.
6. How do you set price from cost and target sales margin?
Divide cost by one minus the target margin rate.
7. Cost is 60 and markup is 30%. What is price?
78.
8. What margin does that price give?
18 divided by 78, or about 23.1%.
9. Cost is 60 and target margin is 25%. What price is required?
80.
10. What is target costing?
Start with an expected market price and subtract required profit to determine allowable cost.
Worked applications
11. Market price is 120 and target profit is 30. What is target cost?
90.
12. Estimated cost is 98. What is the target cost gap?
8 per unit.
13. What is price elasticity of demand?
Percentage change in quantity demanded divided by percentage change in price, using a stated calculation method.
14. What does an absolute elasticity greater than one indicate?
Quantity changes proportionately more than price in the range measured.
15. Price falls from 20 to 18 and sales rise from 1,000 to 1,200. What happens to revenue?
It rises from 20,000 to 21,600.
16. If unit variable cost is 12 in that example, what happens to contribution?
It falls from 8,000 to 7,200.
17. What is a short-run price floor with spare capacity?
At least incremental cost in a simple comparison, subject to strategic and other effects.
18. What changes when capacity is full?
Include contribution forgone from displaced sales.
19. Why assess product mix when pricing?
A price change can shift demand to other products and affect total contribution.
Review and exam practice
20. What is customer profitability analysis?
Compare customer revenue with the product and service costs attributable to serving that customer.
21. Give an example of a customer service cost.
Returns handling, expedited delivery or order processing.
22. What is the net result for sales of 15,000, product cost of 9,000 and attributable service costs of 4,000?
2,000 before any other costs.
23. Can a high-revenue customer be less profitable than a smaller one?
Yes. Frequent returns, discounts or specialised service can consume more contribution.
24. Why test multiple volume scenarios before changing a price?
Volume response is uncertain and can reverse the projected profit effect.
25. What should a pricing recommendation document?
Cost base, expected volume, contribution, capacity, competitor context and key risks.