Case Problem
Case Problem
PRICING
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY
Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT
True-False Statements
1. 1 C 6. 2 C 11. 6 K 16. 7 K 21. 3 C
2. 1 K 7. 2 C 12. 7 K 17. 7 C 22. 3 K
3. 1 K 8. 5 K 13. 7 K 18. 7 K 23. 3 K
4. 2 C 9. 5 K 14. 7 C 19. 8 K 24. 4 K
5. 2 C 10. 5 K 15. 6 C 20. 8 C 25. 4 C
Multiple Choice Questions
26. 1 K 42. 5 C 58. 7 C 74. 4 K 90. 6 C
27. 1 K 43. 5 C 59. 7 K 75. 4 C 91. 6 C
28. 1 K 44. 5 K 60. 7 C 76. 1 AP 92. 6 C
29. 1 C 45. 5 AP 61. 6 K 77. 2 AP 93. 6 C
30. 1 C 46. 5 AP 62. 7 AP 78. 2 AP 94. 7 C
31. 2 K 47. 5 AP 63. 7 AP 79. 2 AP 95. 7 C
32. 2 K 48. 7 C 64. 8 C 80. 7 AP 96. 7 C
33. 2 C 49. 7 K 65. 8 K 81. 7 AP 97. 4 C
34. 2 AP 50. 7 K 66. 3 K 82. 3 AP 98. 7 C
35. 2 AP 51. 7 C 67. 3 K 83. 4 AP 99. 5 C
36. 2 C 52. 6 K 68. 3 K 84. 7 C 100. 6 K
37. 2 K 53. 6 C 69. 3 K 85. 7 AP 101. 7 K
38. 2 AP 54. 6 K 70. 3 K 86. 7 AP 102. 7 C
39. 2 AP 55. 7 C 71. 3 C 87. 7 AP 103. 8 K
40. 5 K 56. 7 K 72. 4 K 88. 7 AP
41. 5 K 57. 7 C 73. 4 K 89. 7 AP
Brief Exercises
104. 2 AP 106. 2 AP 108. 5 AP 110. 7 AP 112. 7 AP
105. 2 AP 107. 2 AP 109. 7 AP 111. 7 AP 113. 7 AN
Exercises
114. 1 AP 118. 5 AP 122. 8 AP 126. 5 AN
115. 2 AP 119. 5 AP 123. 7 AN 127. 2 AP
116. 2 AP 120. 7 AN 124. 3,4 AP 128. 7 AP
117. 2 AP 121. 7 AN 125. 3,4 AP 129. 7 AP
Completion Statements
130. 1 K 132. 2 K 134. 6 K 136. 6 K 138. 8 K
131. 2 K 133. 5 K 135. 7 K 137. 6 K 139. 3 K
Matching
140. 1-8 K
Short Answer Essay
141. 5 C 142. 7 C
Multi Part Question
143. 6,7 AP
Pricing 9-2
1. Calculate a target cost when the market determines a product’s price. To calculate a
target cost, the company determines its target selling price. Once the target selling price is
set, it determines its target cost by setting a desired profit. The difference between the
target price and the desired profit is the target cost of the product.
2. Calculate a target selling price using full cost-plus pricing. In cost-plus pricing, the
company determines a cost base and adds a markup to it to determine a target selling
price. The cost-plus pricing formula is as follows: cost (markup percentage cost) target
selling price.
3. Calculate a target selling price using absorption cost-plus pricing. The absorption
cost-plus approach uses the manufacturing cost as the cost base and covers the selling
and administrative costs plus the target ROI through the markup. The target selling price
is calculated as follows: manufacturing cost per unit (markup percentage manufacturing
cost per unit).
4. Calculate a target selling price using variable cost-plus pricing. The variable cost-
plus approach uses all of the variable costs, including selling and administrative costs, as
the cost base and covers the fixed costs and target ROI through the markup. The target
selling price is calculated as follows: variable cost per unit (markup percentage variable
cost per unit).
6. Define transfer price and its role in an organization. The transfer price is the amount
charged for goods that are transferred between two divisions of the same company.
Transfer-pricing policy should achieve goal congruence, maintain division autonomy, and
provide accurate performance evaluation among division managers.
TRUE-FALSE STATEMENTS
1. In most cases, a company sets the price instead of it being set by the competitive market.
2. In a competitive market, a company is forced to act as a price taker and must emphasize
minimizing and controlling costs.
3. The difference between the target price and the desired profit is the target cost of the
product.
4. In a competitive environment, the company must set a target cost and a target selling
price.
5. The cost-plus pricing approach establishes a cost base and adds a mark-up to this base
to determine a target selling price.
6. The cost-plus pricing model gives consideration to the demand side—whether customers
will pay the target selling price.
7. Sales volume plays a large role in determining per unit costs in the cost-plus pricing
approach.
8. In time and material pricing, the material charge is based on the cost of direct materials
used and a material loading charge for related overhead costs.
9. The first step for time and material pricing is to calculate the material loading charge.
10. The material loading charge is expressed as a percentage of the total estimated costs of
materials for the year.
11. Divisions within vertically integrated companies normally sell goods only to other divisions
within the same company.
12. Using the negotiated transfer pricing approach, a minimum transfer price is established by
the selling division.
13. There are two approaches for determining a transfer price: cost-based and market-based.
9-6 Test Bank for Managerial Accounting, Third Canadian Edition
14. If a cost-based transfer price is used, the transfer price must be based on variable cost.
15. A problem with a cost-based transfer price is that it does not provide adequate incentive
for the selling division to control costs.
16. In the formula for a minimum transfer price, opportunity cost is the contribution margin of
goods sold externally.
17. The market-based transfer price approach produces a higher total contribution margin to
the company than the cost-based approach.
18. A negotiated transfer price should be used when an outside market for the goods does
not exist.
19. The number of transfers between divisions that are located in different countries has
decreased as companies rely more on outsourcing.
20. Differences in tax rates between countries can complicate the determination of the
appropriate transfer price.
21. The absorption cost approach is consistent with generally accepted accounting principles
because it defines the cost base as the manufacturing cost.
22. The first step in the absorption cost approach is to calculate the mark-up percentage used
in setting the target selling price.
23. Because absorption cost data already exists in general ledger accounts, it is cost effective
to use it for pricing.
24. The mark-up percentage in the variable cost-plus approach is calculated by dividing the
desired ROI/unit plus fixed costs/unit by the variable costs/unit.
25. Under the variable cost-plus approach, the cost base consists of all of the variable costs
associated with a product except variable selling and administrative costs.
Pricing 9-7
26. Factors that can affect pricing decisions include all of the following except
a. cost considerations.
b. environment.
c. pricing objectives.
d. all of these are factors.
28. A company must price its product to cover its costs and earn a reasonable profit in
a. all cases.
b. its early years.
c. the long run.
d. the short run.
30. All of the following are correct statements about the target price except it
a. is the price the company believes would place it in the optimal position for its
target audience.
b. is used to determine a product's target cost.
c. is determined after the company has identified its market and does market
research.
d. is determined after the company sets its desired profit amount.
32. In cost-plus pricing, the mark-up percentage is calculated by dividing the desired ROI per
unit by the
a. fixed cost per unit.
b. total cost per unit.
c. total manufacturing cost per unit.
Pricing 9-9
34. The following per unit information is available for a new product of Blue Ribbon Company:
Desired ROI $ 15
Fixed cost 50
Variable cost 100
Total cost 150
Selling price 165
35. Bryson Company has just developed a new product. The following data are available for
this product:
36. All of the following are correct statements about the cost-plus pricing approach except that it
a. is simple to calculate.
b. considers customer demand.
c. includes only variable costs in the cost base.
d. will only work when the company sells the quantity it budgeted.
37. In the cost-plus pricing approach, the desired ROI per unit is calculated by multiplying the
ROI percentage by
a. fixed costs.
b. total assets.
c. total costs.
9-10 Test Bank for Managerial Accounting, Third Canadian Edition
d. variable costs.
Red Grass Company produces high definition television sets. The following information is
available for this product:
Fixed cost per unit $ 100
Variable cost per unit 300
Total cost per unit 400
Desired ROI per unit 140
40. In time and material pricing, a material loading charge covers all of the following except
a. purchasing costs.
b. related overhead.
c. desired profit margin.
d. all of these are covered.
41. The first step for time and material pricing is to calculate the
a. charge for obtaining materials.
b. charge for holding materials.
c. labour charge per hour.
d. charges for a particular job.
42. The labour charge per hour in time and material pricing includes all of the following except
a. an allowance for a desired profit.
b. charges for labour loading.
c. selling and administrative costs.
d. overhead costs.
43. The last step in determining the material loading charge percentage is to
a. estimate annual costs for purchasing, receiving, and storing materials.
b. estimate the total cost of parts and materials.
c. divide material charges by the total estimated costs of parts and materials.
Pricing 9-11
44. In time and material pricing, the charge for a particular job is the sum of the labour charge
and the
a. materials charge.
b. material loading charge.
c. materials charge + desired profit.
d. materials charge + the material loading charge.
The following data are available for Wheels ‘N Spokes Repair Shop for 2012:
The desired profit margin is $15 per labour hour. The material loading charge is 35% of invoice
cost. It is estimated that 4,000 labour hours will be worked in 2012.
46. In January 2012, Wheels ‘N Spokes repairs a bicycle that uses parts of $200. Its material
loading charge on this repair would be
a. $35.
b. $70.
c. $235.
d. $270.
47. In March 2012, Wheels ‘N Spokes repairs a bicycle that takes three hours to repair and
uses parts of $70. The bill for this repair would be
a. $244.50.
b. $289.50.
c. $304.50.
d. $349.50.
48. Negotiated transfer pricing is not always used because of each of the following reasons
except that
a. market price information is sometimes not easily obtainable.
b. a lack of trust between the negotiating divisions may lead to a breakdown in the
negotiations.
9-12 Test Bank for Managerial Accounting, Third Canadian Edition
49. All of the following are approaches for determining a transfer price except the
a. cost-based approach.
b. market-based approach.
c. negotiated approach.
d. time and material approach.
50. When a cost-based transfer price is used, the transfer price may be based on any of the
following except
a. fixed cost.
b. full cost.
c. variable cost.
d. all of these may be used.
51. All of the following are correct statements about the cost-based transfer price approach
except that it
a. can understate the actual contribution to profit by the selling division.
b. can reduce a division manager's control over the division's performance.
c. bases the transfer price on standard cost instead of actual cost.
d. provides incentive for the selling division to control costs.
52. The general formula for the minimum transfer price is: minimum transfer price equals
a. fixed cost + opportunity cost.
b. external purchase price.
c. total cost + opportunity cost.
d. variable cost + opportunity cost.
53. A firm’s transfer pricing policy should accomplish all of the following except
a. promote goal congruence.
b. maintain divisional autonomy.
c. provide accurate performance evaluation.
d. maximize the taxes paid in a foreign country.
54. In the formula for the minimum transfer price, opportunity cost is the __________ of the
goods sold externally.
a. variable cost
b. total cost
c. selling price
d. contribution margin
55. The transfer price approach that conceptually should work the best is the
a. cost-based approach.
b. market-based approach.
Pricing 9-13
56. The transfer price approach that is often considered the best approach because it
generally provides the proper economic incentives is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time and material pricing approach.
57. All of the following are correct statements about the market-based approach except that it
a. assumes that the transfer price should be based on the most objective inputs
possible.
b. provides a fairer allocation of the company's contribution margin to each division.
c. produces a higher company contribution margin than the cost-based approach.
d. ensures that each division manager is properly motivated and rewarded.
59. Assuming the selling division has available capacity, a negotiated transfer price should be
within the range of
a. fixed cost per unit and the external purchase price.
b. total cost per unit and the external purchase price.
c. variable cost per unit and the external purchase price.
d. variable cost per unit and the opportunity cost.
60. The transfer price approach that will result in the largest contribution margin to the buying
division is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time and material pricing approach.
61. The maximum transfer price from the buying division's standpoint is the
a. total cost + opportunity cost.
b. variable cost + opportunity cost.
c. external purchase price.
d. external purchase price + opportunity cost.
The Wood Division of Fir Products, Inc. manufactures wood mouldings and sells them externally
for $110. Its variable cost is $40 per unit, and its fixed cost per unit is $14. Fir's president wants
the Wood Division to transfer 5,000 units to another company division at a price of $54.
62. Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer
price it should accept is
a. $14.
b. $40.
c. $54.
d. $110.
63. Assuming the Wood Division does not have any available capacity, the minimum transfer
price it should accept is
a. $14.
b. $40.
c. $54.
d. $110.
64. All of the following are correct statements about transfers between divisions located in
countries with different tax rates except that
a. differences in tax rates across countries complicate the determination of the
appropriate transfer price.
b. many companies prefer to report more income in countries with low tax rates.
c. companies must pay income tax in the country where income is generated.
d. a decreasing number of transfers are between divisions located in different
countries.
65. Transfers between divisions located in countries with different tax rates
a. simplify the determination of the appropriate transfer price.
b. are decreasing in number as more companies "localize" operations.
c. encourage companies to report more income in countries with low tax rates.
d. all of these are correct.
66. Which of the following is consistent with generally accepted accounting principles?
a. Absorption cost approach
b. Variable cost-plus approach
c. Variable-cost approach
d. Both absorption cost and variable cost-plus approach
67. Under the absorption cost approach, all of the following are included in the cost base
except
a. direct materials.
b. fixed manufacturing overhead.
c. selling and administrative costs.
d. variable manufacturing overhead.
Pricing 9-15
68. The first step in the absorption cost approach is to calculate the
a. desired ROI per unit.
b. mark-up percentage.
c. target selling price.
d. unit manufacturing cost.
69. The mark-up percentage in the absorption cost approach is calculated by dividing the sum
of the desired ROI per unit and
a. fixed costs per unit by manufacturing cost per unit.
b. fixed costs per unit by variable costs per unit.
c. selling and administrative expenses per unit by manufacturing cost per unit.
d. selling and administrative expenses per unit by variable costs per unit.
70. In the absorption cost approach, the mark-up percentage covers the
a. desired ROI only.
b. desired ROI and selling and administrative expenses.
c. desired ROI and fixed costs.
d. selling and administrative expenses only.
71. The absorption cost approach is used by most companies for all of the following reasons
except that
a. absorption cost information is readily provided by a company's cost accounting
system.
b. absorption cost provides the most defensible bases for justifying prices to
interested parties.
c. basing prices on only variable costs could encourage managers to set too low a
price to boost sales.
d. this approach is more consistent with cost-volume-profit analysis.
72. Under the variable cost-plus approach, the cost base includes all of the following except
a. fixed manufacturing costs.
b. variable manufacturing costs.
c. total fixed costs.
d. variable selling and administrative costs.
73. In the variable cost-plus approach, the mark-up percentage covers the
a. desired ROI only.
b. desired ROI and fixed costs.
c. desired ROI and selling and administrative expenses.
d. fixed costs only.
74. The mark-up percentage denominator in the variable cost-plus approach is the
a. desired ROI per unit.
b. fixed costs per unit.
c. manufacturing cost per unit.
9-16 Test Bank for Managerial Accounting, Third Canadian Edition
75. The reasons for using the variable cost-plus approach include all of the following except
this approach
a. avoids arbitrary allocation of common fixed costs to individual product lines.
b. is more consistent with cost-volume-profit analysis.
c. provides the most defensible bases for justifying prices to all interested parties.
d. provides the type of data managers need for pricing special orders.
76. Cuff budgets sales of its truck tires at $160 per tire and estimates that 10,000 tires can be
sold during the coming year. Variable costs per tire are $60 and Cuff desires a profit of
$30 per tire. The target cost per tire is
a. $160.
b. $130.
c. $80.
d. $100.
77. Hen Company has developed a new product, egg crates that prevent breakage. The cost
per crate is $50 and the company expects to sell 1,000 crates per year. Hen Company
has invested $1,000,000 in equipment to produce the crates and desires a 10% return on
investment. What is Hen Company’s desired mark-up percentage?
a. 10%
b. 20%
c. 100%
d. 200%
78. Hen Company has developed a new product, egg crates that prevent breakage. The cost
per crate is $50 and the company expects to sell 1,000 crates per year. Hen Company
has invested $1,000,000 in equipment to produce the crates and desires a 10% return on
investment. What is Hen Company’s selling price for one egg crate?
a. $110
b. $150
c. $100
d. $250
79. Partridge Co. has produced a product with a total unit cost of $60 and a desired ROI per
unit of $25. If Partridge Co.’s target selling price is $85, what is its percentage mark-up on
cost?
a. 141.67%
b. 100%
c. 50%
d. 41.67%
80. Management of the Catering Company would like the Food Division to transfer 10,000
cans of its final product to the Restaurant Division for $80. The Food Division sells the
product to customers for $150 per unit. The Food Division’s variable cost per unit is $55
Pricing 9-17
and its fixed cost per unit is $25. The Food Division is currently operating at full capacity.
What is the minimum transfer price the Food Division should accept?
a. $25
b. $55
c. $80
d. $150
81. Management of the Catering Company would like the Food Division to transfer 10,000
cans of its final product to the Restaurant Division for $80. The Food Division sells the
product to customers for $150 per unit. The Food Division’s variable cost per unit is $55
and its fixed cost per unit is $25. The Food Division has 10,000 units available capacity.
What is the minimum transfer price the Food Division should accept?
a. $25
b. $55
c. $80
d. $150
82. Maggie Co. has variable manufacturing costs per unit of $20, and fixed manufacturing
cost per unit is $15. Variable selling and administrative costs per unit are $4, while fixed
selling and administrative costs per unit $6. Maggie desires an ROI of $7.50 per unit. If
Maggie Co. uses the absorption cost approach, what is its mark-up percentage?
a. 8.33%
b. 50%
c. 16.67%
d. 25%
83. Maggie Co. has variable manufacturing costs per unit of $20, and fixed manufacturing
cost per unit is $10. Variable selling and administrative costs per unit are $5, while
fixed selling and administrative costs per unit $2. Maggie desires an ROI of $8 per unit. If
Maggie Co. uses the variable cost-plus approach, what is its mark-up percentage?
a. 50%
b. 80%
c. 30%
d. 100%
Division A produces a product that it sells to the outside market. It has compiled the
following:
85. Division B of the same company is currently buying an identical product from an outside
provider for $38 per unit. It wishes to purchase 5,000 units per year from Division A.
Division A is currently selling 30,000 units of the product per year. If the internal transfer is
made, Division A will not incur any selling costs. What would be the minimum transfer
price per unit that Division A would be willing to accept?
a. $10
b. $11
c. $38
d. $40
86. Division B of the same company is currently buying an identical product from an outside
provider for $38 per unit. It wishes to purchase 5,000 units per year from Division A.
Division A is currently selling 25,000 units of the product per year. If the internal transfer is
made, Division A will not incur any selling costs. What would be the minimum transfer
price per unit that Division A would be willing to accept?
a. $10
b. $11
c. $38
d. $40
87. Division B of the same company is currently buying an identical product from an outside
provider for $38 per unit. It wishes to purchase 5,000 units per year from Division A.
Division A is currently selling 25,000 units of the product per year. If the internal transfer is
made, Division A will not incur any selling costs. What would be the maximum transfer
price per unit that Division B would be willing to accept?
a. $10
b. $11
c. $38
d. $40
88. Division B of the same company is currently buying an identical product from an outside
provider for $38 per unit. It wishes to purchase 5,000 units per year from Division A.
Division A is currently selling 25,000 units of the product per year. If the internal transfer is
made, Division A will not incur any selling costs. At what price would the internal transfer
occur?
a. At the lowest price that is acceptable to Division A
b. At the maximum price that is acceptable to Division B
Pricing 9-19
89. Division B of the same company is currently buying an identical product from an outside
provider for $38 per unit. It wishes to purchase 5,000 units per year from Division A.
Division A is currently selling 26,000 units of the product per year. If the internal transfer is
made, Division A will not incur any selling costs. What would be the minimum transfer
price per unit that Division A would be willing to accept?
a. $10.00
b. $14.60
c. $15.40
d. $40.00
90. What would be a legitimate reason for upper management to insist on an internal transfer
even though the product could be sourced outside the company at a price that is lower
than the company’s variable cost?
a. Management is concerned that its manufacturing equipment will soon be
obsolete, and it wants to get full use out of it before it happens.
b. Management wants to ensure a secure supply of the product.
c. The company has excess capacity.
d. There is never a legitimate reason that justifies an internal transfer if a product
can be sourced outside the company at a price that is lower than the company’s
variable cost.
93. What legitimate reason might management have for insisting that one of its divisions buy
a part from another division within the same company even though the buying division
could source the part at a lower price externally?
a. It wants to make use of excess capacity in the seller’s division.
9-20 Test Bank for Managerial Accounting, Third Canadian Edition
b. It is concerned about the external supplier’s ability to deliver the part on a timely
basis.
c. It wants to make use of excess capacity in the buyer’s division.
d. There is never a legitimate reason that justifies ordering a division to buy
internally when it could source the product cheaper externally.
96. Which of the following has the most impact on setting a market-based price?
a. Changes in quality of the product or service
b. Prices charged by the company’s suppliers
c. The efficiency of the company’s supply chain
d. Demand for the service or product
100. Generally, a transfer of products between two divisions should take place if it:
a. allows one division to benefit from technology developed in another division.
b. results in increased incremental income to the company as a whole.
Pricing 9-21
101. In setting internal transfer prices, the minimum price that the selling division would accept
is:
a. A price that will result in a profit to the selling division.
b. A price that will result in a profit to the purchasing division.
c. Its variable cost of the product plus opportunity costs lost by the transfer.
d. Its variable cost plus an internal profit margin.
102. In setting internal transfer prices, the maximum price that the purchasing division would
accept is:
a. A price that will result in a profit to the selling division.
b. A price that will result in a profit to the purchasing division.
c. Its variable cost of the product plus opportunity costs gained by the transfer.
d. Its external cost to purchase the product.
BRIEF EXERCISES
Instructions
Calculate the target selling price assuming that a 40% mark-up on total per unit cost.
Total unit cost + (Mark-up percentage X Total unit cost) = Target selling price
$121 + (40% X $121) = $169.40
Instructions
What is Tina Co’s ROI per unit?
($15,000,000 X 10%)
= = $20
75,000
Instructions
Calculate MagTag’s mark-up percentage using a total cost approach.
$75
= 25%
$35 + $30 + $18 + $103 + $17 + $97
Instructions
Calculate each of the following:
a. Budgeted ROI.
b. Mark-up percentage using a total cost approach.
$750,000
= 24%
$2,625,000 + $500,000
Instructions
Calculate the total bill for repairing the small boat engine.
Instructions
Calculate the minimum transfer price that the tire division should accept.
Instructions
Calculate the minimum transfer price that the tire division should accept.
Instructions
Calculate the minimum transfer price that Sandbar should accept.
Instructions
Calculate the minimum amount that Division A would accept to transfer the part to Division B.
EXERCISES
Exercise 114
Trout Company is considering introducing a new line of pagers targeting the preteen population.
Trout believes that if the pagers can be priced competitively at $30, approximately 750,000 units
can be sold. The controller has determined that an investment in new equipment totalling
$3,750,000 will be required. Trout requires a minimum rate of return of 10% on all investments.
Instructions
Calculate the target cost per unit of the pager.
Exercise 115
Rita Corporation produces commercial fertilizer spreaders. The following information is available
for Rita's anticipated annual volume of 600,000 units.
Per Unit Total
Direct materials $37
Direct labour 43
Variable manufacturing overhead 65
Fixed manufacturing overhead $15,000,000
Variable selling and administrative expenses 73
Fixed selling and administrative expenses 11,400,000
The company has a desired ROI of 20%. It has invested assets of $325,000,000.
Instructions
Calculate each of the following:
a. Total cost per unit.
b. Desired ROI per unit.
c. Mark-up percentage using total cost per unit.
d. Target selling price.
$108.33 + $0
c. Mark-up percentage using total cost per unit =———— = 41 %
$262
Exercise 116
Goliath Corporation is in the process of setting a selling price for a new product it has just
designed. The following data relate to this product for a budgeted volume of 40,000 units.
Per Unit Total
Direct materials $15
Direct labour 35
Variable manufacturing overhead 12
Fixed manufacturing overhead $2,100,000
Variable selling and administrative expenses 8
Fixed selling and administrative expenses 1,300,000
Goliath uses cost-plus pricing to set its target selling price. The mark-up on total unit cost is 15%.
Instructions
Calculate each of the following for the new product:
a. Total variable cost per unit, total fixed cost per unit, and total cost per unit.
b. Desired ROI per unit.
c. Target selling price.
Budgeted Cost
Total Costs Volume Per Unit
Fixed manufacturing overhead $2,100,000 ÷ 40,000 = $52.50
Fixed selling and administrative expenses 1,300,000 ÷ 40,000 = 32.50
Fixed cost per unit $85
Exercise 117
Tree Top Company is in the process of setting a selling price for its newest model stunt kite, the
Looper. The controller of Tree Top estimates variable cost per unit for the new model to be as
follows:
Direct materials $15
Direct labour 13
Variable manufacturing overhead 4
Variable selling and administrative expenses 5
$37
In addition, Tree Top anticipates incurring the following fixed cost per unit at a budgeted sales
volume of 20,000 units:
Total Costs ÷ Budget Volume = Cost per Unit
Fixed manufacturing overhead $240,000 20,000 $12
Fixed selling and administrative expenses 260,000 20,000 13
Fixed cost per unit $25
Tree Top uses cost-plus pricing and would like to earn a 12 percent return on its investment (ROI)
of $250,000.
Instructions
Calculate the selling price that would provide Tree Top a 12 percent ROI.
Exercise 118
Greasy Spoon Service repairs commercial food preparation equipment. The following budgeted
cost data is available for 2012:
Time Material
Charges Charges
Technicians' wages and benefits $600,000
Parts manager's salary and benefits $ 72,000
Office manager's salary and benefits 112,000 18,000
Other overhead 48,000 110,000
Total budgeted costs $760,000 $200,000
Greasy Spoon has budgeted for 10,000 hours of technician time during the coming year. It
desires a $64 profit margin per hour of labour and a 50% profit margin on parts. Greasy Spoon
estimates the total invoice cost of parts and materials in 2012 will be $500,000.
Instructions
a. Calculate the rate charged per hour of labour.
b. Calculate the material loading charge.
9-30 Test Bank for Managerial Accounting, Third Canadian Edition
c. Greasy Spoon has received a request from Lime Corporation for an estimate to repair a
commercial fryer. The company estimates that it would take 20 hours of labour and $8,000 of
parts. Calculate the total estimated bill.
b. Material
Material Total Invoice Cost,Loading
Charges Parts and Materials Charge
Overhead costs
Parts manager's salary and benefits $72,000
Office manager's salary and benefits 18,000
$90,000 ÷ $500,000 = 18%
Other overhead 110,000 ÷ $500,000 = 22%
40%
Profit margin 50%
Material loading charge 90%
Labour charges
20 hours @ $140 $2,800
Material charges
Cost of parts and materials $8,000
Material loading charge (90% × $8,000) 7,200 15,200
Total price of labour and materials $18,000
Exercise 119
Forrest Painting Service has budgeted the following time and material for 2012:
Time Material
Charges Charges
Painters’ wages and benefits $36,000
Service manager's salary and benefits $21,000
Office employee's salary and benefits 12,000 3,000
Cost of paint 50,000
Overhead (supplies, utilities, etc.) 10,000 8,500
Total budgeted costs $58,000 $82,500
Pricing 9-31
Forrest budgets 4,000 hours of paint time in 2012 and will charge a profit of $12 per hour, in
addition to a 25% mark-up on the cost of paint.
On February 15, 2012, Forrest is asked to prepare a price estimate to paint a building. Forrest
estimates that this job will take 12 labour hours and $600 in paint.
Instructions
a. Calculate the labour rate for 2012.
b. Calculate the material loading charge rate for 2012.
c. Prepare a time and materials price estimate for painting the building.
Exercise 120
Rose Corporation manufactures state-of-the-art DVD players. It is a division of Sany TV, which
manufactures televisions. Rose sells the DVD players to Sany, as well as to retail stores. The
following information is available for Rose's DVD player: variable cost per unit $150; fixed costs
9-32 Test Bank for Managerial Accounting, Third Canadian Edition
per unit $75; and a selling price of $400 to outside customers. Sany currently purchases DVD
players from an outside supplier for $390 each. Top management of Sany would like Rose to
provide 20,000 DVD players per year at a transfer price of $150 each.
Instructions
Calculate the minimum transfer price that Rose should accept under each of the following
assumptions:
a. Rose is operating at full capacity.
b. Rose has sufficient excess capacity to provide the 20,000 players to Sany.
b. The minimum transfer price is $150, the variable cost of the DVD players, since Rose has
excess capacity. However, since the market price is $390 (Sany's current cost); Rose should
be able to negotiate a price much higher than $150.
Exercise 121
Green Grass Co., a division of Lawn Supplies, Inc., produces lawn mowers. Green Grass sells its
lawn mowers to home improvement stores, as well as to Lawn Supplies, Inc. The following
information is available for Green Grass’ mowers:
Fixed costs per unit $ 230
Variable cost per unit 150
Selling price per unit 500
Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for $475. In
order to ensure a reliable supply, the management of Lawn Supplies, Inc. ordered Green Grass to
provide 65,000 lawn mowers per year at a transfer price of $475 per unit. Green Grass is
currently operating at full capacity. It could avoid $10 per unit of variable selling costs by selling
internally.
Instructions
a. Calculate the minimum transfer price that Green Grass should be required to accept.
b. Calculate the increase (decrease) in contribution margin for Lawn Supplies, Inc. for this
transfer.
b. The decrease in contribution margin per unit to Lawn Supplies, Inc. is:
Exercise 122
Canada’s Tires is a division of the Wheels To Go Company. Canada’s Tires produces bicycle tires
in its automated plant in Canada. Fixed costs per tire are $5, and variable costs are $2 per tire.
The tires are shipped to Wheels To Go’s plant in Africa where bicycles are assembled and sold
locally at a sales price of $50 each. Fixed costs to make the bicycles are $10 per unit and
variable costs per unit are $15 plus the cost of the tires. Wheels To Go has a tax rate of 30% in
Canada, and 20% in Africa.
Instructions
a. Calculate the after tax income for Canada’s Tires, the African assembly division, and the
company as a whole if 100,000 tires are transferred at Canada’s Tires’ full cost. Assume the
100,000 tires are all used to produce 50,000 bicycles.
b. Calculate the after tax income for Canada’s Tires, the African assembly division, and the
company as a whole if 100,000 tires are transferred at 110% of Canada’s Tires’ full cost.
Assume the 100,000 tires are all used to produce 50,000 bicycles.
c. What would be your recommendation to Wheels To Go?
Assembly Division
Sales (50,000 bicycles X $50/bicycle) $2,500,000
Less expenses
Tires (100,000 tires X $7/tire) $700,000
Other Variable (50,000 bicycles X $15/bicycle) 750,000
Fixed Costs (50,000 bicycles X $10/bicycle) 500,000 1,950,000
Income before tax 550,000
Income tax at 20% 110,000
Net Income $440,000
b. Canada’s Tires
Sales (100,000 tires X $7/tire X 1.10) $770,000
Less expenses (100,000 X $7/tire) 700,000
Income before tax 70,000
Income tax at 30% 21,000
Net Income $49,000
Assembly Division
Sales (50,000 bicycles X $50/bicycle) $2,500,000
Less expenses
Tires (100,000 tires X $7.70/tire) $770,000
Other Variable (50,000 bicycles X $15/bicycle) 750,000
Fixed Costs (50,000 bicycles X $10/bicycle) 500,000 2,020,000
Income before tax 480,000
Income tax at 20% 96,000
Net Income $384,000
9-34 Test Bank for Managerial Accounting, Third Canadian Edition
c. Wheels To Go should transfer the tires at full cost resulting in zero net income in Canada and
therefore no tax owing in Canada. By “locating the profit” in the location with the lower tax
rate, Wheels To Go will pay a lower total tax amount, resulting in a larger after tax income.
Exercise 123
International Chemicals is a division of World Wide Chemicals. It produces HDL which is a
ingredient used in many products. Variable costs to produce HDL include $7 per litre
manufacturing costs, and $2/litre selling expense. International Chemicals’ fixed costs are
$100,000. It currently sells 75,000 litres of HDL to customers for $12/litre.
EKP is another division of World Wide Chemicals. It uses HDL, and has been sourcing its needs
from an outside supplier for $10/litre.
Instructions
a. What is the minimum price International Chemicals would be willing to sell HDL to EKP if it
has sufficient capacity to satisfy demand from both EKP and other customers?
b. What is the highest price EKP would be willing to pay International Chemicals for HDL?
c. If the transfer does occur, what would be the transfer price?
d. If International Chemicals has capacity to produce 75,000 litres of HDL, and EKP needs
10,000 litres, what is the minimum price International Chemicals would be willing to accept?
b. EKP will not be willing to pay International Chemicals more than $10/litre, which is the price it
can purchase HDL from other sources.
c. The transfer would occur, with a price somewhere in the $9 to $10 per litre range.
d. In order to satisfy EKP’s demand for 10,000 litres, International Chemicals would lose sales of
10,000 litres. Therefore, the minimum transfer price would be variable cost + opportunity cost,
or $9/litre + ($12 - $9)/litre = $12 per litre.
Exercise 124
The following information is available for a product manufactured by Gardenia Corporation:
Per Unit Total
Direct materials $62.50
Direct labour 47.50
Variable manufacturing overhead 15.00
Fixed manufacturing overhead $250,000
Variable selling and admin. expenses 10.00
Fixed selling and admin. expenses 55,000
Gardenia has a desired ROI of 16%. It has invested assets of $8,250,000 and expects to produce
2,000 units per year.
Instructions
Pricing 9-35
$55,000
Fixed selling and administrative expenses per unit = ———— = $27.50 per unit
2,000
16% × $8,250,000
Exercise 125
Peachtree Doors, Inc. is in the process of setting a target price on its newly designed patio door.
Cost data relating to the door at a budgeted volume of 5,000 units is as follows:
Peachtree uses cost-plus pricing that provides it with a 25% ROI on its patio door line. A total of
$4,000,000 in assets is committed to production of the new door.
Instructions
a. Calculate each of the following under the absorption approach:
i. Mark-up percentage needed to provide desired ROI.
ii. Target price of the patio door.
9-36 Test Bank for Managerial Accounting, Third Canadian Edition
Exercise 126
Sani Sanukesh operates a catering company. Sani provides food and servers for parties; she also
rents tables, chairs, linens, chocolate fountains, table ware, and recommends florists on
occasion. Eduardo and Griselda Quintanilla contacted Sani about catering for their daughter’s
wedding. They have requested an open bar, appetizers for 300 guests, an exquisite 3-layer
wedding cake, and 40 tables with colourful linens, fine china and crystal stemware. Sani created
the following bid for the Quintanillas:
Pricing 9-37
Imagine that the Quintanillas nearly faint when they are presented with the bid. Eduardo suggests
that their target costs for their daughter’s wedding was $3,750, and no more. How could Sani
work with the parents to reduce costs?
Exercise 127
Quick Konstruct builds custom, high-end homes. Each home requires a bid, and Quick’s bidding
practise is to estimate the costs of materials, direct labour and subcontracting fees. These are
totalled and mark-up is applied to cover overhead and profit. In the next year, Quick believes it
will be the successful bidder on 10 jobs with the following total revenues and costs:
Revenues $648,000
Materials $200,000
Direct labour $250,000
Subcontractors $150,000 $600,000
Excess $48,000
Instructions
a. What is the mark-up percentage on total direct costs?
b. If Quick is asked to bid on a job with estimated direct costs of $55,000, what is the amount of
the total bid? If the customer complains that the profit is too high, how might Quick counter
that comment?
Exercise 128
The Doormat Company has two divisions, Doors and Mats. The Door Division has the capacity
to make 100,000 Doors and regularly sells 90,000 doors each year to the outside market.
Information about the doors is as follows:
Selling price $100 per door
Variable manufacturing costs $75 per door
The Mat Division currently buys 20,000 doors from an outside supplier for $90 each and would
like to buy them from the Door Division. They have suggested a price of $80 per door.
Instructions
Calculate the change in net income for the Doormat Company if the transfer between divisions
takes place at that price.
Exercise 129
The Sunrise Mattress Company uses transfer pricing for all work in process transfers between its
divisions. Senior management believes that the transfer price is an important tool to motivate
appropriate behaviour and believes that each division should negotiate its prices when a transfer
takes place. To make the mattresses that the company sells, the Spring Division buys processed
cloth padding from an outside supplier.
Cost information on the foam produced in the Foam Division is as follows:
Raw material costs $10 per tonne
Variable manufacturing costs $17 per tonne
Fixed manufacturing costs $15 per tonne
Variable selling costs $4 per tonne
Outside selling price $40 per tonne
Annual production capacity 100,000 tonnes
The Foam Division currently produces and sells at its capacity.
Instructions
If the Spring Division were to change from cloth padding to foam padding for its mattresses,
calculate the transfer price that the Foam Division would accept.
COMPLETION STATEMENTS
130. The difference between the target price and the desired profit is the _________________
cost of the product.
131. In the cost-plus pricing formula, the target selling price equals cost + (________________
× cost).
132. The _______________ pricing approach has a major advantage: it is simple to calculate.
133. Under the time and material pricing approach, the material charge is based on the cost of
direct materials used and a material __________________ for related overhead costs.
134. The transfer of goods between divisions of the same company is termed _____________
sales.
135. The three approaches for determining a transfer price are: negotiated,
________________ based, and _________________ based transfer prices.
136. To ensure that the selling division attempts to control its costs, the transfer price should be
based on _________________ cost instead of actual cost.
137. The formula for the minimum transfer price is: Minimum transfer price = Variable cost +
___________________.
132. cost-plus
134. internal
136. standard
138. outsourcing
MATCHING
140. Match the items in the two columns below by entering the appropriate code letter in the
space provided.
ANSWERS TO MATCHING
a. E e. H
b. G f. C
c. A g. F
d. D h. B
Pricing 9-43
Instructions
a. Should the A Division transfer part R27 to Division B? Why or why not?
b. Discuss whether a transfer is in the best interest of Elektroniks Company as a whole.
b. If the job is only a one-time situation and does not result in A having to lose its regular
customers, the transfer is in Elektronik’s long term interest.
If the bid results in a long-term relationship, then the transfer will also be in Elektronik’s
interest since any lost contribution margin from A’s customers will be picked up on a recurring
basis from B’s relationship.
But if it is only a one-time contract and A has to turn away customers, the company has to be
assured that it can recover those customers down the road.
Pricing 9-45
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