SUMMARY OF QUESTIONS BY OBJECTIVES AND …s3.amazonaws.com/prealliance_oneclass_sample/oKY7blkDp7.pdfUnder a cost-based approach, the transfer price may be based on variable cost alone

CHAPTER 8

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 Statements1. 1 C 6. 2 C 11. 3 K 16. 4 K a21. 6 C2. 1 K 7. 2 C 12. 4 K 17. 4 C a22. 6 K3. 1 K 8. 3 K 13. 4 K 18. 4 K a23. 6 K4. 2 K 9. 3 K 14. 4 C 19. 5 K a24. 6 K5. 2 C 10. 3 K 15. 4 C 20. 5 C a25. 6 C

Multiple Choice Questions26. 1 K 50. 2 AP 74. 3 AP 98. 4 AP 122. 4 AP27. 1 K 51. 2 AP 75. 3 AP 99. 4 AP 123. 4 AP28. 1 K 52. 2 AP 76. 3 AP 100. 4 AP 124. 4 AP29. 1 C 53. 2 AP 77. 3 AP 101. 4 AP 125. 5 C30. 1 C 54. 2 C 78. 3 AP 102. 4 AP 126. 5 K31. 1 K 55. 2 C 79. 3 AP 103. 4 AP a127. 6 K32. 1 K 56. 2 K 80. 3 AP 104. 4 AP a128. 6 K33. 1 K 57. 2 K 81. 3 K 105. 4 AP a129. 6 K34. 1 K 58. 2 C 82. 3 K 106. 4 AP a130. 6 K35. 1 C 59. 2 AP 83. 3 K 107. 4 C a131. 6 K36. 1 AP 60. 2 AP 84. 3 AP 108. 4 K a132. 6 C37. 1 AP 61. 2 C 85. 3 AP 109. 4 K a133. 6 K38. 1 AP 62. 2 K 86. 3 AP 110. 4 C a134. 6 K39. 1 AP 63. 2 AP 87. 4 K 111. 4 K a135. 6 K40. 1 AP 64. 2 AP 88. 4 K 112. 4 C a136. 6 C41. 2 K 65. 3 K 89. 4 K 113. 4 K a137. 6 AP42. 2 K 66. 3 K 90. 4 C 114. 4 C a138. 6 AP43. 2 AP 67. 3 C 91. 4 AP 115. 4 K a139. 6 AP44. 2 AP 68. 3 C 92. 4 K 116. 4 C a140. 6 AP45. 2 AP 69. 3 K 93. 4 K 117. 4 C a141. 6 AP46. 2 AP 70. 3 AP 94. 4 K 118. 4 K a142. 6 AP47. 2 AP 71. 3 AP 95. 4 K 119. 4 C a143. 6 AP48. 2 AP 72. 3 AP 96. 4 K 120. 4 K a144. 6 AP49. 2 AP 73. 3 K 97. 4 C 121. 4 AP a145. 6 AP

Brief Exercises146. 1 AP 149. 2 AP 152. 3 AP 155. 4 AP a158 6 AP147. 2 AP 150. 2 AP 153. 3 AP 156. 4 AP a159

.6 AP

148. 2 AP 151. 2 AP 154. 3 AP 157. 4 AP

Exercises160. 1 AP 164. 2 AP 168. 3 AP 172. 4 AN a176. 6 AP161. 1 AP 165. 2 AP 169. 3 AP 173. 4 AN a177. 6 AP162. 1 AP 166. 2 AP 170. 4 AN 174. 4 AN163. 2 AP 167. 3 AP 171. 4 AN 175. 4 AN

Test Bank for Managerial Accounting, Fifth Edition

a This question covers a topic in an Appendix to the chapter.

Completion Statements178. 1 K 180. 2 K 182. 4 K 184. 4 K 186. 5 K179. 2 K 181. 3 K 183. 4 K 185. 4 K a187. 6 K

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Study Objective 1

1. TF 27. MC 31. MC 35. MC 39. MC 161. Ex2. TF 28. MC 32. MC 36. MC 40. MC 162. Ex3. TF 29. MC 33. MC 37. MC 146. BE 178. C

26. MC 30. MC 34. MC 38. MC 160. Ex

Study Objective 2

4. TF 43. MC 49. MC 55. MC 61. MC 149. BE 166. Ex5. TF 44. MC 50. MC 56. MC 62. MC 150. BE 179. C6. TF 45. MC 51. MC 57. MC 63. MC 151. BE 180. C7. TF 46. MC 52. MC 58. MC 64. MC 163. Ex

41. MC 47. MC 53. MC 59. MC 147. BE 164. Ex42. MC 48. MC 54. MC 60. MC 148. BE 165. Ex

Study Objective 3

8. TF 66. MC 71. MC 76. MC 81. MC 86. MC 168. Ex9. TF 67. MC 72. MC 77. MC 82. MC 152. BE 169. Ex

10. TF 68. MC 73. MC 78. MC 83. MC 153. BE 181. C11. TF 69. MC 74. MC 79. MC 84. MC 154. BE65. MC 70. MC 75. MC 80. MC 85. MC 167. BE

Study Objective 4

12. TF 89. MC 98. MC 107. MC 116. MC 155. BE 182. C13. TF 90. MC 99. MC 108. MC 117. MC 156. BE 183. C14. TF 91. MC 100. MC 109. MC 118. MC 157. BE 184. C15. TF 92. MC 101. MC 110. MC 119. MC 170. Ex 185. C16. TF 93. MC 102. MC 111. MC 120. MC 171. Ex17. TF 94. MC 103. MC 112. MC 121. MC 172. Ex18. TF 95. MC 104. MC 113. MC 122. MC 173. Ex87. MC 96. MC 105. MC 114. MC 123. MC 174. Ex88. MC 97. MC 106. MC 115. MC 124. MC 175. Ex

Study Objective 5

19. TF 20. TF 125. MC 126. MC 186. C

Study Objective 6a

21. TF 127. MC 132. MC 137. MC 142. MC 159. BE22. TF 128. MC 133. MC 138. MC 143. MC 176. Ex23. TF 129. MC 134. MC 139. MC 144. MC 177. Ex24. TF 130. MC 135. MC 140. MC 145. MC 187. C25. TF 131. MC 136. MC 141. MC 158. BE

Note: TF = True-False BE = Brief Exercise C = Completion

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MC = Multiple Choice Ex = ExerciseThe chapter also contains one set of eight Matching questions and two Short-Answer Essay questions.

CHAPTER STUDY OBJECTIVES

1. Compute a target cost when the market determines a product price. To compute 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 desired profit is the target cost of the product.

2. Compute a target selling price using cost-plus pricing. Cost-plus pricing involves establishing a cost base and adding to this cost base a markup to determine a target selling price. The cost-plus pricing formula is expressed as follows: Target selling price = Cost + (Markup percentage × Cost).

3. Use time-and-material pricing to determine the cost of services provided. Under time-and-material pricing, two pricing rates are set—one for labor used on a job and another for the material. The labor rate includes direct labor time and other employee costs. The material charge is based on the cost of direct parts and materials used and a material loading charge for related overhead cost.

4. Determine a transfer price using the negotiated, cost-based, and market-based approaches. The negotiated price is determined through agreement of division managers. Under a cost-based approach, the transfer price may be based on variable cost alone or on variable cost plus fixed costs. Companies may add a markup to these numbers. The cost-based approach often leads to poor performance evaluations and purchasing decisions. A market-based transfer price is based on existing competing market prices and services. A market-based system is often considered the best approach because it is objective and generally provides the proper economic incentives.

5. Explain issues involved in transferring goods between divisions in different countries. Companies must pay income tax in the country where they generate the income. In order to maximize income and minimize income tax, many companies prefer to report more income in countries with low tax rates, and less income in countries with high tax rates. This is accomplished by adjusting the transfer prices they use on internal transfers between divisions located in different countries.

*6. Determine prices using absorption-cost pricing and variable-cost pricing. Absorption-cost pricing uses total manufacturing cost as the cost base and provides for selling and administrative costs plus the target ROI through the markup. The target selling price is computed as: Manufacturing cost per unit + (Markup percentage × Manufacturing cost per unit). Variable-cost pricing uses all of the variable costs, including selling and administrative costs, as the cost base and provides for fixed costs and target ROI through the markup. The target selling price is computed as: Variable cost per unit + (Markup percentage × Variable cost per unit).


TRUE-FALSE STATEMENTS

1. In most cases, a company sets the price instead of it being set by the competitive market.

Ans: F, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

2. In a competitive market, a company is forced to act as a price taker and must emphasize minimizing and controlling costs.

Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

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.

Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

5. The cost-plus pricing approach establishes a cost base and adds a markup to this base to determine a target selling price.

Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

6. The cost-plus pricing model gives consideration to the demand side—whether customers will pay the target selling price.

Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

7. Sales volume plays a large role in determining per unit costs in the cost-plus pricing approach.

Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

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.

Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

10. The material loading charge is expressed as a percentage of the total estimated cost of materials for the year.


11. Divisions within vertically integrated companies normally sell goods only to other divisions within the same company.

Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

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12. Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division.

Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

13. There are two approaches for determining a transfer price: cost-based and market-based.

Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

14. If a cost-based transfer price is used, the transfer price must be based on variable cost.

Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

15. A problem with a cost-based transfer price is that it does not provide adequate incentive for the selling division to control costs.

Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

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.

Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

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.

Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Global Business

20. Differences in tax rates between countries can complicate the determination of the appropriate transfer price.

Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Global Business

a21. The absorption-cost approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost.

Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA

a22. The first step in the absorption-cost approach is to compute the markup percentage used in setting the target selling price.

Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a23. Because absorption cost data already exists in general ledger accounts, it is cost effective to use it for pricing.

Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA


a24. The markup percentage in the variable-cost approach is computed by dividing the desired ROI/unit plus fixed costs/unit by the variable costs/unit.

Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a25. Under the variable-cost approach, the cost base consists of all of the variable costs associated with a product except variable selling and administrative costs.

Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

1. F 6. F 11. F 16. T a21. T2. T 7. T 12. T 17. F a22. F3. T 8. T 13. F 18. T a23. T4. F 9. F 14. F 19. F a24. T5. T 10. T 15. T 20. T a25. F

MULTIPLE CHOICE QUESTIONS

26. Factors that can affect pricing decisions include all of the following excepta. cost considerations.b. environment.c. pricing objectives.d. all of these are factors.

Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

27. In most cases, prices are set by thea. customers.b. competitive market.c. largest competitor.d. selling company.

Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

28. A company must price its product to cover its costs and earn a reasonable profit ina. all cases.b. its early years.c. the long run.d. the short run.

Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

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29. Prices are set by the competitive market whena. the product is specially made for a customer.b. there are no other producers capable of manufacturing a similar item.c. a company can effectively differentiate its product from others.d. a product is not easily distinguished from competing products.

Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

30. All of the following are correct statements about the target price except ita. 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.


31. Companies that sell products whose prices are set by market forces are calleda. price givers.b. price leaders.c. price takers.d. price setters.


32. In which of the following situations would a company not set the prices of its products?a. When the product is not easily differentiated from competing productsb. When the product is specially made for a customerc. When there are few or no other producers capable of making a similar productd. When the product can be effectively differentiated from others

Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

33. The calculation to determine target cost isa. variable manufacturing costs + fixed manufacturing costs.b. sales price – (variable manufacturing costs + fixed manufacturing costs).c. variable manufacturing costs + selling and administrative variable costs.d. sales price – desired profit.

Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

34. Target cost is comprised ofa. variable and fixed manufacturing costs only.b. variable manufacturing and selling and administrative costs only.c. total manufacturing and selling and administrative costs.d. fixed manufacturing and selling and administrative costs only.

Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management


35. A company that is a price taker would most likely use which of the following methods?a. Time-and-material pricingb. Target costingc. Cost plus pricing, contribution approachd. Cost plus pricing, absorption approach

Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

36. Bond Co. is using the target cost approach on a new product. Information gathered so far reveals:

Expected annual sales 400,000 unitsDesired profit per unit $0.25Target cost $168,000

What is the target selling price per unit?a. $0.42b. $0.50c. $0.25d. $0.67

Ans: d, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

37. Well Water Inc. wants to produce and sell a new flavored water. In order to penetrate the market, the product will have to sell at $2.00 per 12 oz. bottle. The following data has been collected:

Annual sales 50,000 bottlesProjected selling and administrative costs $8,000Desired profit $80,000

The target cost per bottle isa. $0.24.b. $0.40.c. $0.16.d. $0.60.

Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

38. Larry Cable Inc. plans to introduce a new product and is using the target cost approach. Projected sales revenue is $810,000 ($4.50 per unit) and target costs are $729,000. What is the desired profit per unit?a. $0.45b. $2.25c. $4.05d. None of the above

Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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39. Wasson Widget Company is contemplating the production and sale of a new widget. Projected sales are $225,000 (or 75,000 units) and desired profit is $27,000. What is the target cost per unit?a. $3.00b. $2.64c. $3.36d. $3.60

Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

40. Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit per unit is $2.76. The expected unit sales price is $33 based on 10,000 units. What is the total target cost?a. $302,400b. $330,000c. $27,600d. $357,600

Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

41. In cost-plus pricing, the markup consists ofa. manufacturing costs.b. desired ROI.c. selling and administrative costs.d. total cost and desired ROI.

Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

42. The desired ROI per unit is calculated bya. multiplying the ROI times the investment and dividing by the estimated volume.b. multiplying the unit selling price by the ROI.c. dividing the total cost by the estimated volume and multiplying by the ROI.d. dividing the ROI by the estimated volume and subtracting the result from the unit cost.

Ans: a, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Performance Measurement

43. Bellingham Suit Co. has received a shipment of suits that cost $150 each. If the company uses cost-plus pricing and applies a markup percentage of 60%, what is the sales price per suit?a. $250b. $240c. $210d. $375



Use the following information for questions 44–47.

Custom Shoes Co. has gathered the following information concerning one model of shoe:

Variable manufacturing costs $30,000Variable selling and administrative costs $15,000Fixed manufacturing costs $120,000Fixed selling and administrative costs $90,000Investment $1,275,000ROI 30%Planned production and sales 5,000 pairs

44. What is the total cost per pair of shoes?a. $30b. $51c. $126d. $72


45. What is the desired ROI per pair of shoes?a. $51.00b. $126.00c. $76.50d. $127.50

Ans: c, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

46. What is the target selling price per pair of shoes?a. $106.50b. $127.50c. $85.50d. $118.50


47. What is the markup percentage?a. 150%b. 255%c. 850%d. 182%


Use the following information for questions 48 and 49.

Lock Inc. has collected the following data concerning one of its products:

Unit sales price $145Total sales 10,000 unitsUnit cost $115Total investment $1,200,000

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48. The ROI percentage isa. 20%.b. 30%.c. 35%.d. 25%.

Ans: d, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

49. The markup percentage isa. 26.09%.b. 20.69%.c. 25%.d. 22.59%.


50. A company using cost-plus pricing has an ROI of 24%, total sales of 16,000 units and a desired ROI per unit of $30. What was the amount of investment?a. $115,200b. $2,000,000c. $364,800d. $631,580

Ans: b, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement


Brislin Products has a new product going on the market next year. The following data are projections for production and sales:

Variable costs $250,000Fixed costs $450,000ROI 15%Investment $1,400,000Sales 200,000 units

51. What is the target selling price per unit?a. $4.55b. $3.50c. $2.30d. $3.30


52. What is the markup percentage?a. 84%b. 15%c. 40%d. 30%



53. What would the markup percentage be if only 150,000 units were sold and Brislin still wanted to earn the desired ROI?a. 24.71%b. 40.0%c. 26.25%d. 32.94%


54. When using cost-plus pricing, which amount per unit does not change when the expected volume differs from the budgeted volume?a. Variable costb. Fixed costc. Desired ROId. Target selling price

Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

55. Why does the unit selling price increase when expected volume is lower than budgeted volume?a. Variable costs and fixed costs have to be spread over fewer units.b. Fixed costs and desired ROI have to be spread over fewer units.c. Variable costs and desired ROI have to be spread over fewer units.d. Fixed costs only have to be spread over fewer units.

Ans: b, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

56. In cost-plus pricing, the target selling price is computed asa. variable cost per unit + desired ROI per unit.b. fixed cost per unit + desired ROI per unit.c. total unit cost + desired ROI per unit.d. variable cost per unit + fixed manufacturing cost per unit + desired ROI per unit.

Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

57. In cost-plus pricing, the markup percentage is computed by dividing the desired ROI per unit by thea. fixed cost per unit.b. total cost per unit.c. total manufacturing cost per unit.d. variable cost per unit.

Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Performance Measurement

58. The cost-plus pricing approach's major advantage isa. it considers customer demand.b. that sales volume has no effect on per unit costs.c. it is simple to compute.d. it can be used to determine a product’s target cost.

Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

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59. The following per unit information is available for a new product of Red Ribbon Company:

Desired ROI $ 24Fixed cost 40Variable cost 60Total cost 100Selling price 124

Red Ribbon Company's markup percentage would bea. 19%.b. 24%.c. 40%.d. 60%.


60. Bryson Company has just developed a new product. The following data is available for this product:

Desired ROI per unit $ 18Fixed cost per unit 30Variable cost per unit 45Total cost per unit 75

The target selling price for this product isa. $93.b. $75.c. $63.d. $48.


61. All of the following are correct statements about the cost-plus pricing approach except that ita. is simple to compute.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.

Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

62. In the cost-plus pricing approach, the desired ROI per unit is computed by multiplying the ROI percentage bya. fixed costs.b. total assets.c. total costs.d. variable costs.

Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics



Red Grass Company produces high definition television sets. The following information is available for this product:

Fixed cost per unit $200Variable cost per unit 600Total cost per unit 800Desired ROI per unit 240

63. Red Grass Company's markup percentage would bea. 120%.b. 60%.c. 40%.d. 30%.


64. The target selling price for this television isa. $440.b. $800.c. $840.d. $1,040.


65. In time-and-material pricing, a material loading charge covers all of the following excepta. purchasing costs.b. related overhead.c. desired profit margin.d. All of these are covered.

Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

66. The first step for time-and-material pricing is to calculate thea. charge for obtaining materials.b. charge for holding materials.c. labor charge per hour.d. charges for a particular job.


67. The labor charge per hour in time-and-material pricing includes all of the following excepta. an allowance for a desired profit.b. charges for labor loading.c. selling and administrative costs.d. overhead costs.

Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

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Pricing 8 - 15

68. The last step in determining the material loading charge percentage is toa. 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.d. add a desired profit margin on the materials themselves.

Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

69. In time-and-material pricing, the charge for a particular job is the sum of the labor charge and thea. materials charge.b. material loading charge.c. materials charge + desired profit.d. materials charge + the material loading charge.


Use the following information for questions 70-72.

The following data is available for Wheels ‘N Spokes Repair Shop for 2011:

Repair technicians’ wages $180,000Fringe benefits 40,000Overhead 30,000Total $250,000

The desired profit margin is $20 per labor hour. The material loading charge is 40% of invoice cost. It is estimated that 5,000 labor hours will be worked in 2011.

70. Wheels ‘N Spokes’ labor charge in 2011 would bea. $50.b. $56.c. $64.d. $70.

Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

71. In January 2011, Wheels ‘N Spokes repairs a bicycle that uses parts of $160. Its material loading charge on this repair would bea. $64.b. $96.c. $160.d. $224.

Ans: a, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

72. In March 2011, Wheels ‘N Spokes repairs a bicycle that takes two hours to repair and uses parts of $120. The bill for this repair would bea. $260.b. $280.c. $296.d. $308.



73. Which of the following organizations would most likely not use time-and-material pricing?a. Automobile repair companyb. Engineering firmc. Custom furniture manufacturerd. Public accounting firm



Carlos Consulting Inc. provides financial consulting and has collected the following data for the next year’s budgeted activity for a lead consultant.

Consultant’s wages $90,000Fringe benefits $22,500Related overhead $17,500

Supply clerk’s wages $18,000Fringe benefits $4,000Related overhead $20,000

Profit margin per hour $15Profit margin on materials 15%Total estimated consulting hours 5,000Total estimated supply costs $168,000

74. The labor rate per hour isa. $37.50.b. $26.00.c. $36.50.d. $41.00.


75. The material loading charge isa. 25%.b. 40%.c. 55%.d. 15%.


76. A consulting job takes 20 hours of consulting time and $180 of supplies. The client’s bill would bea. $1,072.b. $772.c. $952.d. $1,000.


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Pricing 8 - 17


Lonely Guy Repair Service recently performed repair services for a customer that totaled $400. Somehow the bill was lost and the company accountant was trying to recreate the bill from memory. This is what was remembered:

Total bill $400Labor profit margin $10Materials profit margin 20%Total labor charges $260Cost of materials used $100Total hourly cost $22.50

77. What was the material loading charge?a. 20%b. 25%c. 35%d. 40%


78. How many hours were billed on the job?a. 13.0b. 12.3c. 11.5d. 8.0


79. Lawrence Legal Services recently billed a customer $720. Labor hours were 6 and the cost of the materials used was $150. If the company’s hourly labor rate was $75, what material loading charge was used?a. 40%b. 50%c. 80%d. 100%

Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

80. Dudly Drafting Services uses a 45% material loading charge and a labor rate of $30 per hour. How much will be charged on a job that requires 3.5 hours of work and $60 of materials?a. $192b. $165c. $132d. $200



81. The time component under time-and-material pricing includes aa. loading charge.b. charge for receiving, handling, and storing materials.c. portion of the materials clerk’s wages.d. profit margin.


82. Using time-and-material pricing involves how many steps?a. 4b. 3c. 2d. 1

Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

83. The last step in calculating the hourly rate to be charged in time-and-material pricing is toa. estimate the total labor costs plus fringe benefits.b. estimate the total labor hours.c. add a profit margin.d. add a charge for overhead costs.



Jaycee Auto Repair has the following budgeted costs for the next year:

Time Charges Material ChargesShop employees’ wages and benefits $120,000 $ -Parts manager’s salary and benefits - 45,000Office employee’s salary and benefits 30,000 15,000Other overhead 15,000 40,000Invoice cost of parts and materials - 400,000

Total budgeted costs $165,000 $500,000

84. The labor rate to be used next year assuming 7,500 hours of repair time and a profit margin of $20 per labor hour isa. $22.b. $36.c. $38.d. $42.

Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

85. The material loading charge to be used next year assuming a 40% markup on material cost isa. 65%.b. 40%.c. 80%.d. 20%.


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Pricing 8 - 19

86. Jaycee estimates that the repairs to a Cadillac Escalade damaged in a rollover will take 45 hours of labor and $3,500 in parts and materials. The total cost of the repairs isa. $5,800.b. $7,665.c. $5,775.d. $6,790.


87. The price used to record a sale between divisions within the same vertically integrated company is called thea. sales price.b. integrated price.c. transfer price.d. bargain price.

Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

88. The overall objective in the determination of a transfer price is toa. maximize the return of the selling division.b. minimize the cost to the purchasing division.c. minimize the return of the selling division.d. maximize the return to the whole company.

Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

89. Which two methods are used most often when establishing a transfer price?a. Negotiated transfer pricing and cost-based transfer pricingb. Cost-based transfer pricing and market-based transfer pricingc. Negotiated transfer pricing and market-based transfer pricingd. Cost-based transfer pricing and standard-based pricing

Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics


The Selling Division’s unit sales price is $20 and its unit variable cost is $12. Its capacity is 10,000 units. Fixed costs per unit are $5. Current outside sales are 8,000 units.

90. What is the Selling Division’s opportunity cost per unit from selling 2,000 units to the Purchasing Division?a. $8b. $20c. $3d. $0

Ans: d, SO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


91. What is the Selling Division’s opportunity cost per unit from selling 3,000 units to the Purchasing Division?a. $8b. $20c. $3d. $0

Ans: a, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

92. In the minimum transfer price formula, variable cost is defined as the variable cost ofa. all units sold, both internally and externally.b. units sold externally.c. units not sold.d. units sold internally.


93. Under the negotiated transfer pricing approach, the minimum transfer price is established by thea. purchasing division.b. corporate headquarters management.c. selling division.d. corporate negotiator.


94. Under the negotiated transfer pricing approach, the maximum transfer price is established by thea. purchasing division.b. corporate headquarters management.c. selling division.d. corporate negotiator.


95. Assume the Thread Division has excess capacity. The Garment Division wants the Thread Division to furnish them additional spools of thread that could be made using the excess capacity. In a negotiated transfer price, the Thread Division should accept as a minimum any transfer price that exceeds thea. total cost of producing spools for outside sales.b. variable costs of producing the additional spools for the Garment Division.c. contribution margin and outside spool sales.d. foregone contribution margin on outside spool sales.

Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

96. The most common method used to establish transfer prices isa. negotiated transfer pricing.b. market-based transfer pricing.c. cost-plus transfer pricing.d. cost-based transfer pricing.


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Pricing 8 - 21

97. When a sale occurs between divisions of the same company, which transfer pricing approach may lead to the buying division overpricing its product?a. Cost based transfer pricingb. Market-based transfer pricingc. Negotiated transfer pricingd. Cost-plus transfer pricing

Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics


The Lumber Division of Paul Bunyon Homes Inc. produces and sells lumber that can be sold to outside customers or within the company to the Construction Division. The following data have been gathered for the coming period:

Lumber Division:Capacity 200,000 board feetPrice per board foot $3.00Variable production cost per bd. ft. $1.50Variable selling cost per bd. ft. $0.60

Construction Division:Board feet needed 60,000Outside price paid per bd. ft. $2.40

If the Lumber Division sells to the Construction Division, $0.45 per board foot can be saved in shipping costs.

98. If current outside sales are 130,000 board feet, what is the minimum transfer price that the Lumber Division could accept?a. $1.50b. $1.65c. $2.10d. $3.00

Ans: b, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

99. If current outside sales are 150,000 board feet, what is the minimum transfer price that the Lumber Division could accept?a. $2.40b. $1.95c. $1.65d. $2.55

Ans: d, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

100. If the Lumber Division has sufficient excess capacity to fulfill the Construction Division’s needs, what will be the effect on the company’s overall contribution margin?a. Decrease by $36,000b. Decrease by $27,000c. Increase by $45,000d. Increase by $40,500

Ans: c, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics



Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to the Production Division. It has been decided that the Engine Division will sell 20,000 units to the Production Division at $1,400 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $3,400 and unit variable costs and fixed costs of $1,400 and $1,000, respectively. The Production Division is currently paying $3,200 per unit to an outside supplier. $120 per unit can be saved on internal sales from reduced selling expenses.

101. What is the minimum transfer price that the Engine Division should accept?a. $3,280b. $3,400c. $3,200d. $2,000


102. What is the increase/decrease in overall company profits if this transfer takes place?a. Decrease $1,600,000b. Increase $3,360,000c. Decrease $4,000,000d. Increase $36,000,000

Ans: a, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement


The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.30 per can. Its unit variable costs and unit fixed costs are $0.12 and $0.04, respectively. The Packaging Division wants to purchase 50,000 cans at $0.16 a can. Selling internally will save $0.01 a can.

103. Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should accept?a. $0.12b. $0.16c. $0.11d. $0.15


104. Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept?a. $0.29b. $0.33c. $0.14d. $0.17


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Pricing 8 - 23


The Dairy Division of Famous Foods, Inc. produces and sells milk to outside customers. The operation has the capacity to produce 250,000 gallons of milk a year. Last year’s operating results were as follows:

Sales (200,000) gallons $500,000Variable costs 312,000Contribution margin 188,000Fixed costs 100,000Net Income $ 88,000

105. Assume the Yogurt Division wants to purchase 30,000 gallons of milk from the Dairy Division. The minimum price that will increase the Dairy Division’s profit isa. $2.50 per gallon.b. $0.94 per gallon.c. $1.56 per gallon.d. $0.44 per gallon.


106. Assume the Dairy Division is operating at capacity. If the Yogurt Division wants to purchase 30,000 gallons of milk from the Dairy Division, what is the minimum price that will allow the Dairy Division to maintain its current net income?a. $2.50 per gallonb. $0.94 per gallonc. $1.56 per gallond. $0.44 per gallon


107. Negotiated transfer pricing is not always used because of each of the following reasons except thata. 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.c. negotiations often lead to different pricing strategies from division to division.d. opportunity cost is sometimes not determinable.


108. All of the following are approaches for determining a transfer price except thea. cost-based approach.b. market-based approach.c. negotiated approach.d. time-and-material approach.



109. When a cost-based transfer price is used, the transfer price may be based on any of the following excepta. fixed cost alone.b. full cost.c. variable cost alone.d. All of these may be used.


110. All of the following are correct statements about the cost-based transfer price approach except that ita. 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.


111. The general formula for the minimum transfer price is: minimum transfer price equalsa. fixed cost + opportunity cost.b. external purchase price.c. total cost + opportunity cost.d. variable cost + opportunity cost.

Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

112. Variable costs of units sold internally will always bea. lower than the variable costs of units sold externally.b. higher than the variable costs of units sold externally.c. the same as the variable costs of units sold externally.d. Variable costs of units sold internally may be either higher or lower than for units sold

externally.

Ans: d, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

113. In the formula for the minimum transfer price, opportunity cost is the __________ of the goods sold externally.a. variable costb. total costc. selling priced. contribution margin

Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

114. The transfer price approach that conceptually should work the best is thea. cost-based approach.b. market-based approach.c. negotiated price approach.d. time-and-material pricing approach.

Ans: c, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

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Pricing 8 - 25

115. The transfer price approach that is often considered the best approach because it generally provides the proper economic incentives is thea. cost-based approach.b. market-based approach.c. negotiated price approach.d. time-and-material pricing approach.

Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

116. All of the following are correct statements about the market-based approach except that ita. 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.

Ans: c, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

117. The negotiated transfer price approach should be used whena. the selling division has available capacity and is willing to accept less than the market

price.b. an outside market for the goods does not exist.c. no market price is available.d. any of these situations exist.

Ans: d, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

118. Assuming the selling division has available capacity, a negotiated transfer price should be within the range ofa. 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.


119. The transfer price approach that will result in the largest contribution margin to the buying division is thea. cost-based approach.b. market-based approach.c. negotiated price approach.d. time-and-material pricing approach.

Ans: a, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

120. The maximum transfer price from the buying division's standpoint is thea. 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 rubber moldings and sells them externally for $165. Its variable cost is $75 per unit, and its fixed cost per unit is $21. Fir's president wants the Wood Division to transfer 5,000 units to another company division at a price of $96.

121. Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer price it should accept isa. $21.b. $75.c. $96.d. $165.


122. Assuming the Wood Division does not have any available capacity, the minimum transfer price it should accept isa. $21.b. $75.c. $96.d. $165.



Management of the Catering Company would like the Food Division to transfer 10,000 cans of its final product to the Restaurant Division for $120. The Food Division sells the product to customers for $210 per unit. The Food Division’s variable cost per unit is $105 and its fixed cost per unit is $30.

123. If the Food Division is currently operating at full capacity, what is the minimum transfer price the Food Division should accept?a. $30b. $105c. $135d. $210


124. If the Food Division has 10,000 units available capacity, what is the minimum transfer price the Food Division should accept?a. $30b. $105c. $135d. $210


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Pricing 8 - 27

125. All of the following are correct statements about transfers between divisions located in countries with different tax rates except thata. differences in tax rates across countries complicate the determination of the appro-

priate 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.


126. Transfers between divisions located in countries with different tax ratesa. 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.

Ans: c, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Global Business

a127. Which of the following is consistent with generally accepted accounting principles?a. Absorption-cost approachb. Contribution approachc. Variable-cost approachd. Both absorption-cost and contribution approach

Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a128. Under the absorption-cost approach, all of the following are included in the cost base excepta. direct materials.b. fixed manufacturing overhead.c. selling and administrative costs.d. variable manufacturing overhead.

Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA

a129. The first step in the absorption-cost approach is to compute thea. desired ROI per unit.b. markup percentage.c. target selling price.d. unit manufacturing cost.


a130. The markup percentage in the absorption-cost approach is computed by dividing the sum of the desired ROI per unit anda. 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.



a131. In the absorption-cost approach, the markup percentage covers thea. desired ROI only.b. desired ROI and selling and administrative expenses.c. desired ROI and fixed costs.d. selling and administrative expenses only.

Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

a132. The absorption-cost approach is used by most companies for all of the following reasons except thata. 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.

Ans: d, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

a133. Under the variable-cost approach, the cost base includes all of the following excepta. variable selling and administrative costs.b. variable manufacturing costs.c. total fixed costs.d. All of the above are included.

Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management

a134. In the variable-cost approach, the markup percentage covers thea. desired ROI only.b. desired ROI and fixed costs.c. desired ROI and selling and administrative expenses.d. fixed costs only.

Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

a135. The markup percentage denominator in the variable-cost approach is thea. desired ROI per unit.b. fixed costs per unit.c. manufacturing cost per unit.d. variable costs per unit.


a136. The reasons for using the variable-cost approach include all of the following except this approacha. 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.

Ans: c, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

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Pricing 8 - 29

a137. Maggie Co. has variable manufacturing costs per unit of $40, and fixed manufacturing cost per unit is $30. Variable selling and administrative costs per unit are $8, while fixed selling and administrative costs per unit are $12. Maggie desires an ROI of $15 per unit. If Maggie Co. uses the absorption-cost approach, what is its markup percentage?a. 8.33%b. 50%c. 16.67%d. 25%


a138. Maggie Co. has variable manufacturing costs per unit of $40, and fixed manufacturing cost per unit is $20. Variable selling and administrative costs per unit are $10, while fixed selling and administrative costs per unit are $4. Maggie desires an ROI of $16 per unit. If Maggie Co. uses the variable-cost approach, what is its markup percentage?a. 50%b. 80%c. 30%d. 100%



Papillon Co. has determined the following per unit amounts:

Direct materials $20 Fixed selling and administrative $40Direct labor 24 Variable overhead 16Desired ROI 22 Variable selling and administrative 10Fixed overhead 30

a139. The cost base using the absorption-cost approach isa. $60.b. $70.c. $130.d. $90.

Ans: d, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

a140. The markup percentage using the absorption-cost approach isa. 80%.b. 102%.c. 131%.d. 90%.


a141. The target selling price using the absorption-cost approach isa. $234.b. $162.c. $108.d. $247.



a142. The cost base using the variable-cost approach isa. $60.b. $70.c. $130.d. $90.


a143. The markup percentage using the variable-cost approach isa. 80%.b. 102%.c. 131%.d. 90%.

Ans: c, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a144. The target selling price using the variable-cost approach isa. $207.90.b. $138.60.c. $141.40.d. $161.70.


a145. Alfredo Co. has collected the following per unit data:

Direct labor $30 Variable selling and admin. $12Direct materials 20 Fixed overhead 4Variable overhead 16 Fixed selling and admin. 28

The markup percentage is 120%. What is the markup amount under the variable-cost approach?

a. $108.40b. $93.60c. $79.20d. $175.20


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Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

26. d 44. b 62. b 80. a 98. b 116. c a134. b27. b 45. c 63. d 81. d 99. d 117. d a135. d28. c 46. b 64. d 82. b 100. c 118. c a136. c29. d 47. a 65. d 83. c 101. a 119. a a137. b30. d 48. d 66. c 84. d 102. a 120. c a138. b31. c 49. a 67. b 85. a 103. c 121. b a139. d32. a 50. b 68. d 86. b 104. a 122. d a140. a33. d 51. a 69. d 87. c 105. c 123. d a141. b34. c 52. d 70. d 88. d 106. a 124. b a142. b35. b 53. d 71. a 89. b 107. d 125. d a143. c36. d 54. a 72. d 90. d 108. d 126. c a144. d37. b 55. b 73. c 91. a 109. a a127. a a145. b38. a 56. c 74. d 92. d 110. d a128. c39. b 57. b 75. b 93. c 111. d a129. d40. a 58. c 76. a 94. a 112. d a130. c41. b 59. b 77. d 95. b 113. d a131. b42. a 60. a 78. d 96. d 114. c a132. d43. b 61. c 79. c 97. b 115. b a133. c

BRIEF EXERCISES

BE 146

Home Appliances Co. wants to introduce a new digital display, laser driven iron to the market. The estimated unit sales price is $85. The required investment is $3,500,000. Unit sales are expected to be 200,000 and the minimum required rate of return on all investments is 15%.

InstructionsCompute the target cost per iron.

Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

Solution 146 (5 min)

Sales (200,000 × $85) $17,000,000Less desired ROI ($3,500,000 × 15%) 525,000Target cost 16,475,000Number of irons ÷ 200,000Target cost per iron $ 82.38


BE 147

Talia Corp. produces digital cameras. For each camera produced, direct materials are $24, direct labor is $16, variable manufacturing overhead is $12, fixed manufacturing overhead is $28, variable selling and administrative expenses are $10, and fixed selling and administrative expenses are $24.

InstructionsCompute the target selling price assuming a 40% markup on total per unit cost.

Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Direct materials........................................................ $24Direct labor............................................................... 16Variable manufacturing overhead............................. 12Fixed manufacturing overhead................................. 28Variable selling and administrative expenses........... 10Fixed selling and administrative expenses............... 24

Total unit cost..................................................... $114

Total unit cost + (Markup percentage × Total unit cost) = Target selling price$114 + (40% × $114) = $159.60

BE 148

Tina Company expects to produce 100,000 products in the coming year and has invested $20,000,000 in the equipment needed to produce the products. Tina requires a return on investment of 14%.

InstructionsWhat is Tina’s ROI per unit?

Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement


ROI per unit = units of Number

)percentage ROI Desired investment (Total × =

×($20,000,000 14%)100,000

= $28

BE 149

NayTag produces washing machines and dryers. The following per unit information is available for washing machines: direct materials, $72; direct labor, $48; variable manufacturing overhead, $36; fixed manufacturing overhead, $84; variable selling and administrative expenses, $24; fixed selling and administrative expenses, $56. NayTag desires an ROI per unit of $96.

InstructionsCompute NayTag’s markup percentage using a total cost approach.

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The markup percentage would be:$56 $24 $84 $36 $48 $72

$96

+++++ = 30%


BE 150

MAC Company has invested $3,000,000 in assets to produce 10,000 units of its finished product. MAC’s budget for the year is as follows: net income, $390,000; variable costs, $2,400,000; fixed costs, $200,000.

InstructionsCompute each of the following:1. Budgeted ROI.2. Markup percentage using a total cost approach.



1. ROI is equal to net income divided by invested assets. For MAC Company, budgeted ROI is:

Budgeted ROI = $390,000 ÷ $3,000,000 = 13%

2. The markup percentage is equal to:cost Total

income Net

For MAC Company, the budgeted markup percentage is:$390,000

$2,400,000 $200,000+ = 15%

BE 151

During the current year Greeve Corporation expects to produce 10,000 units and has budgeted the following: net income $300,000; variable costs $900,000; and fixed costs $100,000. It has invested assets of $1,750,000. The company's budgeted ROI was 20%. What was its budgeted markup percentage using a full-cost approach?



The markup percentage is equal to Desired ROI per unit divided by total unit cost. The desired ROI per unit is computed as follows:

$1,750,000 20%Desired ROI per unit = $3510,000 units

× =

The total unit cost is computed as follows:

$900,000 $100,000Total unit cost = $10010,000 units

+ =


Solution 151 (cont.)

The markup percentage is computed as follows:

Desired ROI per unit $35 = 35%Total unit cost $100

=

BE 152

Horton Small Engine Repair charges $45 per hour of labor. It has a material loading percentage of 40%. On a recent job replacing the engine of a riding lawnmower, Horton worked 4 hours and used parts with a cost of $500. Calculate Horton's total bill.



Horton's total bill would equal:

(4 hours × $45) + $500 + ($500 × 40%) = $880

BE 153

On a recent job repairing a small boat engine, Marine Repairs Company worked 21 hours and used parts with a cost of $1,400. Marine Repairs Company charges $80 per hour of labor and has a material loading charge of 60%.

InstructionsCalculate the total bill for repairing the small boat engine.



The total bill would equal: (21 hours × $80) + $1,400 + ($1,400 × 60%) = $3,920

BE 154

Alma and Associates, a new consulting service, recently received a bill for repairs on its computers totaling $2,420. Alma thinks it may have been overcharged and is trying to recreate the components of the bill. She knows the hourly rate is $75 and 15 hours of labor was charged. She also knows $700 of parts were replaced.

InstructionsCompute the material loading charge percentage the repair service used.


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Total repair bill $2,420Less labor charges (15 hours × $75) 1,125Total charge for parts 1,295Less parts cost 700Cost of loading charge 595Parts cost ÷ 700Loading charge percentage 85%

BE 155

Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the batteries to its customers for $82 per unit. The variable cost per unit is $42, and fixed costs per unit are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 batteries to another division within the company at a price of $54. Freberg is operating at full capacity.

InstructionsCompute the minimum transfer price that Freberg should accept.

Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


The minimum transfer price is equal to Freberg’s variable cost plus its opportunity cost. The opportunity cost is equal to its contribution margin on goods sold to external parties. Thus, the minimum transfer price in this case is: $42 + ($82 – $42) = $82.

BE 156

Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the batteries to its customers for $82 per unit. The variable cost per unit is $50, and fixed costs per unit are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 batteries to another division within the company at a price of $61. Freberg has sufficient excess capacity to provide the 30,000 batteries to the other division.




If Freberg has excess capacity, then its opportunity cost is zero. In this case, the minimum transfer price is: $50 + $0 = $50.

BE 157

Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the batteries to its customers for $82 per unit. The variable cost per unit is $50, and fixed costs per unit are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 special, high-performance batteries to another division within the company. Freberg’s variable cost on these special batteries is $62 per unit. Freberg is operating at full capacity.


BE 157 (Cont.)




The minimum transfer price is equal to Freberg’s variable cost plus its opportunity cost. In this case, the minimum transfer price is: $62 + ($82 – $50) = $94.

aBE 158

Bundy Batteries produces batteries for laptop computers. The following per unit cost information is available: direct materials $15; direct labor $18; variable manufacturing overhead $12; fixed manufacturing overhead $30; variable selling & administrative expenses $10; and fixed selling & administrative expenses $20. The desired ROI per unit is $25.

InstructionsCompute the markup percentage using the absorption-cost approach.


aSolution 158 (5 min)

Markup percentage = $30 $12 $18 $15

$20) ($10 $25

+++++

= 73.33%

aBE 159

Future Adhesives Inc. uses the variable-cost approach to determine target selling prices. A special adhesive used in the aerospace industry has the following per unit data: desired ROI $30; fixed manufacturing overhead $25; and fixed selling & administrative costs $35. The markup percentage is 125%.

InstructionsCompute the target selling price.


aSolution 159 (5 min)

Markup percentage = $30 $25 $35Cost base+ + = 125%

Cost base = $90 ÷ 125% = $72Target selling price = $72 + ($72 × 125%) = $162

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EXERCISES

Ex. 160

Stone Company is considering introducing a new line of pagers, targeting the preteen population. Stone believes that if the pagers can be priced competitively at $45, approximately 400,000 units can be sold. The controller has determined that an investment in new equipment totaling $4,000,000 will be required. Stone requires a minimum rate of return of 16% on all investments.

InstructionsCompute the target cost per unit of the pager.


Solution 160 (6-10 min.)

Sales (400,000 × $45) $18,000,000Less desired ROI ($4,000,000 × 16%) 640,000Target cost for 400,000 units $17,360,000

Target cost per unit = $17,360,000 ÷ 400,000 = $43.40

Ex. 161

Mellie Computer Devices Inc. is considering the introduction of a new printer. The company’s accountant had prepared an analysis computing the target cost per unit but misplaced his working papers. From memory he remembers the estimated unit sales price was $200 and the target unit cost was $195. Sales were projected at 200,000 units with a required $5,000,000 investment.

InstructionsCompute the required minimum rate of return.


Solution 161 (5–10 min.)

Sales (200,000 × $200) $40,000,000Less target cost (200,000 × $195) 39,000,000Desired ROI (in dollars) 1,000,000Investment ÷ 5,000,000Minimum ROI 20%

Ex. 162

Laserspot is involved in producing and selling high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLaser, appears to have a very large potential market. Because of competition, Laserspot does not believe that it can charge more than $80 for LittleLaser. At this price, Laserspot believes it can sell 100,000 of these laser guns. LittleLaser will require an investment of $7,500,000 to manufacture, and the company wants an ROI of 20%.


Solution 162 (Cont.)

InstructionsDetermine the target cost for one LittleLaser.



The following formula may be used to determine return on investment

Investment × ROI percentage = Return on investment$7,500,00 × 20% = $1,500,000

Return on investment per unit is then $15 ($1,500,000 ÷ 100,000)

The target cost is therefore $65 computed as follows:

Target cost = Market Price − Desired profit $65 = $80 − $15

Ex. 163

Joey's Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,400,000 in the studio and expects a return on investment (ROI) of 15%. Budgeted costs for the coming year are as follows.

Per Session Total Direct materials (tapes, CDs, etc) $60Direct labor $400Variable overhead $50Fixed overhead $850,000Variable selling and administrative expenses $40Fixed selling and administrative expenses $600,000

Instructions

(a) Determine the total cost per session.(b) Determine the desired ROI per session.(c) Calculate the mark-up percentage on the total cost per session.(d) Calculate the target price per session.


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(a) Total cost per session:Per Session

Direct materials $ 60Direct labor 400Variable overhead 50Fixed overhead ($850,000 ÷ 1,000) 850Variable selling & administrative expenses 40Fixed selling & administrative expenses ($600,000 ÷ 1,000) 600

$2,000

(b) Desired ROI per session = (15% × $2,400,000) ÷ 1,000 = $360

(c) Mark-up percentage on total cost per session = $360 ÷ 2,000 = 18%

(d) Target price per session = $2,000 + ($2,000 × 18%) = $2,360

Ex. 164

Rita Corporation produces commercial fertilizer spreaders. The following information is available for Rita's anticipated annual volume of 400,000 units.

Per Unit Total Direct materials $42Direct labor 54Variable manufacturing overhead 72Fixed manufacturing overhead $12,000,000Variable selling and administrative expenses 34Fixed selling and administrative expenses 7,200,000

The company has a desired ROI of 20%. It has invested assets of $120,000,000.

InstructionsCompute each of the following:1. Total cost per unit.2. Desired ROI per unit.3. Markup percentage using total cost per unit.4. Target selling price.


Solution 164 (12 min.)

1. Total cost per unit:Per Unit

Direct materials $ 42Direct labor 54Variable manufacturing overhead 72Fixed manufacturing overhead ($12,000,000 ÷ 400,000 30Variable selling and administrative expenses 34Fixed selling and administrative expenses ($7,200,000 ÷ 400,000) 18

$250



2. Desired ROI per unit = (20% × $120,000,000) ÷ 400,000 = $60

3. Markup percentage using total cost per unit = $60

$250 = 24%

4. Target selling price = $250 + ($250 × 40%) = $310

Ex. 165

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 60,000 units.

Per Unit Total Direct materials $20Direct labor 40Variable manufacturing overhead 10Fixed manufacturing overhead $1,800,000Variable selling and administrative expenses 6Fixed selling and administrative expenses 1,440,000

Goliath uses cost-plus pricing to set its target selling price. The markup on total unit cost is 30%.

InstructionsCompute each of the following for the new product:1. Total variable cost per unit, total fixed cost per unit, and total cost per unit.2. Desired ROI per unit.3. Target selling price.



1. Direct materials $20Direct labor 40Variable manufacturing overhead 10Variable selling and administrative expenses 6Variable cost per unit $76

Budgeted CostTotal Costs Volume Per Unit

Fixed manufacturing overhead $1,800,000 ÷ 60,000 = $30Fixed selling and administrative expenses 1,440,000 ÷ 60,000 = 24Fixed cost per unit $54

Variable cost per unit $ 76Fixed cost per unit 54Total cost per unit $130

2. Total cost per unit $130Markup × 30%

Desired ROI per unit $ 39

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3. Total cost per unit $130Desired ROI per unit 39Target selling price $169

Ex. 166

Skyhigh Company is in the process of setting a selling price for its newest model stunt kite, the Looper. The controller of Skyhigh estimates variable cost per unit for the new model to be as follows:

Direct materials $18Direct labor 8Variable manufacturing overhead 4Variable selling and administrative expenses 5

$35

In addition, Skyhigh anticipates incurring the following fixed cost per unit at a budgeted sales volume of 20,000 units:

Total Costs ÷ Budget Volume = Cost per UnitFixed manufacturing overhead $240,000 20,000 $12Fixed selling and administrative expenses 260,000 20,000 13Fixed cost per unit $25

Skyhigh uses cost-plus pricing and would like to earn a 15 percent return on its investment (ROI) of $400,000.

InstructionsCompute the selling price that would provide Skyhigh a 15 percent ROI.



Variable cost per unit $35Fixed cost per unit 25Desired ROI per unit 3*Target selling price $63

*$250,000 × .15 = $60,000; $60,000 ÷ 20,000 = $3 per unit


Ex. 167

Silver Spoon Service repairs commercial food preparation equipment. The following budgeted cost data is available for 2011:

Time MaterialCharges Charges

Technicians' wages and benefits $500,000Parts manager's salary and benefits $ 72,000Office manager's salary and benefits 112,000 18,000Other overhead 48,000 135,000Total budgeted costs $660,000 $225,000

Silver Spoon has budgeted for 10,000 hours of technician time during the coming year. It desires a $64 profit margin per hour of labor and a 50% profit margin on parts. Silver Spoon estimates the total invoice cost of parts and materials in 2011 will be $500,000.

Instructions1. Compute the rate charged per hour of labor.2. Compute the material loading charge.3. Silver 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 labor and $8,000 of parts. Compute the total estimated bill.



1. Per HourTotal Cost Total Hours Charge

Hourly labor rate for repairsTechnicians' wages and benefits $500,000 ÷ 10,000 = $ 50.00

Overhead costsOffice manager's salary and benefits 112,000 ÷ 10,000 = 11.20Other overhead 48,000 ÷ 10,000 = 4.80

$660,000 ÷ 10,000 = 66.00Profit margin 64.00Rate charged per hour of labor $130.00

2. MaterialMaterial Total Invoice Cost, LoadingCharges Parts and Materials Charge

Overhead costsParts manager's salary and benefits $ 72,000Office manager's salary and benefits 18,000

$ 90,000 ÷ $500,000 = 18%Other overhead 135,000 ÷ $500,000 = 27%

45%Profit margin 50%Material loading charge 95%

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Solution 167 (cont.)

3. Job: Lime Corporation

Labor charges20 hours @ $130 $ 2,600

Material chargesCost of parts and materials $8,000Material loading charge (95% × $8,000) 7,600 15,600

Total price of labor and materials $18,200

Ex. 168

Forrest Painting Service has budgeted the following time and material for 2011:

BUDGETED COSTS FOR 2011

Time MaterialCharges Charges

Painters' wages and benefits $ 36,000Service manager's salary and benefits $23,000Office employee's salary and benefits 12,000 3,000Cost of paint 50,000Overhead (supplies, utilities, etc.) 16,000 8,500Total budgeted costs $64,000 $84,500

Forrest budgets 4,000 hours of paint time in 2011 and will charge a profit of $14 per hour, in addition to a 30% markup on the cost of paint.

On February 15, 2011, Forrest is asked to prepare a price estimate to paint a building. Forrest estimates that this job will take 12 labor hours and $500 in paint.

Instructions1. Compute the labor rate for 2011.2. Compute the material loading charge rate for 2011.3. Prepare a time-and-material price estimate for painting the building.



1. Computation of labor rateTotal Cost Total Hours Per Hour Charge

Hourly labor ratePainters' wages and benefits $36,000 ÷ 4,000 = $9

Overhead costsOffice employee's salary and benefits 12,000 ÷ 4,000 = 3Other overhead 16,000 ÷ 4,000 = 4

$64,000 ÷ 4,000 = 16Profit margin 14Rate charged per hour of labor $30



2. Computation of material loading chargeMaterial

Material Total Invoice Cost LoadingCharges of Paint Charge

Overhead costsService manager's salary and benefits $23,000Office employee's salary and benefits 3,000

26,000 ÷ $50,000 = 52%Other overhead 8,500 ÷ 50,000 = 17%

$34,500 ÷ 50,000 = 69%Profit margin 30%Material loading charge 99%

3. Price estimate for time and materials

Job: Paint building

Labor charges: 12 hours @ $30 $ 360Material charges

Cost of paint $500Material loading charge (99% × $500) 495 995


Ex. 169

Chuck's Classic Cars restores classic automobiles to showroom status. Budgeted data for the current year are:

Material Time LoadingCharges Charges

Restorers' wages and fringe benefits $270,000Puchasing agent's salary and fringe benefits $ 67,500Administrative salaries and fringe benefits 54,000 22,500Other overhead costs 20,000 75,600Total budgeted costs $344,000 $165,600

The company anticipated that the restorers would work a total of 10,000 hours this year. Expected parts and materials were $1,200,000.

In late January, the company experienced a fire in its facilities that destroyed most of the accounting records. The accountant remembers that the hourly labor rate was $64.40 and that the material loading charge was 88.80%.

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Ex. 169 (cont.)

Instructions(a) Determine the profit margin per hour on labor.(b) Determine the profit margin on materials.(c) Determine the total price of labor and materials on a job that was comnpleted after the fire

that required 150 hours of labor and $60,000 in parts and materials.



(a)Total Cost ÷ Total Hours Hourly Charge

Hourly labor rate:Restorers' wages and fringes $270,000 ÷ 10,000 = $27.00

Overhead costs:Administrative salaries & fringes 54,000 ÷ 10,000 = 5.40Other overhead costs 20,000 ÷ 10,000 = 2.00

Total hourly cost $344,000 ÷ 10,000 = $34.40

Profit margin = Hourly rate − total hourly cost = $64.40 − $34.40 = $30.00

(b)Material Total Invoice MaterialLoading Cost, Parts & LoadingCharges ÷ Materials = Percentage

Overhead costs:Purchasing agent’ssalary and fringes $ 67,500

Administrative salaries & fringes 22,50090,000 ÷ $1,200,000 = 7.50%

Other overhead costs 75,000 ÷ $1,200,000 = 6.30%Total $165,060 ÷ $1,200,000 = $13.80%

Material loading charge (with profit) 88.80%Material loading charge (without profit) 13.80%Profit margin on materials 75.00%

(c)Labor charges: 150 hours @ $64.40 $ 9,660Material charges:

Cost of parts & materials $60, 000Material loading charge ($60,000 × 88.80%) 53,280 113,280



Ex. 170

The Appraisal Department of Easy Mortgage Bank performs appraisals of business properties for loans being considered by the bank and appraisals for home buyers that are financing their purchase through some other financial institution. The department charges $210 per home appraisal, and its variable costs are $165 per appraisal.

Recently, Easy Mortgage Bank has opened its own Home-Loan Department and wants the Appraisal Department to perform 1,500 appraisals on all Easy Mortgage Bank-financed home loans. Bank management feels that the cost of these appraisals to the Home-Loan Department should be $200. The variable cost per appraisal to the Home-Loan Department would be $8 less than those performed for outside customers due to savings in administrative costs.

Instructions(a) Determine the minimum transfer price, assuming the Appraisal Department has excess

capacity.(b) Determine the minimum transfer price, assuming the Appraisal Department has no excess

capacity.(c) Assuming the Appraisal Department has no excess capacity, should management force the

department to charge the Home-Loan Department only $200? Discuss.

Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


(a) Minimum transfer price = ($165 − $8) + $0 = $157

(b) Minimum transfer price = ($165 − $8) + ($210 − $165) = $202

(c) No. By forcing the Appraisal Department to accept the $200 per appraisal price, management is penalizing the Appraisal department. If the department was allowed to sell its services to outside customers it could earn $45 ($210 − $165) in contribution margin per appraisal. Forcing them to sell their services internally would allow them to earn only $43 ($200 − $157) in contribution margin. A loss of $2 per appraisal or a total of $3,000 (1,500 × $2) would result.

Ex. 171

The Pacific Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $1,800. Division A charges Division B market price for the part, which is $1,050 per unit. Variable costs are $800 and $900 for Divisions A and B, respectively.

The manager of Division B feels that Division A should transfer the part at a lower price than market because at market, Division B is unable to make a profit.

Instructions(a) Calculate Division B’s contribution margin if transfers are made at the market price, and

calculate the company’s total contribution margin.(b) Assume that Division A can sell all its production in the open market. Should Division A

transfer the goods to Division B? If so, at what price?

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Ex. 171 (Cont.)

(c) Assume that Division A can sell in the open market only 500 units at $1,050 per unit out of the 1,000 units that it can produce every month. Assume also that a 20% reduction in price is necessary to sell all 1,000 units each month. Should transfers be made? If so, how many units should the division transfer and at what price? To support your decision, submit a schedule that compares the contribution margins under three different alternatives.

Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement


(a)

Division A Division B Total CompanySales $1,050 $1,800 $1,800Less: CostsVariable costs $ 800 $ 900 $1,700Transfer costs 0 1,050 0Total costs $ 800 $1,950 $1,700Contribution to income $ 250 $ (150) $ 100

(b) The opportunity cost is the market price. Transfers should be made at market prices less any avoidable costs. In the current situation, it would appear that no transfers would be made.

(c) (i) Maintain price, no transfers(500 × $1,050) − $400,000 = $125,000

(ii) Cut price, no transfers(1,000 × $840) − $800,000 = $40,000

(iii) Maintain price and transfers(500 × $1,800) + (500 × $1,050) − $1,250,000* = $175,000

* (500 × $1,700) + (500 × $800)

The firm is better off by maintaining the current market price for Division A’s product and transferring 500 units to Division B. A transfer price within the range of $800 to $900 would be needed to motivate both divisional managers to engage in the transfers. An optimal transfer price cannot be determined from the information given (even with full information, the best transfer price in the range may not be determinable).

Ex. 172

Pert Corporation manufactures state-of-the-art DVD players. It is a division of Vany TV, which manufactures televisions. Pert sells the DVD players to Vany, as well as to retail stores. The following information is available for Pert's DVD player: variable cost per unit $200; fixed costs per unit $150; and a selling price of $500 to outside customers. Vany currently purchases DVD players from an outside supplier for $460 each. Top management of Vany would like Pert to provide 50,000 DVD players per year at a transfer price of $200 each.


Ex. 172 (Cont.)

InstructionsCompute the minimum transfer price that Pert should accept under each of the following assumptions:1. Pert is operating at full capacity.2. Pert has sufficient excess capacity to provide the 50,000 players to Vany.



1. The minimum transfer price is $500 [$200 + ($500 – $200)], the outside market price, since Pert is operating at full capacity.

2. The minimum transfer price is $200, the variable cost of the DVD players, since Pert has excess capacity. However, since the market price is $460 (Vany's current cost), Pert should be able to negotiate a price much higher than $200.

Ex. 173

Green Yard Company, a division of Lawn Supplies, Inc., produces lawn mowers. Green Yard sells lawn mowers to home improvement stores, as well as to Lawn Supplies, Inc. The following information is available for Green Yard's mowers:

Fixed cost per unit $120Variable cost per unit 80Selling price per unit 300

Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for $275. In order to ensure a reliable supply, the management of Lawn Supplies, Inc. ordered Green Yard to provide 100,000 lawn mowers per year at a transfer price of $275 per unit. Green Yard is currently operating at full capacity. It could avoid $5 per unit of variable selling costs by selling internally.

Instructions1. Compute the minimum transfer price that Green Yard should be required to accept.2. Compute the increase (decrease) in contribution margin for Lawn Supplies, Inc. for this

transfer.



1. The minimum transfer price that Green Yard should accept is:

($80 – $5 + ($300 – $80) = $295

2. The decrease in contribution margin per unit to Lawn Supplies, Inc. is:

Contribution margin lost by Green Yard ($300 – $80) $220Increased contribution margin to Lawn Supplies ($275 – $75) 200Net decrease in contribution margin $ 20

Total contribution margin decrease is: $20 × 100,000 units = $2,000,000

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Ex. 174

Spirit Manufacturing is a division of Birch Communications, Inc. Spirit produces cell phones and sells these phones to other communication companies, as well as to Birch. Recently, the vice president of marketing for Birch approached Spirit with a request to make 20,000 units of a special cell phone that could be used anywhere in the world. The following information is available regarding the Spirit division:

Selling price of regular cell phone $80Variable cost of regular cell phone 40Additional variable cost of special cell phone 30

InstructionsCalculate the minimum transfer price and indicate whether the internal transfer should occur for each of the following:1. The marketing vice president offers to pay Spirit $90 per phone. Spirit has available capacity.

2. The marketing vice president offers to pay Spirit $90 per phone. Spirit has no available capacity and would have to forgo sales of 20,000 phones to existing customers to meet this request.

3. The marketing vice president offers to pay Spirit $140 per phone. Spirit has no available capacity and would have to forgo sales of 30,000 phones to existing customers to meet this request.



1. Assuming that Spirit Manufacturing has available capacity, variable cost would be ($40 + $30) or $70 and the opportunity cost would be zero. Therefore, the minimum transfer price would be $70 = $70 + $0. Since the $90 transfer price being offered exceeds the $70 minimum transfer price, the offer should be accepted.

2. Assuming no available capacity, and that the new units produced would be equal to the number of standard units forgone, variable cost of the special cell phone would be ($40 + $30) or $70 and the opportunity cost would be ($80 – $40) or $40. Therefore, the minimum transfer price would be $110 = $70 + $40. Since this is higher than the $90 transfer price, Spirit Manufacturing should reject the offer.

3. Assuming no available capacity, and that in order to produce the 20,000 special cell phones, 30,000 standard cell phones would be forgone, the minimum variable cost would be ($40 + $30) or $70 and the opportunity cost would be:

Total contribution margin on standard cell phones ($80 – $40) × 30,000—————————————————————— = —————————— = $60

Number of special cell phones $20,000

Therefore, the minimum transfer price would be $130 = ($40 + $30) + $60. Since the $140 transfer price being offered exceeds the minimum transfer price of $130, Spirit Manufacturing should accept the offer.


Ex. 175

Pubworld is a textbook publishing company that has contracts with several different authors. It also operates a printing operation called Printpro. Both companies operate as separate profit centers. Printpro prints textbooks written by Pubworld authors, as well as books written by non-Pubworld authors. The printing operation bills out at $0.06 per page and a typical textbook requires 600 pages of print. A developmental editor from Pubworld approached the printing operation manager offering to pay $0.035 per page for 5,000 copies of a 600-page textbook. Outside printers are currently charging $0.04 per page. Printpro's variable cost per page is $0.03.

Instructions1. Calculate the appropriate transfer price and indicate whether the printing should be done

internally by Printpro under each of the following situations:a. Printpro has available capacity.b. Printpro has no available capacity and would have to cancel an outside customer's job to

accept the editor's offer.

2. Calculate the change in contribution margin for each company, if top management forces Printpro to accept the $0.035 transfer price when it has no available capacity.



1a. Assuming that the printing operation has available capacity, the printing operation's variable cost is $0.03 and its opportunity cost is $0. The minimum transfer price would be $0.03 = $0.03 + $0. Therefore, in this case, the printing operation should accept the offer to print internally. The $0.035 transfer price would provide a contribution margin of $0.005 ($0.035 – $0.03) per page. Depending on its bargaining strength, the printing operation might want to ask for a transfer price higher than $0.035, since the company is saving money at any price below the $0.04 price charged by outside printers.

1b. Assuming no available capacity, the printing operation's variable cost is $0.03 per page and its opportunity cost is $0.03 ($0.06 – $0.03) per page. The minimum transfer price would be $0.06 = $0.03 + $0.03. Therefore, the printing operation would not accept the internal transfer price of $0.035.

2. Printpro would lose: ($0.06 – $0.03) × 600 pages × 5,000 copies = $90,000

Pubworld would save: ($0.04 – $0.035) × 600 pages × 5,000 copies = $15,000

aEx. 176

The following information is available for a product manufactured by Gardenia Corporation:

Per Unit Total Direct materials $62

Direct labor 48 Variable manufacturing overhead 15 Fixed manufacturing overhead $250,000 Variable selling and admin. expenses 10 Fixed selling and admin. expenses 55,000

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aEx. 176 (Cont.)

Gardenia has a desired ROI of 16%. It has invested assets of $8,250,000 and expects to produce 2,500 units per year.

InstructionsCompute each of the following:1. Cost per unit of fixed manufacturing overhead and fixed selling and administrative expenses.2. Desired ROI per unit.3. Markup percentage using the absorption-cost approach.4. Markup percentage using the variable-cost approach.


aSolution 176 (12–14 min.)

$250,0001. Fixed manufacturing overhead = ———— = $100 per unit

2,500

$55,000 Fixed selling and administrative expenses per unit = ———— = $22 per unit

2,500

16% × $8,250,0002. Desired ROI per unit = ————————— = $528 per unit

2,500

$528 + ($10 + $22)3. Absorption-cost markup percentage = ——————————— = 249%

$62 + $48 + $15 + $100

$528 + ($100 + $22)4. Variable-cost markup percentage = ——————————— = 481%

$62 + $48 + $15 + $10

aEx. 177

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:

Per Unit Total Direct materials $100Direct labor 120Variable manufacturing overhead 80Fixed manufacturing overhead $500,000Variable selling and administrative expenses 25Fixed selling and administrative expenses 375,000

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.

Instructions1. Compute each of the following under the absorption-cost approach:

a. Markup percentage needed to provide desired ROI.b. Target price of the patio door.


aEx. 177 (Cont.)

2. Compute each of the following under the variable-cost approach:a. Markup percentage needed to provide desired ROI.b. Target price of the patio door.

Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 177 (12–14 min.)

1. Absorption-cost approacha. Computation of unit manufacturing cost:

Per UnitDirect materials $100Direct labor 120Variable manufacturing overhead 80Fixed manufacturing overhead ($500,000 ÷ 5,000) 100Total manufacturing cost $400

Computation of markup percentage to provide a 25% ROI:

Markup [25% × ($4,000,000 ÷ 5,000)] + [$25 + ($375,000 ÷ 5,000)] $300Percentage = —————————————————————————— = —— = 75%

$400 $400

b. Computation of target price:Target price: $400 + (75% × $400) = $700

2. Variable-cost approacha. Computation of unit variable cost:

Per UnitDirect materials $100Direct labor 120Variable manufacturing overhead 80Variable selling and administrative expenses 25Total variable cost $325

Computation of markup percentage to provide a 25% ROI:

Markup [25% × ($4,000,000 ÷ 5,000)] + [($500,000 ÷ 5,000) + ($375,000 ÷ 5,000)] Percentage = —————————————————————————————————

$325

$375= —— = 115.38%

$325

b. Computation of target price:Target price: $325 + (115.38% × $325) = $700

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COMPLETION STATEMENTS

178. The difference between the target price and the desired profit is the _________________

cost of the product.

Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

179. In the cost-plus pricing formula, the target selling price equals cost + (________________

× cost).


180. The _______________ pricing approach has a major advantage: it is simple to compute.


181. 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.


182. The transfer of goods between divisions of the same company is termed _____________

sales.

Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

183. The three approaches for determining a transfer price are negotiated, ________________

based, and _________________ based transfer prices.


184. To ensure that the selling division attempts to control its costs, the transfer price should be

based on _________________ cost instead of actual cost.


185. The formula for the minimum transfer price is: Minimum transfer price = Variable cost +

___________________.


186. __________________ involves contracting with an external party to provide a good or

service, rather than performing the work internally.


a187. The __________________ approach is consistent with generally accepted accounting

principles because it defines the cost base as the manufacturing cost.

Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics


Answers to Completion Statements

178. target179. markup percentage180. cost-plus181. loading charge182. internal183. cost, market184. standard185. Opportunity cost186. Outsourcing

a187. absorption-cost

MATCHING

188. Match the items in the two columns below by entering the appropriate code letter in the space provided.

A. Cost-plus pricing E. OutsourcingB. Market-based transfer price F. Target selling priceC. Markup G. Time-and-material pricingD. Negotiated transfer price H. Virtual companies

____ 1. Contracting with an external party to provide a good or service.

____ 2. An approach to cost-plus pricing that uses two pricing rates.

____ 3. Product's selling price is determined by adding a markup to a cost base.

____ 4. Transfer price is determined by agreement of division managers.

____ 5. Companies that have no manufacturing facilities.

____ 6. Percentage applied to a product's cost.

____ 7. Price that will provide the desired profit on a product.

____ 8. Transfer price is based on existing prices of competing products.


Answers to Matching

1. E 5. H2. G 6. C3. A 7. F4. D 8. B

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SHORT-ANSWER ESSAY QUESTIONS

S-A E 189

A variation on cost-plus pricing is time-and-material pricing. Under this approach, two pricing rates are set.

Required:Explain where this approach is used and identify the steps involved in time-and-material pricing. Also explain what the material loading charge covers and how it is expressed.

Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Solution 189

The time-and-material pricing approach is used often in service industries, especially professional firms and consulting firms. This approach involves three steps: (1) calculate the labor charge per hour, (2) calculate the charge for obtaining and holding materials, and (3) calculate the charges for a particular job. The material loading charge covers the costs of purchasing, handling, and storing materials, plus any desired profit margin on the materials. It is expressed as a percentage of the total estimated costs of parts and materials.

S-A E 190

There are three possible approaches for determining a transfer price: negotiated, cost-based, and market-based transfer prices.

Required:Explain how the transfer price is determined under each of the approaches.

Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Solution 190

Under the negotiated transfer price approach, the transfer price will range between the external purchase price per unit and the sum of unit variable cost and unit opportunity cost. In the cost-based approach, the transfer price is based on either the full cost or the variable cost of the selling division. Under the market-based approach, the minimum transfer price is the unit variable cost plus the unit opportunity cost.

Documents

SUMMARY OF QUESTIONS BY OBJECTIVES AND …s3.amazonaws.com/prealliance_oneclass_sample/oKY7blkDp7.pdfUnder a cost-based approach, the transfer price may be based on variable cost alone