TEST BANK managerial accounting by 5e kieso weygand ch08

CHAPTER PRICING SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item SO BT Item SO BT Item SO BT Item SO BT 4 5 K C K K C 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 4 4 4 4 4 4 4 4 4 4 4 4 AP AP AP AP AP AP AP AP AP C K K C K C K C K C C K C K AP a 155 156 a 157 6 AP AP AP 167 168 a 169 4 AN AN AP Item SO BT 21 22 a 23 a 24 a 25 6 6 C K K K C 122 123 124 125 126 a 127 a 128 a 129 a 130 a 131 a 132 a 133 a 134 a 135 a 136 a 137 a 138 a 139 a 140 a 141 a 142 a 143 a 144 a 145 4 5 6 6 6 6 6 6 6 6 6 AP AP AP C K K K K K K C K K K C AP AP AP AP AP AP AP AP AP a AP True-False Statements 1 2 C K K K C 10 2 3 C C K K K 11 12 13 14 15 4 4 K K K C C 16 17 18 19 20 a a Multiple Choice Questions 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 1 1 1 1 1 1 1 2 2 2 2 K K K C C K K K K C AP AP AP AP AP K K AP AP AP AP AP AP AP 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 2 2 2 2 2 2 2 3 3 3 3 AP AP AP AP C C K K C AP AP C K AP AP K K C C K AP AP AP K 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 3 3 3 3 3 3 4 4 4 4 4 AP AP AP AP AP AP AP K K K AP AP AP K K K C AP K K K K K C Brief Exercises 146 147 148 2 AP AP AP 149 150 151 2 AP AP AP 152 153 154 4 AP AP AP Exercises 158 159 160 a 1 AP AP AP 161 162 163 2 AP AP AP 164 165 166 4 AP AN AN This question covers a topic in an Appendix to the chapter 170 8-2 Test Bank for ISV Managerial Accounting, Fourth Edition Completion Statements 171 172 K K 173 174 K K 175 176 4 K K 177 178 4 K K a 179 180 K K SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item 26 TF TF TF MC 27 28 29 30 MC MC MC MC 31 32 33 34 41 42 TF TF TF TF MC MC 43 44 45 46 47 48 MC MC MC MC MC MC 49 50 51 52 53 54 10 11 65 TF TF TF TF MC 66 67 68 69 70 MC MC MC MC MC 71 72 73 74 75 12 13 14 15 16 17 18 87 TF TF TF TF TF TF TF MC 88 89 90 91 92 93 94 95 MC MC MC MC MC MC MC MC 96 97 98 99 100 101 102 103 19 TF 20 TF 125 21 22 23 24 25 TF TF TF TF TF 127 128 129 130 131 MC MC MC MC MC 132 133 134 135 136 Type Item Type Item Study Objective MC 35 MC 39 MC 36 MC 40 MC 37 MC 146 MC 38 MC 158 Study Objective MC 55 MC 61 MC 56 MC 62 MC 57 MC 63 MC 58 MC 64 MC 59 MC 147 MC 60 MC 148 Study Objective MC 76 MC 81 MC 77 MC 82 MC 78 MC 83 MC 79 MC 84 MC 80 MC 85 Study Objective MC 104 MC 112 MC 105 MC 113 MC 106 MC 114 MC 107 MC 115 MC 108 MC 116 MC 109 MC 117 MC 110 MC 118 MC 111 MC 119 Study Objective MC 126 MC 179 Study Objective 6a MC 137 MC 142 MC 138 MC 143 MC 139 MC 144 MC 140 MC 145 MC 141 MC 156 Type Item Type Item Type MC MC BE Ex 159 171 Ex C MC MC MC MC BE BE 149 150 160 161 162 172 BE BE Ex Ex Ex C 173 C MC MC MC MC MC 86 151 152 163 164 MC BE BE Ex Ex 174 C MC MC MC MC MC MC MC MC 120 121 122 123 124 153 154 155 MC MC MC MC MC BE BE BE 165 166 167 168 175 176 177 178 Ex Ex Ex Ex C C C C 157 169 170 180 BE Ex Ex C C MC MC MC MC BE Note: TF = True-False BE = Brief Exercise C = Completion MC = Multiple Choice Ex = Exercise The chapter also contains one set of eight Matching questions and two Short-Answer Essay questions Pricing 8-3 CHAPTER STUDY OBJECTIVES 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 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) Use time-and-material pricing to determine the cost of services provided Under timeand-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 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 costbased 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 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 Absorptioncost 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) 8-4 Test Bank for ISV Managerial Accounting, Fourth Edition TRUE-FALSE STATEMENTS In most cases, a company sets the price instead of it being set by the competitive market In a competitive market, a company is forced to act as a price taker and must emphasize minimizing and controlling costs The difference between the target price and the desired profit is the target cost of the product In a competitive environment, the company must set a target cost and a target selling price The cost-plus pricing approach establishes a cost base and adds a markup to this base to determine a target selling price The cost-plus pricing model gives consideration to the demand side—whether customers will pay the target selling price Sales volume plays a large role in determining per unit costs in the cost-plus pricing approach 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 The first step for time-and-material pricing is to calculate the material loading charge 10 The material loading charge is expressed as a percentage of the total estimated cost of materials for the year 11 Divisions within vertically integrated companies normally sell goods only to other divisions within the same company 12 Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division 13 There are two approaches for determining a transfer price: cost-based and market-based 14 If a cost-based transfer price is used, the transfer price must be based on variable cost 15 A problem with a cost-based transfer price is that it does not provide adequate incentive for the selling division to control costs 16 In the formula for a minimum transfer price, opportunity cost is the contribution margin of goods sold externally 17 The market-based transfer price approach produces a higher total contribution margin to the company than the cost-based approach 18 A negotiated transfer price should be used when an outside market for the goods does not exist Pricing a 8-5 19 The number of transfers between divisions that are located in different countries has decreased as companies rely more on outsourcing 20 Differences in tax rates between countries can complicate the determination of the appropriate transfer price 21 The absorption-cost approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost a 22 The first step in the absorption-cost approach is to compute the markup percentage used in setting the target selling price a 23 Because absorption cost data already exists in general ledger accounts, it is cost effective to use it for pricing a 24 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 a 25 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 Answers to True-False Statements Item Ans F T T F T Item 10 Ans F T T F T Item 11 12 13 14 15 Ans F T F F T Item 16 17 18 19 20 Ans T F T F T Item a 21 22 a 23 a 24 a 25 a Ans T F T T F 8-6 Test Bank for ISV Managerial Accounting, Fourth Edition MULTIPLE CHOICE QUESTIONS 26 Factors that can affect pricing decisions include all of the following except a cost considerations b environment c pricing objectives d all of these are factors 27 In most cases, prices are set by the a customers b competitive market c largest competitor d selling company 28 A company must price its product to cover its costs and earn a reasonable profit in a all cases b its early years c the long run d the short run 29 Prices are set by the competitive market when a 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 30 All of the following are correct statements about the target price except it a is the price the company believes would place it in the optimal position for its target audience b is used to determine a product's target cost c is determined after the company has identified its market and does market research d is determined after the company sets its desired profit amount 31 Companies that sell products whose prices are set by market forces are called a 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 products b When the product is specially made for a customer c When there are few or no other producers capable of making a similar product d When the product can be effectively differentiated from others 33 The calculation to determine target cost is a 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 Pricing 8-7 34 Target cost is comprised of a 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 35 A company that is a price taker would most likely use which of the following methods? a Time-and-material pricing b Target costing c Cost plus pricing, contribution approach d Cost plus pricing, absorption approach 36 Bond Co is using the target cost approach on a new product Information gathered so far reveals: Expected annual sales Desired profit per unit Target cost 600,000 units $0.25 $168,000 What is the target selling price per unit? a $0.28 b $0.50 c $0.25 d $0.53 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 Projected selling and administrative costs Desired profit 50,000 bottles $8,000 $80,000 The target cost per bottle is a $0.24 b $0.40 c $0.16 d $0.60 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 $748,800 What is the desired profit per unit? a $0.34 b $2.08 c $4.16 d None of the above 39 Wasson Widget Company is contemplating the production and sale of a new widget Projected sales are $187,500 (or 75,000 units) and desired profit is $22,500 What is the target cost per unit? a $2.50 b $2.20 c $2.80 d $3.00 8-8 Test Bank for ISV Managerial Accounting, Fourth Edition 40 Boomer Boombox Inc wants to produce and sell a new lightweight radio Desired profit per unit is $2.30 The expected unit sales price is $27.50 based on 10,000 units What is the total target cost? a $252,000 b $275,000 c $23,000 d $298,000 41 In cost-plus pricing, the markup consists of a manufacturing costs b desired ROI c selling and administrative costs d total cost and desired ROI 42 The desired ROI per unit is calculated by a 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 43 Bellingham Suit Co has received a shipment of suits that cost $250 each If the company uses cost-plus pricing and applies a markup percentage of 60%, what is the sales price per suit? a $417 b $400 c $350 d $625 Use the following information for questions 44–47 Custom Shoes Co has gathered the following information concerning one model of shoe: Variable manufacturing costs Variable selling and administrative costs Fixed manufacturing costs Fixed selling and administrative costs Investment ROI Planned production and sales 44 What is the total cost per pair of shoes? a $50 b $85 c $210 d $120 45 What is the desired ROI per pair of shoes? a $85.00 b $210.00 c $127.50 d $212.50 $50,000 $25,000 $200,000 $150,000 $2,125,000 30% 5,000 pairs Pricing 46 What is the target selling price per pair of shoes? a $177.50 b $212.50 c $142.50 d $197.50 47 What is the markup percentage? a 150% b 255% c 850% d 182% 8-9 Use the following information for questions 48 and 49 Lock Inc has collected the following data concerning one of its products: Unit sales price Total sales Unit cost Total investment $145 10,000 units $115 $1,200,000 48 The ROI percentage is a 20% b 30% c 35% d 25% 49 The markup percentage is a 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 12,000 units and a desired ROI per unit of $30 What was the amount of investment? a $86,400 b $1,500,000 c $273,600 d $473,685 Use the following information for questions 51–53 Brislin Products has a new product going on the market next year The following data are projections for production and sales: Variable costs Fixed costs ROI Investment Sales $250,000 $450,000 15% $1,400,000 200,000 units - 10 Test Bank for ISV Managerial Accounting, Fourth Edition 51 What is the target selling price per unit? a $4.55 b $3.50 c $2.30 d $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 cost b Fixed cost c Desired ROI d Target selling price 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 56 In cost-plus pricing, the target selling price is computed as a 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 57 In cost-plus pricing, the markup percentage is computed by dividing the desired ROI per unit by the a fixed cost per unit b total cost per unit c total manufacturing cost per unit d variable cost per unit 58 The cost-plus pricing approach's major advantage is a 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 Pricing - 29 BE 155 (cont.) Instructions Compute the minimum transfer price that Freberg should accept Solution 155 (5 min) The minimum transfer price is equal to Freberg’s variable cost plus its opportunity cost In this case, the minimum transfer price is: $52 + ($82 – $42) = $92 a BE 156 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 Instructions Compute the markup percentage using the absorption-cost approach a Solution 156 (5 min) Markup percentage = a $25 + ($10 + $20) = 73.33% $15 + $18 + $12 + $30 BE 157 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 $20; fixed manufacturing overhead $25; and fixed selling & administrative costs $35 The markup percentage is 125% Instructions Compute the target selling price a Solution 157 (5 min) Markup percentage = $20 + $25 + $35 = 125% Cost base Cost base = $80 ÷ 125% = $64 Target selling price = $64 + ($64 × 125%) = $144 Test Bank for ISV Managerial Accounting, Fourth Edition - 30 EXERCISES Ex 158 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 500,000 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 Instructions Compute the target cost per unit of the pager Solution 158 (6-10 min.) Sales (500,000 × $45) Less desired ROI ($4,000,000 × 16%) Target cost for 500,000 units $22,500,000 640,000 $21,860,000 Target cost per unit = $21,860,000 ÷ 500,000 = $43.72 Ex 159 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 Instructions Compute the required minimum rate of return Solution 159 (5–10 min.) Sales (200,000 × $200) Less target cost (200,000 × $195) Desired ROI (in dollars) Investment Minimum ROI $40,000,000 39,000,000 1,000,000 ÷ 5,000,000 20% Ex 160 Rita Corporation produces commercial fertilizer spreaders The following information is available for Rita's anticipated annual volume of 400,000 units Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Per Unit $42 54 72 Total $12,000,000 64 7,200,000 Pricing Ex 160 - 31 (cont.) The company has a desired ROI of 25% It has invested assets of $120,000,000 Instructions Compute each of the following: Total cost per unit Desired ROI per unit Markup percentage using total cost per unit Target selling price Solution 160 (12 min.) Total cost per unit: Per Unit $ 42 54 72 30 64 18 $280 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($12,000,000 ÷ 400,000 Variable selling and administrative expenses Fixed selling and administrative expenses ($7,200,000 ÷ 400,000) Desired ROI per unit = (25% ì $120,000,000) ữ 400,000 = $75 Markup percentage using total cost per unit = $75 + $0 = 26.79% $280 Target selling price = $280 + ($280 × 25%) = $350 Ex 161 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 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Per Unit $20 40 10 Total $1,800,000 1,440,000 Goliath uses cost-plus pricing to set its target selling price The markup on total unit cost is 30% Instructions Compute each of the following for the new product: Total variable cost per unit, total fixed cost per unit, and total cost per unit Desired ROI per unit Target selling price Test Bank for ISV Managerial Accounting, Fourth Edition - 32 Solution 161 (18 min.) Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Variable cost per unit Fixed manufacturing overhead Fixed selling and administrative expenses Fixed cost per unit Variable cost per unit Fixed cost per unit Total cost per unit $20 40 10 $76 Total Costs $1,800,000 1,440,000 Budgeted Cost Volume Per Unit ÷ 60,000 = $30 ÷ 60,000 = 24 $54 $ 76 54 $130 Total cost per unit Markup Desired ROI per unit $130 × 30% $ 39 Total cost per unit Desired ROI per unit Target selling price $130 39 $169 Ex 162 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 Direct labor Variable manufacturing overhead Variable selling and administrative expenses $18 13 $40 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 Unit Fixed manufacturing overhead $240,000 20,000 $12 Fixed selling and administrative expenses 260,000 20,000 13 Fixed cost per unit $25 Skyhigh uses cost-plus pricing and would like to earn a 16 percent return on its investment (ROI) of $250,000 Instructions Compute the selling price that would provide Skyhigh a 16 percent ROI Pricing Solution 162 - 33 (6–10 min.) Variable cost per unit Fixed cost per unit Desired ROI per unit Target selling price $40 25 2* $67 *$250,000 ì 16 = $40,000; $40,000 ữ 20,000 = $2 per unit Ex 163 Silver Spoon Service repairs commercial food preparation equipment The following budgeted cost data is available for 2008: Technicians' wages and benefits Parts manager's salary and benefits Office manager's salary and benefits Other overhead Total budgeted costs Time Charges $500,000 112,000 48,000 $660,000 Material Charges $ 72,000 18,000 135,000 $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 2008 will be $500,000 Instructions Compute the rate charged per hour of labor Compute the material loading charge 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 Solution 163 (18-20 min.) Total Cost Hourly labor rate for repairs Technicians' wages and benefits Overhead costs Office manager's salary and benefits Other overhead Profit margin Rate charged per hour of labor Per Hour Charge Total Hours $500,000 ÷ 10,000 = $ 50.00 112,000 48,000 $660,000 ÷ ÷ ÷ 10,000 10,000 10,000 = = = 11.20 4.80 66.00 64.00 $130.00 Test Bank for ISV Managerial Accounting, Fourth Edition - 34 Solution 163 (cont.) Material Total Invoice Cost,Loading Parts and Materials Charge Material Charges Overhead costs Parts manager's salary and benefits Office manager's salary and benefits Other overhead $ 72,000 18,000 $ 90,000 135,000 ÷ ÷ $500,000 $500,000 Profit margin Material loading charge = = 18% 27% 45% 50% 95% Job: Lime Corporation Labor charges 20 hours @ $130 Material charges Cost of parts and materials Material loading charge (95% × $8,000) Total price of labor and materials $ 2,600 $8,000 7,600 15,600 $18,200 Ex 164 Forrest Painting Service has budgeted the following time and material for 2008: BUDGETED COSTS FOR 2008 Painters' wages and benefits Service manager's salary and benefits Office employee's salary and benefits Cost of paint Overhead (supplies, utilities, etc.) Total budgeted costs Time Charges $ 36,000 12,000 16,000 $64,000 Material Charges $21,000 3,000 50,000 8,500 $82,500 Forrest budgets 4,000 hours of paint time in 2008 and will charge a profit of $12 per hour, in addition to a 30% markup on the cost of paint On February 15, 2008, Forrest is asked to prepare a price estimate to paint a building Forrest estimates that this job will take 12 labor hours and $600 in paint Instructions Compute the labor rate for 2008 Compute the material loading charge rate for 2008 Prepare a time-and-material price estimate for painting the building Pricing Solution 164 - 35 (18-20 min.) Computation of labor rate Total Cost Hourly labor rate Painters' wages and benefits Overhead costs Office employee's salary and benefits Other overhead Total Hours Per Hour Charge $36,000 ÷ 4,000 = $9 12,000 16,000 $64,000 ÷ ÷ ÷ 4,000 4,000 4,000 = = = 16 12 $28 Profit margin Rate charged per hour of labor Computation of material loading charge Material Charges Overhead costs Service manager's salary and benefits Office employee's salary and benefits Other overhead $21,000 3,000 24,000 8,500 $32,500 Material Loading Charge Total Invoice Cost of Paint ÷ ÷ ÷ $50,000 50,000 50,000 Profit margin Material loading charge = = = 48% 17% 65% 30% 95% Price estimate for time and materials Job: Paint building Labor charges: 12 hours @ $28 Material charges Cost of paint Material loading charge (95% × $600) Total price of labor and materials $ 336 $600 570 1,170 $1,506 Ex 165 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 Instructions Compute the minimum transfer price that Pert should accept under each of the following assumptions: Pert is operating at full capacity Pert has sufficient excess capacity to provide the 50,000 players to Vany Test Bank for ISV Managerial Accounting, Fourth Edition - 36 Solution 165 (9 min.) The minimum transfer price is $500 [$200 + ($500 – $200)], the outside market price, since Pert is operating at full capacity 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 166 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 Variable cost per unit Selling price per unit $180 120 450 Lawn Supplies, Inc can purchase comparable lawn mowers from an outside supplier for $400 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 $400 per unit Green Yard is currently operating at full capacity It could avoid $8 per unit of variable selling costs by selling internally Instructions Compute the minimum transfer price that Green Yard should be required to accept Compute the increase (decrease) in contribution margin for Lawn Supplies, Inc for this transfer Solution 166 (9 min.) The minimum transfer price that Green Yard should accept is: ($120 – $8 + ($450 – $120) = $442 The decrease in contribution margin per unit to Lawn Supplies, Inc is: Contribution margin lost by Green Yard ($450 – $120) Increased contribution margin to Lawn Supplies ($400 – $112) Net decrease in contribution margin $330 288 $ 42 Total contribution margin decrease is: $42 × 100,000 units = $4,200,000 Ex 167 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: Pricing Ex 167 - 37 (cont.) Selling price of regular cell phone Variable cost of regular cell phone Additional variable cost of special cell phone $80 40 30 Instructions Calculate the minimum transfer price and indicate whether the internal transfer should occur for each of the following: The marketing vice president offers to pay Spirit $90 per phone Spirit has available capacity 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 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 Solution 167 (13 min.) 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 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 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 Test Bank for ISV Managerial Accounting, Fourth Edition - 38 Ex 168 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 nonPubworld authors The printing operation bills out at $0.04 per page and a typical textbook requires 600 pages of print A developmental editor from Pubworld approached the printing operation manager offering to pay $0.024 per page for 5,000 copies of a 600-page textbook Outside printers are currently charging $0.03 per page Printpro's variable cost per page is $0.02 Instructions 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 Calculate the change in contribution margin for each company, if top management forces Printpro to accept the $0.024 transfer price when it has no available capacity Solution 168 (13 min.) 1a Assuming that the printing operation has available capacity, the printing operation's variable cost is $0.02 and its opportunity cost is $0 The minimum transfer price would be $0.02 = $0.02 + $0 Therefore, in this case, the printing operation should accept the offer to print internally The $0.024 transfer price would provide a contribution margin of $0.004 ($0.024 – $0.02) per page Depending on its bargaining strength, the printing operation might want to ask for a transfer price higher than $0.024, since the company is saving money at any price below the $0.03 price charged by outside printers 1b Assuming no available capacity, the printing operation's variable cost is $0.02 per page and its opportunity cost is $0.02 ($0.04 – $0.02) per page The minimum transfer price would be $0.04 = $0.02 + $0.02 Therefore, the printing operation would not accept the internal transfer price of $0.024 Printpro would lose: ($0.04 – $0.02) × 600 pages × 5,000 copies = $60,000 Pubworld would save: ($0.03 – $0.024) × 600 pages × 5,000 copies = $18,000 a Ex 169 The following information is available for a product manufactured by Gardenia Corporation: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and admin expenses Fixed selling and admin expenses Per Unit $62 48 15 Total $250,000 10 55,000 Pricing a - 39 Ex 169 (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 Instructions Compute each of the following: Cost per unit of fixed manufacturing overhead and fixed selling and administrative expenses Desired ROI per unit Markup percentage using the absorption-cost approach Markup percentage using the variable-cost approach a Solution 169 (12–14 min.) $250,000 Fixed manufacturing overhead = ———— = $100 per unit 2,500 $55,000 Fixed selling and administrative expenses per unit = ———— = $22 per unit 2,500 16% × $8,250,000 Desired ROI per unit = ————————— = $528 per unit 2,500 $528 + ($10 + $22) Absorption-cost markup percentage = ——————————— = 249% $62 + $48 + $15 + $100 $528 + ($100 + $22) Variable-cost markup percentage = ——————————— = 481% $62 + $48 + $15 + $10 a Ex 170 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: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses Per Unit $200 120 80 Total $500,000 25 375,000 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 Instructions 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 - 40 a Test Bank for ISV Managerial Accounting, Fourth Edition Ex 170 (cont.) 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 a Solution 170 (12–14 min.) Absorption-cost approach a Computation of unit manufacturing cost: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($500,000 ÷ 5,000) Total manufacturing cost Per Unit $200 120 80 100 $500 Computation of markup percentage to provide a 25% ROI: Markup [25% ì ($4,000,000 ữ 5,000)] + [$25 + ($375,000 ÷ 5,000)] $300 Percentage = —————————————————————————— = —— = 60% $500 $500 b Computation of target price: Target price: $500 + (60% × $500) = $800 Variable-cost approach a Computation of unit variable cost: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Total variable cost Per Unit $200 120 80 25 $425 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 = ————————————————————————————————— $425 $375 = —— = 88.24% $425 b Computation of target price: Target price: $425 + (88.24% × $425) = $800 Pricing - 41 COMPLETION STATEMENTS 171 The difference between the target price and the desired profit is the _ cost of the product 172 In the cost-plus pricing formula, the target selling price equals cost + ( × cost) 173 The _ pricing approach has a major advantage: it is simple to compute 174 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 175 The transfer of goods between divisions of the same company is termed _ sales 176 The three approaches for determining a transfer price are negotiated, based, and _ based transfer prices 177 To ensure that the selling division attempts to control its costs, the transfer price should be based on _ cost instead of actual cost 178 The formula for the minimum transfer price is: Minimum transfer price = Variable cost + _ 179 involves contracting with an external party to provide a good or service, rather than performing the work internally a 180 The approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost Answers to Completion Statements 171 172 173 174 175 176 177 178 179 a 180 target markup percentage cost-plus loading charge internal cost, market standard Opportunity cost Outsourcing absorption-cost Test Bank for ISV Managerial Accounting, Fourth Edition - 42 MATCHING 181 Match the items in the two columns below by entering the appropriate code letter in the space provided A B C D Cost-plus pricing Market-based transfer price Markup Negotiated transfer price E F G H Outsourcing Target selling price Time-and-material pricing Virtual companies Contracting with an external party to provide a good or service An approach to cost-plus pricing that uses two pricing rates Product's selling price is determined by adding a markup to a cost base Transfer price is determined by agreement of division managers Companies that have no manufacturing facilities Percentage applied to a product's cost Price that will provide the desired profit on a product Transfer price is based on existing prices of competing products Answers to Matching E G A D H C F B Pricing - 43 SHORT-ANSWER ESSAY QUESTIONS S-A E 182 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 Solution 182 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 183 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 Solution 183 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 costbased 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 ... overall contribution margin? a Decrease by $24,000 b Decrease by $18,000 c Increase by $30,000 d Increase by $27,000 - 18 Test Bank for ISV Managerial Accounting, Fourth Edition Use the following... Variable cost per unit) 8-4 Test Bank for ISV Managerial Accounting, Fourth Edition TRUE-FALSE STATEMENTS In most cases, a company sets the price instead of it being set by the competitive market...8-2 Test Bank for ISV Managerial Accounting, Fourth Edition Completion Statements 171 172 K K 173 174 K K 175 176 4 K K 177 178 4 K K a 179 180 K K SUMMARY OF STUDY OBJECTIVES BY QUESTION