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APPENDIX J
PRICING
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S
TAXONOMY
Item
LO
BT
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True-False Statements
1.
1
C
6.
2
C
11.
3
K
16.
4
K
21.
6
C
2.
1
K
7.
2
C
12.
4
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17.
4
C
22.
6
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3.
1
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3
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13.
4
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18.
4
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23.
6
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4.
2
K
9.
3
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14.
4
C
19.
5
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24.
6
K
5.
2
C
10.
3
K
15.
4
C
20.
5
C
25.
6
C
Multiple Choice Questions
26.
1
K
50.
2
AP
74.
3
AP
98.
4
AP
122.
4
AP
27.
1
K
51.
2
AP
75.
3
AP
99.
4
AP
123.
4
AP
28.
1
K
52.
2
AP
76.
3
AP
100.
4
AP
124.
4
AP
29.
1
C
53.
2
AP
77.
3
AP
101.
4
AP
125.
5
C
30.
1
C
54.
2
C
78.
3
AP
102.
4
AP
126.
5
K
31.
1
K
55.
2
C
79.
3
AP
103.
4
AP
127.
6
K
32.
1
K
56.
2
K
80.
3
AP
104.
4
AP
128.
6
K
33.
1
K
57.
2
K
81.
3
K
105.
4
AP
129.
6
K
34.
1
K
58.
2
C
82.
3
K
106.
4
AP
130.
6
K
35.
1
C
59.
2
AP
83.
3
K
107.
4
C
131.
6
K
36.
1
AP
60.
2
AP
84.
3
AP
108.
4
K
132.
6
C
37.
1
AP
61.
2
C
85.
3
AP
109.
4
K
133.
6
K
38.
1
AP
62.
2
K
86.
3
AP
110.
4
C
134.
6
K
39.
1
AP
63.
2
AP
87.
4
K
111.
4
K
135.
6
K
40.
1
AP
64.
2
AP
88.
4
K
112.
4
C
136.
6
C
41.
2
K
65.
3
K
89.
4
K
113.
4
K
137.
6
AP
42.
2
K
66.
3
K
90.
4
C
114.
4
C
138.
6
AP
43.
2
AP
67.
3
C
91.
4
AP
115.
4
K
139.
6
AP
44.
2
AP
68.
3
C
92.
4
K
116.
4
C
140.
6
AP
45.
2
AP
69.
3
K
93.
4
K
117.
4
C
141.
6
AP
46.
2
AP
70.
3
AP
94.
4
K
118.
4
K
142.
6
AP
47.
2
AP
71.
3
AP
95.
4
K
119.
4
C
143.
6
AP
48.
2
AP
72.
3
AP
96.
4
K
120.
4
K
144.
6
AP
49.
2
AP
73.
3
K
97.
4
C
121.
4
AP
145.
6
AP
Brief Exercises
146.
1
AP
149.
2
AP
152.
3
AP
155.
4
AP
158.
6
AP
147.
2
AP
150.
2
AP
153.
3
AP
156.
4
AP
159.
6
AP
148.
2
AP
151.
2
AP
154.
3
AP
157.
4
AP
Exercises
160.
1
AP
164.
2
AP
168.
3
AP
172.
4
AN
176.
6
AP
161.
1
AP
165.
2
AP
169.
3
AP
173.
4
AN
177.
6
AP
162.
1
AP
166.
2
AP
170.
4
AN
174.
4
AN
163.
2
AP
167.
3
AP
171.
4
AN
175.
4
AN
a This question covers a topic in an Appendix to the chapter.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J - 2
Completion Statements
178.
1
K
180.
2
K
182.
4
K
184.
4
K
186.
5
K
179.
2
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181.
3
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183.
4
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185.
4
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a187.
6
K
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item
Type
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Type
Item
Type
Item
Type
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Type
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Type
Item
Type
Learning Objective 1
1.
TF
27.
MC
31.
MC
35.
MC
39.
MC
161.
Ex
2.
TF
28.
MC
32.
MC
36.
MC
40.
MC
162.
Ex
3.
TF
29.
MC
33.
MC
37.
MC
146.
BE
178.
C
26.
MC
30.
MC
34.
MC
38.
MC
160.
Ex
Learning Objective 2
4.
TF
43.
MC
49.
MC
55.
MC
61.
MC
149.
BE
166.
Ex
5.
TF
44.
MC
50.
MC
56.
MC
62.
MC
150.
BE
179.
C
6.
TF
45.
MC
51.
MC
57.
MC
63.
MC
151.
BE
180.
C
7.
TF
46.
MC
52.
MC
58.
MC
64.
MC
163.
Ex
41.
MC
47.
MC
53.
MC
59.
MC
147.
BE
164.
Ex
42.
MC
48.
MC
54.
MC
60.
MC
148.
BE
165.
Ex
Learning Objective 3
8.
TF
66.
MC
71.
MC
76.
MC
81.
MC
86.
MC
168.
Ex
9.
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.
C
11.
TF
69.
MC
74.
MC
79.
MC
84.
MC
154.
BE
65.
MC
70.
MC
75.
MC
80.
MC
85.
MC
167.
BE
Learning Objective 4
12.
TF
89.
MC
98.
MC
107.
MC
116.
MC
155.
BE
182.
C
13.
TF
90.
MC
99.
MC
108.
MC
117.
MC
156.
BE
183.
C
14.
TF
91.
MC
100.
MC
109.
MC
118.
MC
157.
BE
184.
C
15.
TF
92.
MC
101.
MC
110.
MC
119.
MC
170.
Ex
185.
C
16.
TF
93.
MC
102.
MC
111.
MC
120.
MC
171.
Ex
17.
TF
94.
MC
103.
MC
112.
MC
121.
MC
172.
Ex
18.
TF
95.
MC
104.
MC
113.
MC
122.
MC
173.
Ex
87.
MC
96.
MC
105.
MC
114.
MC
123.
MC
174.
Ex
88.
MC
97.
MC
106.
MC
115.
MC
124.
MC
175.
Ex
Learning Objective 5
19.
TF
20.
TF
125.
MC
126.
MC
186.
C
Learning Objective 6
21.
TF
127.
MC
132.
MC
137.
MC
142.
MC
159.
BE
22.
TF
128.
MC
133.
MC
138.
MC
143.
MC
176.
Ex
23.
TF
129.
MC
134.
MC
139.
MC
144.
MC
177.
Ex
24.
TF
130.
MC
135.
MC
140.
MC
145.
MC
187.
C
25.
TF
131.
MC
136.
MC
141.
MC
158.
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 J - 3
CHAPTER LEARNING 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 the 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 costs 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).
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J - 4
TRUE-FALSE STATEMENTS
1. In most cases, a company sets the price instead of it being set by the competitive market.
2. In a competitive market, a company is forced to act as a price taker and must emphasize
minimizing and controlling costs.
3. The difference between the target price and the desired profit is the target cost of the
product.
4. In a competitive environment, the company must set a target cost and a target selling
price.
5. The cost-plus pricing approach establishes a cost base and adds a markup to this base to
determine a target selling price.
6. The cost-plus pricing model gives consideration to the demand side—whether customers
will pay the target selling price.
7. Sales volume plays a large role in determining per unit costs in the cost-plus pricing
approach.
8. In time-and-material pricing, the material charge is based on the cost of direct materials
used and a material loading charge for related overhead costs.
9. The first step for time-and-material pricing is to calculate the material loading charge.
10. The material loading charge is expressed as a percentage of the total estimated cost of
materials for the year.
11. Divisions within vertically integrated companies normally sell goods only to other divisions
within the same company.
Pricing J - 5
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.
19. The number of transfers between divisions that are located in different countries has
decreased as companies rely more on outsourcing.
20. Differences in tax rates between countries can complicate the determination of the
appropriate transfer price.
21. The absorption-cost approach is consistent with generally accepted accounting principles
because it defines the cost base as the manufacturing cost.
22. The first step in the absorption-cost approach is to compute the markup percentage used
in setting the target selling price.
23. Because absorption cost data already exists in general ledger accounts, it is cost effective
to use it for pricing.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J - 6
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.
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.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
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.
Pricing J - 7
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.
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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J - 8
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 400,000 units
Desired profit per unit $0.35
Target cost $168,000
What is the target selling price per unit?
a. $0.42
b. $0.70
c. $0.35
d. $0.77
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 bottles
Projected selling and administrative costs $8,000
Desired profit $70,000
The target cost per bottle is
a. $0.44.
b. $0.60.
c. $0.16.
d. $0.40.
38. Larry Cable Inc. plans to introduce a new product and is using the target cost approach.
Projected sales revenue is $810,000 ($4.05 per unit) and target costs are $730,000. What
is the desired profit per unit?
a. $0.40
b. $2.03
c. $3.65
d. None of these answer choices are correct.
Pricing J - 9
39. Wasson Widget Company is contemplating the production and sale of a new widget.
Projected sales are $300,000 (or 75,000 units) and desired profit is $36,000. What is the
target cost per unit?
a. $4.00
b. $3.52
c. $4.48
d. $4.80
40. Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit
per unit is $1.84. The expected unit sales price is $22 based on 10,000 units. What is the
total target cost?
a. $201,600
b. $220,000
c. $18,400
d. $238,400
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 $200 each. If the company
uses cost-plus pricing and applies a markup percentage of 60%, what is the sales price
per suit?
a. $333
b. $320
c. $280
d. $500
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J - 10
Use the following information for questions 44–47.
Custom Shoes Co. has gathered the following information concerning one model of shoe:
Variable manufacturing costs $40,000
Variable selling and administrative costs $20,000
Fixed manufacturing costs $160,000
Fixed selling and administrative costs $120,000
Investment $1,700,000
ROI 30%
Planned production and sales 5,000 pairs
44. What is the total cost per pair of shoes?
a. $40
b. $68
c. $168
d. $96
45. What is the desired ROI per pair of shoes?
a. $68
b. $168
c. $102
d. $170
46. What is the target selling price per pair of shoes?
a. $142
b. $170
c. $114
d. $158
47. What is the markup percentage?
a. 150%
b. 255%
c. 850%
d. 182%
Pricing J - 11
Use the following information for questions 48 and 49.
Lock Inc. has collected the following data concerning one of its products:
Unit sales price $145
Total sales 15,000 units
Unit cost $115
Total investment $1,800,000
48. The ROI percentage is
a. 20%.
b. 25%.
c. 30%.
d. 35%.
49. The markup percentage is
a. 20.69%.
b. 22.59%.
c. 25%.
d. 26.09%.
50. A company using cost-plus pricing has an ROI of 24%, total sales of 20,000 units and a
desired ROI per unit of $30. What was the amount of investment?
a. $144,000
b. $2,500,000
c. $456,000
d. $789,475
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 $250,000
Fixed costs $450,000
ROI 14%
Investment $2,000,000
Sales 200,000 units
51. What is the target selling price per unit?
a. $4.90
b. $3.50
c. $2.65
d. $3.65
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J - 12
52. What is the markup percentage?
a. 112%
b. 20%
c. 62%
d. 40%
53. What would the markup percentage be if only 150,000 units were sold and Brislin still
wanted to earn the desired ROI?
a. 32.95%
b. 53.33%
c. 35.0%
d. 44.00%
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.
Pricing J - 13
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.
59. The following per unit information is available for a new product of Red Ribbon Company:
Desired ROI $ 20
Fixed cost 40
Variable cost 60
Total cost 100
Selling price 120
Red Ribbon Company's markup percentage would be
a. 17%.
b. 20%.
c. 33%.
d. 50%.
60. Bryson Company has just developed a new product. The following data is available for
this product:
Desired ROI per unit $ 30
Fixed cost per unit 50
Variable cost per unit 75
Total cost per unit 125
The target selling price for this product is
a. $155.
b. $125.
c. $105.
d. $80.
61. All of the following are correct statements about the cost-plus pricing approach except that
it
a. 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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J - 14
62. In the cost-plus pricing approach, the desired ROI per unit is computed by multiplying the
ROI percentage by ________ and then dividing by units produced.
a. fixed costs.
b. total investment.
c. total costs.
d. variable costs.
Use the following information for questions 63–64.
Red Grass Company produces high definition television sets. The following information is
available for this product:
Fixed cost per unit $250
Variable cost per unit 750
Total cost per unit 1,000
Desired ROI per unit 300
63. Red Grass Company's markup percentage would be
a. 30%.
b. 40%.
c. 60%.
d. 120%.
64. The target selling price for this television is
a. $550.
b. $1,000.
c. $1,050.
d. $1,300.
65. In time-and-material pricing, a material loading charge covers all of the following except
a. purchasing costs.
b. related overhead.
c. desired profit margin.
d. All of these are covered.
66. The first step for time-and-material pricing is to calculate the
a. charge for obtaining materials.
b. charge for holding materials.
c. labor charge per hour.
d. charges for a particular job.
Pricing J - 15
67. The labor charge per hour in time-and-material pricing includes all of the following except
a. an allowance for a desired profit.
b. charges for labor loading.
c. selling and administrative costs.
d. overhead costs.
68. The last step in determining the material loading charge percentage is to
a. estimate annual costs for purchasing, receiving, and storing materials.
b. estimate the total cost of parts and materials.
c. divide material charges by the total estimated costs of parts and materials.
d. add a desired profit margin on the materials themselves.
69. In time-and-material pricing, the charge for a particular job is the sum of the labor charge
and the
a. 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 2013:
Repair technicians’ wages $360,000
Fringe benefits 80,000
Overhead 60,000
Total $500,000
The desired profit margin is $40 per labor hour. The material loading charge is 40% of invoice
cost. It is estimated that 5,000 labor hours will be worked in 2013.
70. Wheels ‘N Spokes’ labor charge in 2013 would be
a. $100.
b. $112.
c. $128.
d. $140.
71. In January 2013, Wheels ‘N Spokes repairs a bicycle that uses parts of $180. Its material
loading charge on this repair would be
a. $72.
b. $108.
c. $180.
d. $252.
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72. In March 2013, Wheels ‘N Spokes repairs a bicycle that takes two hours to repair and
uses parts of $240. The bill for this repair would be
a. $520.
b. $560.
c. $592.
d. $616.
73. Which of the following organizations would most likely not use time-and-material pricing?
a. Automobile repair company
b. Engineering firm
c. Custom furniture manufacturer
d. Public accounting firm
Use the following information for questions 74–76.
Carlos Consulting Inc. provides financial consulting and has collected the following data for the
next year’s budgeted activity for a lead consultant.
Consultants’ wages $90,000
Fringe benefits $22,500
Related overhead $17,500
Supply clerk’s wages $18,000
Fringe benefits $4,000
Related overhead $20,000
Profit margin per hour $20
Profit margin on materials 15%
Total estimated consulting hours 5,000
Total estimated supply costs $168,000
74. The labor rate per hour is
a. $42.50.
b. $26.00.
c. $41.50.
d. $46.00.
75. The material loading charge is
a. 15%.
b. 25%.
c. 40%.
d. 55%.
Pricing J - 17
76. A consulting job takes 20 hours of consulting time and $180 of supplies. The client’s bill
would be
a. $1,172.
b. $772.
c. $952.
d. $1,100.
Use the following information for questions 77–78.
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 $600
Labor profit margin $10
Materials profit margin 20%
Total labor charges $390
Cost of materials used $120
Total hourly cost $22.50
77. What was the material loading charge?
a. 37.5%
b. 43.8%
c. 61.3%
d. 75%
78. How many hours were billed on the job?
a. 19.5
b. 18.5
c. 17.3
d. 12.0
79. Lawrence Legal Services recently billed a customer $690. 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. 30%
b. 50%
c. 60%
d. 100%
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80. Dudly Drafting Services uses a 45% material loading charge and a labor rate of $20 per
hour. How much will be charged on a job that requires 3.5 hours of work and $40 of
materials?
a. $128
b. $110
c. $88
d. $133
81. The time component under time-and-material pricing includes a
a. 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. 4
b. 3
c. 2
d. 1
83. The last step in calculating the hourly rate to be charged in time-and-material pricing is to
a. 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.
Use the following information for questions 84–86.
Jaycee Auto Repair has the following budgeted costs for the next year:
Time Charges Material Charges
Shop employees’ wages and benefits $120,000 $ -
Parts manager’s salary and benefits - 45,000
Office employee’s salary and benefits 30,000 15,000
Other overhead 15,000 40,000
Invoice 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 $25 per labor hour is
a. $22.
b. $41.
c. $43.
d. $47.
Pricing J - 19
85. The material loading charge to be used next year assuming a 40% markup on material
cost is
a. 20%.
b. 40%.
c. 65%.
d. 80%.
86. The labor rate is based on 7,500 repair hours and a profit margin of $25 per labor hour.
Jaycee estimates that the repairs to a Cadillac Escalade damaged in an accident will take
45 hours of labor and $3,500 in parts and materials. The total cost of the repairs is
a. $5,890.
b. $7,890.
c. $5,775.
d. $7,015.
87. The price used to record a sale between divisions within the same vertically integrated
company is called the
a. sales price.
b. integrated price.
c. transfer price.
d. bargain price.
88. The overall objective in the determination of a transfer price is to
a. 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.
89. Which two methods are used most often when establishing a transfer price?
a. Negotiated transfer pricing and cost-based transfer pricing
b. Cost-based transfer pricing and market-based transfer pricing
c. Negotiated transfer pricing and market-based transfer pricing
d. Cost-based transfer pricing and standard-based pricing
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Use the following information for questions 90 and 91.
The Selling Division’s unit sales price is $25 and its unit variable cost is $15. Its capacity is
10,000 units. Fixed costs per unit are $6. 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. $10
b. $25
c. $4
d. $0
91. What is the Selling Division’s opportunity cost per unit from selling 3,000 units to the
Purchasing Division?
a. $10
b. $25
c. $4
d. $0
92. In the minimum transfer price formula, variable cost is defined as the variable cost of
a. 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 the
a. 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 the
a. purchasing division.
b. corporate headquarters management.
c. selling division.
d. corporate negotiator.
Pricing J - 21
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 the
a. 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.
96. The most common method used to establish transfer prices is
a. negotiated transfer pricing.
b. market-based transfer pricing.
c. cost-plus transfer pricing.
d. cost-based transfer pricing.
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 pricing
b. Market-based transfer pricing
c. Negotiated transfer pricing
d. Cost-plus transfer pricing
Use the following information for questions 98–100.
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 feet
Price per board foot $2.50
Variable production cost per bd. ft. $1.25
Variable selling cost per bd. ft. $0.50
Construction Division:
Board feet needed 60,000
Outside price paid per bd. ft. $2.00
If the Lumber Division sells to the Construction Division, $0.35 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. $1.25
b. $1.40
c. $1.75
d. $2.50
99. If current outside sales are 150,000 board feet, what is the minimum transfer price that the
Lumber Division could accept?
a. $2.00
b. $1.65
c. $1.40
d. $2.15
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 $30,000
b. Decrease by $24,000
c. Increase by $36,000
d. Increase by $33,500
Use the following information for questions 101 and 102.
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 $1,050 a unit. The Engine Division, currently operating at capacity, has a unit sales
price of $2,550 and unit variable costs and fixed costs of $1,050 and $750, respectively. The
Production Division is currently paying $2,400 per unit to an outside supplier. $90 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. $2,460
b. $2,550
c. $2,400
d. $1,500
102. What is the increase/decrease in overall company profits if this transfer takes place?
a. Decrease $1,200,000
b. Increase $2,520,000
c. Decrease $3,000,000
d. Increase $27,000,000
Pricing J - 23
Use the following information for questions 103 and 104.
The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.60 per
can. Its unit variable costs and unit fixed costs are $0.24 and $0.08, respectively. The Packaging
Division wants to purchase 50,000 cans at $0.32 a can. Selling internally will save $0.02 a can.
103. Assuming the Can Division has sufficient capacity, what is the minimum transfer price it
should accept?
a. $0.24
b. $0.32
c. $0.22
d. $0.30
104. Assuming the Can Division is already operating at full capacity, what is the minimum
transfer price it should accept?
a. $0.58
b. $0.66
c. $0.28
d. $0.34
Use the following information for questions 105 and 106.
The Dairy Division of Famous Foods, Inc. produces and sells milk to outside customers. The
operation has the capacity to produce 200,000 gallons of milk a year. Last year’s operating
results were as follows:
Sales (160,000) gallons $500,000
Variable costs 312,000
Contribution margin 188,000
Fixed costs 100,000
Net 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 is
a. $2.50 per gallon.
b. $1.18 per gallon.
c. $1.95 per gallon.
d. $0.55 per gallon.
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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. $3.13 per gallon
b. $1.18 per gallon
c. $1.95 per gallon
d. $0.55 per gallon
107. Negotiated transfer pricing is not always used because of each of the following reasons
except that
a. market price information is sometimes not easily obtainable.
b. a lack of trust between the negotiating divisions may lead to a breakdown in the
negotiations.
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 the
a. 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 except
a. 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 it
a. can understate the actual contribution to profit by the selling division.
b. can reduce a division manager's control over the division's performance.
c. bases the transfer price on standard cost instead of actual cost.
d. provides incentive for the selling division to control costs.
111. The general formula for the minimum transfer price is: minimum transfer price equals
a. fixed cost + opportunity cost.
b. external purchase price.
c. total cost + opportunity cost.
d. variable cost + opportunity cost.
Pricing J - 25
112. Variable costs of units sold internally will always be
a. 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. Either higher or lower than for units sold externally.
113. In the formula for the minimum transfer price, opportunity cost is the __________ of the
goods sold externally.
a. variable cost
b. total cost
c. selling price
d. contribution margin
114. The transfer price approach that conceptually should work the best is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time-and-material pricing approach.
115. The transfer price approach that is often considered the best approach because it
generally provides the proper economic incentives is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time-and-material pricing approach.
116. All of the following are correct statements about the market-based approach except that it
a. assumes that the transfer price should be based on the most objective inputs possible.
b. provides a fairer allocation of the company's contribution margin to each division.
c. produces a higher company contribution margin than the cost-based approach.
d. ensures that each division manager is properly motivated and rewarded.
117. The negotiated transfer price approach should be used when
a. 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.
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118. Assuming the selling division has available capacity, a negotiated transfer price should be
within the range of
a. fixed cost per unit and the external purchase price.
b. total cost per unit and the external purchase price.
c. variable cost per unit and the external purchase price.
d. variable cost per unit and the opportunity cost.
119. The transfer price approach that will result in the largest contribution margin to the buying
division is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time-and-material pricing approach.
120. The maximum transfer price from the buying division's standpoint is the
a. total cost + opportunity cost.
b. variable cost + opportunity cost.
c. external purchase price.
d. external purchase price + opportunity cost.
Use the following information for questions 121 and 122.
The Wood Division of Fir Products, Inc. manufactures rubber moldings and sells them externally
for $55. Its variable cost is $25 per unit, and its fixed cost per unit is $7. Fir's president wants the
Wood Division to transfer 5,000 units to another company division at a price of $32.
121. Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer
price it should accept is
a. $7.
b. $25.
c. $32.
d. $55.
122. Assuming the Wood Division does not have any available capacity, the minimum transfer
price it should accept is
a. $7.
b. $25.
c. $32.
d. $55.
Pricing J - 27
Use the following information for questions 123 and 124.
Management of the Catering Company would like the Food Division to transfer 10,000 cans of its
final product to the Restaurant Division for $30. The Food Division sells the product to customers
for $70 per unit. The Food Division’s variable cost per unit is $35 and its fixed cost per unit is $10.
123. If the Food Division is currently operating at full capacity, what is the minimum transfer
price the Food Division should accept?
a. $30
b. $35
c. $45
d. $70
124. If the Food Division has 10,000 units available capacity, what is the minimum transfer
price the Food Division should accept?
a. $30
b. $35
c. $45
d. $70
125. All of the following are correct statements about transfers between divisions located in
countries with different tax rates except that
a. differences in tax rates across countries complicate the determination of the 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 rates
a. simplify the determination of the appropriate transfer price.
b. are decreasing in number as more companies "localize" operations.
c. encourage companies to report more income in countries with low tax rates.
d. all of these answer choices are correct.
127. Which of the following is consistent with generally accepted accounting principles?
a. Absorption-cost approach
b. Contribution approach
c. Variable-cost approach
d. Both absorption-cost and contribution approach
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128. Under the absorption-cost approach, all of the following are included in the cost base
except
a. direct materials.
b. fixed manufacturing overhead.
c. selling and administrative costs.
d. variable manufacturing overhead.
129. The first step in the absorption-cost approach is to compute the
a. desired ROI per unit.
b. markup percentage.
c. target selling price.
d. unit manufacturing cost.
130. The markup percentage in the absorption-cost approach is computed by dividing the sum
of the desired ROI per unit and
a. fixed costs per unit by manufacturing cost per unit.
b. fixed costs per unit by variable costs per unit.
c. selling and administrative expenses per unit by manufacturing cost per unit.
d. selling and administrative expenses per unit by variable costs per unit.
131. In the absorption-cost approach, the markup percentage covers the
a. desired ROI only.
b. desired ROI and selling and administrative expenses.
c. desired ROI and fixed costs.
d. selling and administrative expenses only.
132. The absorption-cost approach is used by most companies for all of the following reasons
except that
a. absorption cost information is readily provided by a company's cost accounting
system.
b. absorption cost provides the most defensible bases for justifying prices to interested
parties.
c. basing prices on only variable costs could encourage managers to set too low a price
to boost sales.
d. this approach is more consistent with cost-volume-profit analysis.
133. Under the variable-cost approach, the cost base includes all of the following except
a. variable selling and administrative costs.
b. variable manufacturing costs.
c. total fixed costs.
d. All of the above are included.
Pricing J - 29
134. In the variable-cost approach, the markup percentage covers the
a. desired ROI only.
b. desired ROI and fixed costs.
c. desired ROI and selling and administrative expenses.
d. fixed costs only.
135. The markup percentage denominator in the variable-cost approach is the
a. desired ROI per unit.
b. fixed costs per unit.
c. manufacturing cost per unit.
d. variable costs per unit.
136. The reasons for using the variable-cost approach include all of the following except this
approach
a. avoids arbitrary allocation of common fixed costs to individual product lines.
b. is more consistent with cost-volume-profit analysis.
c. provides the most defensible bases for justifying prices to all interested parties.
d. provides the type of data managers need for pricing special orders.
137. Maggie Co. has variable manufacturing costs per unit of $20, and fixed manufacturing
cost per unit is $15. Variable selling and administrative costs per unit are $4, while fixed
selling and administrative costs per unit are $6. Maggie desires an ROI of $7.50 per unit.
If Maggie Co. uses the absorption-cost approach, what is its markup percentage?
a. 8.33%
b. 16.67%
c. 25%
d. 50%
138. Maggie Co. has variable manufacturing costs per unit of $20, and fixed manufacturing
cost per unit is $10. Variable selling and administrative costs per unit are $5, while fixed
selling and administrative costs per unit are $2. Maggie desires an ROI of $8 per unit. If
Maggie Co. uses the variable-cost approach, what is its markup percentage?
a. 30%
b. 50%
c. 80%
d. 100%
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Use the following information for questions 139–144.
Papillon Co. has determined the following per unit amounts:
Direct materials $30 Fixed selling and administrative $60
Direct labor 36 Variable overhead 24
Desired ROI 33 Variable selling and administrative 15
Fixed overhead 45
139. The cost base using the absorption-cost approach is
a. $90.
b. $105.
c. $195.
d. $135.
140. The markup percentage using the absorption-cost approach is
a. 131%.
b. 102%.
c. 90%.
d. 80%.
141. The target selling price using the absorption-cost approach is
a. $351.
b. $243.
c. $162.
d. $371.
142. The cost base using the variable-cost approach is
a. $90.
b. $105.
c. $195.
d. $135.
143. The markup percentage using the variable-cost approach is
a. 131%.
b. 102%.
c. 90%.
d. 80%.
Pricing J - 31
144. The target selling price using the variable-cost approach is
a. $311.85.
b. $207.90.
c. $212.10.
d. $242.55.
145. Alfredo Co. has collected the following per unit data:
Direct labor $8 Variable selling and admin. $3
Direct materials 5 Fixed overhead 1
Variable overhead 4 Fixed selling and admin. 7
The markup percentage is 120%. What is the markup amount under the variable-cost
approach?
a. $21.60
b. $24.00
c. $20.40
d. $33.60
Answers to Multiple Choice Questions
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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 300,000 and the minimum required rate of return on all investments is 15%.
Instructions
Compute the target cost per iron.
BE 147
Talia Corp. produces digital cameras. For each camera produced, direct materials are $20, 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.
Instructions
Compute the target selling price assuming a 40% markup on total per unit cost.
Pricing J - 33
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 10%.
Instructions
What is Tina’s ROI per unit?
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 $80.
Instructions
Compute NayTag’s markup percentage using a total cost approach.
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, $360,000; variable costs, $2,400,000; fixed
costs, $300,000.
Instructions
Compute each of the following:
1. Budgeted ROI.
2. Markup percentage using a total cost approach.
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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 $350,000. 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?
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 $400. Calculate Horton's total bill.
Pricing J - 35
BE 153
On a recent job repairing a small boat engine, Marine Repairs Company worked 21 hours and
used parts with a cost of $1,500. Marine Repairs Company charges $80 per hour of labor and
has a material loading charge of 60%.
Instructions
Calculate the total bill for repairing the small boat engine.
BE 154
Alma and Associates, a new consulting service, recently received a bill for repairs on its
computers totaling $2,280. 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.
Instructions
Compute the material loading charge percentage the repair service used.
BE 155
Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the
batteries to its customers for $92 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.
Instructions
Compute the minimum transfer price that Freberg should accept.
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BE 156
Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the
batteries to its customers for $92 per unit. The variable cost per unit is $55, 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.
Instructions
Compute the minimum transfer price that Freberg should accept.
BE 157
Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the
batteries to its customers for $92 per unit. The variable cost per unit is $55, 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.
Instructions
Compute the minimum transfer price that Freberg should accept.
BE 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 $15; and fixed selling &
administrative expenses $20. The desired ROI per unit is $25.
Instructions
Compute the markup percentage using the absorption-cost approach.
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BE 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 150%.
Instructions
Compute the target selling price.
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 300,000 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.
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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 100,000 units with a required $5,000,000
investment.
Instructions
Compute the required minimum rate of return.
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 16%.
Instructions
Determine the target cost for one LittleLaser.
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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
$2,000,000 in the studio and expects a return on investment (ROI) of 16.5%. Budgeted costs for
the coming year are as follows.
Per Session Total
Direct materials (tapes, CDs, etc) $60
Direct labor $400
Variable overhead $50
Fixed overhead $850,000
Variable selling and administrative expenses $40
Fixed selling and administrative expenses $800,000
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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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 $32
Direct labor 54
Variable manufacturing overhead 72
Fixed manufacturing overhead $12,000,000
Variable selling and administrative expenses 34
Fixed selling and administrative expenses 7,200,000
The company has a desired ROI of 20%. It has invested assets of $120,000,000.
Instructions
Compute 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.
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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 $30
Direct labor 40
Variable manufacturing overhead 10
Fixed manufacturing overhead $1,800,000
Variable selling and administrative expenses 6
Fixed 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%.
Instructions
Compute 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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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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 $15
Direct labor 8
Variable manufacturing overhead 4
Variable selling and administrative expenses 5
$32
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 10 percent return on its investment (ROI)
of $400,000.
Instructions
Compute the selling price that would provide Skyhigh a 10 percent ROI.
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Ex. 167
Silver Spoon Service repairs commercial food preparation equipment. The following budgeted
cost data is available for 2013:
Time Material
Charges Charges
Technicians' wages and benefits $500,000
Parts manager's salary and benefits $ 72,000
Office manager's salary and benefits 112,000 18,000
Other overhead 48,000 135,000
Total budgeted costs $660,000 $225,000
Silver Spoon has budgeted for 10,000 hours of technician time during the coming year. It desires
a $54 profit margin per hour of labor and a 40% profit margin on parts. Silver Spoon estimates the
total invoice cost of parts and materials in 2013 will be $500,000.
Instructions
1. 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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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Ex. 168
Forrest Painting Service has budgeted the following time and material for 2013:
BUDGETED COSTS FOR 2013
Time Material
Charges Charges
Painters' wages and benefits $ 36,000
Service manager's salary and benefits $23,000
Office employee's salary and benefits 12,000 3,000
Cost of paint 50,000
Overhead (supplies, utilities, etc.) 16,000 8,500
Total budgeted costs $64,000 $84,500
Forrest budgets 4,000 hours of paint time in 2013 and will charge a profit of $12 per hour, in
addition to a 25% markup on the cost of paint.
On February 15, 2013, 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.
Instructions
1. Compute the labor rate for 2013.
2. Compute the material loading charge rate for 2013.
3. Prepare a time-and-material price estimate for painting the building.
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Ex. 169
Chuck's Classic Cars restores classic automobiles to showroom status. Budgeted data for the
current year are:
Material
Time Loading
Charges Charges
Restorers' wages and fringe benefits $270,000
Puchasing agent's salary and fringe benefits $ 67,500
Administrative salaries and fringe benefits 60,000 22,500
Other overhead costs 20,000 75,600
Total budgeted costs $350,000 $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 $60 and that the
material loading charge was 83.80%.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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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 completed after the fire that
required 150 hours of labor and $60,000 in parts and materials.
Pricing J - 47
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 $280 per home
appraisal, and its variable costs are $220 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 $265. The variable cost per appraisal to the Home-Loan Department would be $10 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 $265? Discuss.
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 $1,200. Division A charges Division B market
price for the part, which is $700 per unit. Variable costs are $530 and $600 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 $700 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.
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 $60; fixed costs per
unit $45; and a selling price of $150 to outside customers. Vany currently purchases DVD players
from an outside supplier for $140 each. Top management of Vany would like Pert to provide
50,000 DVD players per year at a transfer price of $60 each.
Pricing J - 49
Ex. 172 (Cont.)
Instructions
Compute 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.
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 $150
Variable cost per unit 100
Selling price per unit 375
Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for $340. 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 $340 per unit. Green Yard is
currently operating at full capacity. It could avoid $6 per unit of variable selling costs by selling
internally.
Instructions
1. 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.
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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 $100
Variable cost of regular cell phone 50
Additional variable cost of special cell phone 35
Instructions
Calculate 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 $110 per phone. Spirit has available
capacity.
2. The marketing vice president offers to pay Spirit $110 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 $175 per phone. Spirit has no available
capacity and would have to forgo sales of 30,000 phones to existing customers to meet this
request.
Pricing J - 51
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 $0.045 per page for 5,000 copies of a 600-page textbook.
Outside printers are currently charging $0.05 per page. Printpro's variable cost per page is $0.04.
Instructions
1. 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 $0.045 transfer price when it has no available capacity.
Ex. 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
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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Ex. 176 (Cont.)
Gardenia has a desired ROI of 16%. It has invested assets of $8,250,000 and expects to produce
5,000 units per year.
Instructions
Compute 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.
Ex. 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 $100
Direct labor 170
Variable manufacturing overhead 80
Fixed manufacturing overhead $750,000
Variable selling and administrative expenses 25
Fixed 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.
Instructions
1. 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.
Pricing J - 53
Ex. 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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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COMPLETION STATEMENTS
178. The difference between the target price and the desired profit is the _________________
cost of the product.
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.
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.
187. The __________________ approach is consistent with generally accepted accounting
principles because it defines the cost base as the manufacturing cost.
Pricing J - 55
Answers to Completion Statements
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. Outsourcing
B. Market-based transfer price F. Target selling price
C. Markup G. Time-and-material pricing
D. 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
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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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.
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.
