b.
($1,203,000.00 ÷ 100,000) + [($1,203,000.00 ÷ 100,000) ($90,000 ÷ $1,203,000.00)]
c.
($1,203,000.00 ÷ 100,000) + [($500,000 ÷ 100,000) 0.1875]
d.
None of these
20. The state of Illinois has passed a law requiring that every automobile be inspected at least once a year
for pollution control. Anfang Enterprises is considering entering into this type of business. After
extensive studies, Joseph Anfang has developed the following set of projected annual data on which to
make his decision:
Direct service labor
$363,000.00
Variable service overhead costs
270,000.00
Fixed service overhead costs
280,000.00
Marketing expenses
120,000.00
General and administrative expenses
170,000.00
Minimum profit
90,000.00
Cost of assets employed
500,000.00
Anfang believes that his company will inspect 100,000 automobiles per year. The company earns an
average of 18.75 percent return on its assets.
The price to be charged for inspecting each automobile using the gross margin pricing method would
be calculated as follows:
a.
($1,203,000.00 ÷ 100,000) + [($1,203,000.00 ÷ 100,000) ($90,000 ÷ $1,203,000.00)]
b.
($1,203,000.00 ÷ 100,000) + [($500,000 ÷ 100,000) 0.1875]
c.
($913,000.00 ÷ 100,000) + {($913,000.00 ÷ 100,000) [($90,000 + $290,000) ÷
$913,000.00]}
d.
None of these
21. The pricing method that establishes selling prices based on a stipulated rate above total production
costs is
a.
return on assets pricing.
b.
target cost pricing.
c.
gross margin pricing.
d.
time and materials pricing.
22. The pricing method that is used primarily by service businesses is
a.
return on assets pricing.
b.
gross margin pricing.
c.
target cost pricing.
d.
time and materials pricing.
23. The pricing method that establishes selling prices based on a specified rate of return on the assets
employed in the operation is
a.
target cost pricing.
b.
return on assets pricing.
c.
time and materials pricing.
d.
gross margin pricing.
24. Which of the following is not a cost-based pricing method?
a.
Target costing
b.
Time and materials pricing
c.
Return on assets pricing
d.
Gross margin pricing
25. Which of the following is not a step in the target costing approach to pricing?
a.
Define the desired profit to be made on that product.
b.
Dictate which products should not be produced.
c.
Compute a target cost for the product by subtracting the desired profit from the
competitive market price.
d.
Identify the price at which a product will be competitive in the marketplace.
26. A major advantage of the target costing approach to pricing is that target costing
a.
allows a company to analyze the potential profit of a product before spending money to
produce the product.
b.
is not dependent on customers’ quality versus price decisions.
c.
identifies unproductive assets.
d.
anticipates the product’s profitability midway through its life cycle.
27. Market research shows potential customers will buy a particular product at a selling price of $3,100. If
the desired profit is 28 percent of target cost, the company should make the product if the cost does not
exceed
a.
$3,100.
b.
$868.
c.
$2,232.
d.
$2,422.
28. Transfer pricing
a.
is a concept readily accepted by managers of divisions, because it relies on concepts used
in cost-based pricing methods.
b.
incorporates procedures that allow for ease in determining the amount of profit associated
with each division of a decentralized company.
c.
involves determining the cost and profit if the output of one division is transferred to
another division of the same company.
d.
is not used by many companies because it is difficult to eliminate intercompany profits.
29. A common problem associated with transfer pricing occurs when
a.
a division purchases inputs for processing from an outside source at a price higher than the
internal transfer price.
b.
the gross margin pricing method is used to compute the price.
c.
a division sells its excess output to an external customer.
d.
managers do not agree with the transfer prices of the inputs provided to them or of the
outputs of their own division.
30. Division Alpha can purchase a required part from an outside supplier at $35. Division Beta will supply
the part at a transfer price of $38.50. Division Alpha’s manager should
a.
pay the $38.50 price to Division Beta.
b.
tell his immediate supervisor that Division Beta is being unreasonable.
c.
negotiate an appropriate transfer price with the manager of Division Beta.
d.
buy from the outside supplier.
31. A negotiated transfer price
a.
is one that is bargained for between the managers of the buying and selling divisions.
b.
would not be based on a product market price that has been reduced through bargaining by
division managers.
c.
could never be used in an agreement based on standard costs and a profit margin.
d.
is usually developed by lawyers following defined legal procedures.
32. Use of market transfer prices
a.
is the only acceptable approach in a free enterprise economy.
b.
usually does not cause the selling division to ignore negotiating attempts by the buying
division.
c.
may cause an internal shortage of materials.
d.
usually does not work against the operating objectives of the company as a whole.
33. The primary difference between a cost-based transfer price and a market-based transfer price is
a.
that the market-based price is usually lower.
b.
that the cost-based price will always be more advantageous to the company’s overall
profit.
c.
the appropriate profit factor.
d.
the influence of an external source for the raw material or part.
34. Development of a transfer price involves
a.
the use of the highest external market price so that the transferring division is very
profitable.
b.
determination of an appropriate profit markup.
c.
computation of the selling and delivery costs of the item being transferred.
d.
the use of a team of lawyers representing the outside interests of the company.
35. Development of a transfer price involves
a.
legal agreements.
b.
increases in insurance premiums.
c.
redistribution.
d.
negotiation.
36. Development of a transfer price involves
a.
including only costs allocated from corporate levels when determining semi-finished
product line costs.
b.
direct upper management intervention if different transfer prices are determined by the
selling division and the buying division.
c.
applying a target profit rate to the unit cost for the semi-finished product.
d.
heavy reliance on industry averages.
37. Which of the following is not one of the three commonly used methods for determining transfer
prices?
a.
Dictated
b.
Negotiated
c.
Cost-plus
d.
Market-based
38. When a buying division elects to purchase from an outside supplier,
a.
the impact on overall company profits is usually not considered in the decision.
b.
only fixed costs should be included in the decision analysis.
c.
the price from the outside supplier is likely to be more than the incremental cost to the
supplying division.
d.
overall company profits should be enhanced.
39. Which of the following items should not be used to measure the performance of a manager whose
division “sells” to other divisions of the company exclusively?
a.
Negotiated profit margin within the transfer prices
b.
Labor efficiency rates
c.
Corporate overhead allocations
d.
Variable costs of production
SHORT ANSWER
1. Lightfoot, Inc., is an international shoe company that specializes in retailing medium-priced goods.
Retail outlets are located throughout the world. Management wishes to create an image of giving the
customer the most quality for the money spent. Selling prices are developed to attract customers away
from competitors. End–of-the-month sales are a regular practice for all stores, with customers being
accustomed to this practice. Company buyers are carefully trained and look for quality goods at lower
prices. Competitors’ prices are checked daily. Sales are targeted to increase a minimum of 7 percent
per year. All sales yield a 12 percent return on assets. Sales personnel are expected to wear the
company product, as well as appropriate clothing in order to properly display the product being sold.
Personnel can purchase the shoes at 5 percent over cost. Cleanliness and professional appearance are
required for all stores. Identify the pricing policy objectives of this company.
ANS:
2. Blackstone, Inc., features over a dozen models of tires in many different sizes. Two of the models of
tires are Deluxe and Regular. Tire size LX14 is available in both models. The following information
was obtained:
Deluxe
Regular
Selling prices:
Single tire, installed
$ 54
$ 49
Set of four tires, installed
199
185
Cost per tire
30
23
The selling prices include installation costs. Each Deluxe tire costs $6 to mount and balance; each
Regular tire costs $5 to mount and balance.
a. Compute the unit selling price for the tire only for both single tires and sets of four for each
alternative.
b. Was cost the major consideration supporting these prices?
c. What other factors could have influenced these prices?
Selling price
$54.00
Less installation
Net selling price
$48.00
Unit price
$48.00
3. Lethal Industries has recently patented a new product called MaxiDrive, an automobile oil for
maximum engine performance. The following annual information was developed by the company‘s
controller for use in price determination:
Variable production costs
$1,860,000
Fixed overhead
620,000
Selling expenses
420,000
General and administrative expenses
230,000
Desired profit
342,000
Annual demand for the product is expected to be 500,000 quarts. Round answers to nearest two
decimal places.
a. Compute the projected unit cost for one quart of MaxiDrive.
b. Prepare the formulas for computing the markup percentage and the selling price for one quart using
the gross margin pricing method.
4. Jake Black has an opportunity to start an automobile pollution inspection business. After extensive
studies, he has developed the following set of projected annual data on which to make his decision:
Direct service labor
$330,000
Variable service overhead costs
260,000
Fixed service overhead costs
250,000
Selling expenses
160,000
Variable production costs
Fixed overhead
620,000
Selling expenses
General and administrative expenses
230,000
Total costs
Units produced
Cost per unit ($3,130,000 ÷ 500,000)
General and administrative expenses
200,000
Desired profit
102,000
Cost of assets employed
600,000
Black believes that his company will inspect 100,000 automobiles per year. The company earns an
average of 20 percent return on its assets.
a. Compute the projected cost for inspecting each automobile.
b. Determine the price to charge for inspecting each automobile using the gross margin pricing
method.
c. Using the return on assets pricing method, compute the unit price to charge for this service.
Variable production costs
Fixed service overhead costs
Total production costs
Selling expenses
General and administrative expenses
administrative costs
Total costs
Units inspected
Inspection cost per unit ($1,200,000 ÷ 100,000)
5. Regal Kitchens, Inc., is considering the production of a new kitchen vent system. The Marketing
Department has determined that there would be demand for the product at or below a selling price of
$150 per unit. Anticipated unit costs are as follows:
Direct materials
$26.00
Direct labor costs
Manufacturing
Hours
2.2
Hourly rate
$12.00
Assembly
Hours
2.5
Hourly rate
$10.00
Machine hours
2
Regal uses the following activity-based costs:
Materials handling
120% of direct material
Production
$7.00 per machine hour
Shipping and handling
$10 per unit
The company’s desired profit is 25 percent over total production and shipping costs.
Calculate the target cost for this product and determine whether or not it should be produced.
6. Richardson, Inc., is in the process of developing a transfer price for the first section of what will
eventually be an automatic lawn-cutting device. The housing is made in Department A and is used by
Department B in the final assembly operation. Unit costs for the housing are as follows:
Projected total cost per unit:
Direct materials cost
Assembly labor (2.5 $10.00)
Overhead costs
Materials handling (1.2 $26.00)
Production (2 machine hours $7.00)
Shipping and handling
Projected total unit cost
Summary:
Target unit cost ($150 ÷ 1.25)
Projected unit cost
Difference above target
Cost Categories
Unit Cost
Direct materials
$8.10
Direct labor
7.00
Variable overhead
4.50
Fixed overhead
4.40
Profit markup (30 percent of cost)
?
Department B can purchase the housing from an outside supplier at $29.50 per unit.
a. Develop the cost-plus transfer price for the housing.
b. What should the transfer price be? Support your answer.
7. Management of Mountain Berry Industries has just decided to employ a set of transfer prices for
intracompany transfers between departments. The objective is to include return on assets as part of the
performance evaluation of managers of the various cost centers. Data from the Molding Department
for the past six months are as follows:
Account
Total Costs
Expected
Increases/
(Decreases)
Raw plastic—XYZ
$190,000
10%
Raw plastic—ABC
305,000
(4)
Direct labor—melting
125,000
5
Direct labor—blending
138,000
5
Direct labor—shaping
151,000
5
Variable overhead
70,000
3
Fixed overhead
95,000
(2)
During the six-month period, 100,000 units were produced. The same number of units are expected to
be completed during the next six-month period. The company’s markup percentage is 20 percent.
a. Compute the estimated total costs for the molding department for the next six months.
Direct materials
Direct labor
Variable overhead
Fixed overhead
$24.00
Profit markup (30 percent of cost)
Cost-plus transfer price
$31.20
b. Develop the cost-plus transfer price for this plastic unit. Round answers to nearest two decimal
places.
8. Java Coffee Company produces special types of blended coffee. Its products are used in exclusive
restaurants throughout the world, and quality is the primary objective of the company. A team of
quality consultants is employed to continually assess the quality of the coffee beans purchased and the
blending procedures and ingredients used. The company‘s controller is in the process of determining
the prices to be used during the coming year. Three blends are currently produced: Regular, Mocha,
and Choco. Total anticipated costs per blend are shown below for 2010:
Total Cost
Regular
Mocha
Choco
Direct materials
$65,600
$51,800
$26,600
Direct labor
96,200
29,800
29,800
Variable overhead
75,400
38,900
38,900
Fixed overhead
82,400
49,800
49,800
Total selling, general, and
administrative expenses
50,400
49,700
39,900
Desired profit
29,500
21,700
25,395
Expected production for 2010 is 100,000 pounds of Regular, 40,000 pounds of Mocha, and 25,000
pounds of Choco. Round answers to nearest two decimal places.
a. Compute the selling price for each blend using the gross margin pricing method.
b. If the competition’s selling price for the Choco blend averaged $10.10 per pound, would this
influence the controller’s pricing decision? State your reasons.
ANS:
9. Seven years ago, Jared Singh formed the Singh Corporation and began producing computer equipment
for home use. Because of the highly technical and competitive nature of the industry, Singh established
a research and development division that is responsible for continuous evaluation and updating of
critical electronic parts used in all of the corporation’s products. The staff of the R&D Division has
been very successful, contributing to the corporation’s number one ranking in the industry in the
United States.
Two years ago, the R&D Division took on the added responsibility of producing all microchip
circuit boards for Singh computer equipment. One of its specialties is a graphics dissemination board
(GDB). The GDB is a major factor in the quality of the Singh computers. Demand for the GDB has
increased significantly in the last year, and the R&D Division has had to increase its production and
assembly labor force. Three outside customers want to purchase the GDB for their computer products.
To date, the R&D Division has been producing the GDBs only for internal use.
The controller of the R&D Division wants to create a transfer price for GDBs that will be used for
all intracompany transfers. The following information has been projected for the next six months:
Costs:
Direct materials
$771,800
Direct labor
796,200
Overhead costs
410,300
Costs allocated from corporate office
988,700
A profit factor of at least 20 percent must be added to the cost (including costs allocated from the
corporate office) of the GDB for internal transfer purposes. The outside customers are willing to pay
$45 for the GDB. Demand over the next six months is estimated at 78,000 GDBs for internal use and
22,000 for external customers.
a. Compute the cost of producing and distributing one GDB. Round answers to nearest two decimal
places.
b. What should be the transfer price used by the R&D Division? What factors influenced your
decision?
10. For several years, Patel Division has produced an electronic component that it sells to Morrison
Division at the prevailing market price of $27. Patel manufactures the component only for Morrison
Division and has previously made no sales of this product to outside customers. The product is
available from independent suppliers who would charge the Morrison Division $27 per unit. Patel
Division currently produces and sells 30,000 of these components each year and also manufactures
several other products. The following annual cost information was compiled after the close of 2010
operations, during which time Patel Division operated at full capacity:
Patel Division (2010)
Cost per
Component
Direct materials
$ 9.00
Direct labor (hourly basis)
11.20
Variable overhead
5.00
General fixed overhead of plant
12.40
Traceable fixed overhead ($90,000 ÷ 30,000)
3.00
Variable shipping expenses
1.00
Total unit cost
$41.60
General fixed overhead represents allocated joint fixed costs such as building depreciation, property
taxes, and salaries of production executives. If production of the components were discontinued,
$72,000 of the annual traceable fixed overhead could be eliminated. The costs to be saved currently
require cash outlays; the balance of traceable fixed overhead is equipment depreciation on machinery
that could be used elsewhere in the plant.
a. Compute the incremental cost per unit of this product manufactured by Patel Division.
b. The division manager contends that producing the components to accommodate other divisions is a
sound policy as long as variable costs are recovered by sales. Should Patel Division continue to
produce the components for Morrison Division?
Direct materials
Direct labor
