Pricing J – 39
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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J – 40
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.
Pricing J – 41
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.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 18, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Performance Measurement
Solution 165 (18 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J – 42
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.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Performance Measurement
Solution 166 (6–10 min.)
Pricing J – 43
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.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 18, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Business Economics
Solution 167 (18-20 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J – 44
Solution 167 (cont.)
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.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 18, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Business Economics
Solution 168 (18-20 min.)
Pricing J – 45
Solution 168 (Cont.)
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
J – 46
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.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Business Economics
Solution 169 (10–12 min.)
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.
Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Business Economics
Solution 170 (8-10 min.)
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?
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J – 48
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.
Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Performance Measurement
Solution 171 (8–10 min.)
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.
Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Business Economics
Solution 172 (9 min.)
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.
Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Business Economics
Solution 173 (9 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J – 50
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.
Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Business Economics
Solution 174 (13 min.)
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.
Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Business Economics
Solution 175 (13 min.)
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
J – 52
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.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Problem Solving/Decision Making, IMA: Performance Measurement
Solution 176 (12–14 min.)
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.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC:
Problem Solving/Decision Making, IMA: Reporting
Solution 177 (12–14 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J – 54
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.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA
PC: Project Management, IMA: Business Economics
Answers to Matching
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
J – 56
SHORT-ANSWER ESSAY QUESTIONS
S-A E 189
A variation on cost-plus pricing is time-and-material pricing. Under this approach, two pricing
rates are set.
Required:
Explain where this approach is used and identify the steps involved in time–and-material pricing.
Also explain what the material loading charge covers and how it is expressed.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC:
Communication, IMA: Business Economics
Solution 189
S-A E 190
There are three possible approaches for determining a transfer price: negotiated, cost-based,
and market-based transfer prices.
Required:
Explain how the transfer price is determined under each of the approaches.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA
PC: Communication, IMA: Business Economics