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
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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
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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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.
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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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Solution 150 (5 min)
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.
Pricing J – 37
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.