CHAPTER 8
Pricing
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
A
Problems
B
Problems
1. Compute a target cost when
the market determines a
product price.
1, 2
1
1
2. Compute a target selling price
using cost-plus pricing.
3, 4, 5,
6, 7, 8
2, 3,
4, 5
2
1A, 2A
1B, 2B
3. Use time-and–material pricing
to determine the cost of
services provided.
9, 10
6
3
3A
3B
4. Determine a transfer price
using the negotiated, cost-
based, and market-based
approaches.
11, 12, 13,
14, 15,
16, 17
7, 8, 9
4
4A, 5A, 6A
4B, 5B, 6B
5. Explain issues involved in
transferring goods between
divisions in different countries.
18
*6. Determine prices using
absorption-cost pricing
and variable-cost pricing.
19, 20
10, 11
7A, 8A
7B, 8B
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the
chapter.
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Use cost-plus pricing to determine various amounts.
Simple
20–30
2A
Use cost-plus pricing to determine various amounts.
Simple
20–30
3A
Use time-and-material pricing to determine bill.
Simple
20–30
4A
Determine minimum transfer price with no excess capacity
and with excess capacity.
Moderate
20–30
5A
Determine minimum transfer price with no excess capacity.
Moderate
20–30
6A
Determine minimum transfer price under different situations.
Moderate
20–30
*7A*
Compute the target price using absorption-cost pricing and
variable-cost pricing.
Moderate
30–40
*8A*
Compute various amounts using absorption-cost pricing and
variable-cost pricing.
Complex
40–50
1B
Use cost-plus pricing to determine various amounts.
Simple
20–30
2B
Use cost-plus pricing to determine various amounts.
Simple
20–30
3B
Use time-and-material pricing to determine bill.
Simple
20–30
4B
Determine minimum transfer price with no excess capacity
and with excess capacity.
Moderate
20–30
5B
Determine minimum transfer price with no excess capacity.
Moderate
20–30
6B
Determine minimum transfer price under different situations.
Moderate
20–30
*7B*
Compute the target price using absorption-cost pricing and
variable-cost pricing.
Moderate
30–40
*8B*
Compute various amounts using absorption-cost pricing and
variable-cost pricing.
Complex
40–50
BLOOM’S TAXONOMY TABLE
Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 6/e, Solutions Manual (For Instructor Use Only) 8-3
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
*1. Compute a target cost when the
market determines a product
price.
Q8-1
Q8-2
BE8-1
DI8-1
E8-1
E8-2
E8-3
*2. Compute a target selling price
using cost-plus pricing.
Q8-3
Q8-5
Q8-6
Q8-4
Q8-7
Q8-8
BE8-2
BE8-3
BE8-4
BE8-5
DI8-2
E8-3
E8-4
E8-5
E8-6
E8-7
P8–1A
P8–2A
P8–1B
P8–2B
*3. Use time-and-material pricing
to determine the cost of
services provided.
Q8–10
Q8-9
BE8-6
DI8-3
E8-8
E8-9
E8–10
P8–3A
P8–3B
*4. Determine a transfer price using
the negotiated, cost-based, and
market-based approaches.
Q8–13
Q8–15
Q8–16
Q8–11
Q8–12
Q8–14
Q8–17
BE8-7
BE8-8
BE8-9
DI8-4
E8–11
E8–12
E8–13
E8–14
E8–15
E8–16
E8–17
P8–4A
P8–5A
P8–6A
P8–4B
P8–5B
P8–6B
*5. Explain issues involved in
transferring goods between
divisions in different countries.
Q8–18
*6. Determine prices using
absorption-cost pricing
and variable-cost pricing.
Q8–19
Q8–20
BE8-10
BE8-11
E8–18
E8–20
P8–7A
P8–8A
P8–7B
BYP8-5
BYP8-1
BYP8-3
BYP8-2
ANSWERS TO QUESTIONS
1. The first type of pricing environment is where the company is a price taker; that is, the company
3. The basic formula to determine the target selling price in cost-plus pricing is:
Target selling price
=
Cost
+
(Markup percentage X Cost)
4. The basic formula to determine the target selling price in cost-plus pricing is:
Target selling price
=
Cost
+
(Markup percentage X Cost)
$23.40
=
$18
+
(30% X $18)
5. The basic formula to compute the markup percentage is:
Markup percentage
=
Desired ROI per unit
Total unit cost
7. Total cost base per unit, excluding selling and administrative expenses ……………………. $60
Selling and administrative expenses per unit ………………………………………………………… 15
$6
=
8%
$75
8. Variable cost per unit ………………………………………………………………………………………… $16
Fixed cost per unit ……………………………………………………………………………………………. 9
$6
= 24%
$25
9. Time-and-material pricing is most often used in service industries. It involves two pricing rates,
10. The material loading charge is a fee added to each bill to cover the costs of purchasing, receiving,
handling, and storing materials, plus any desired profit margin on the materials themselves. The
Questions Chapter 8 (Continued)
*11. A transfer price is the price used to record the transfer of goods or services between two divisions
in the same company. Setting a fair transfer price is important because an improper price will
*12. The objective of an appropriate transfer price is to maximize the return to the whole company
*13. The three approaches for determining transfer prices are:
*14. When a cost-based transfer price is used, the exchange of goods between divisions is recorded
by using the costs incurred by the selling division. This may either be the variable costs or
*15. The general formula for determining the minimum transfer price that the selling division should
be willing to accept is:
Minimum transfer price
=
Variable cost
+
Opportunity cost
*16. When determining the minimum transfer price, the opportunity cost is the contribution margin
*18. A company with divisions in different countries will set the transfer price so that more profit is
*20. The markup percentage using variable-cost pricing would be:
$3 + $9
= 75%
$16
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8-1
target cost.
BRIEF EXERCISE 8-2
Direct materials …………………………………………………………………………… $12
Direct labor …………………………………………………………………………………. 8
Variable manufacturing overhead …………………………………………………. 6
Total unit cost
+
(Markup percentage X Total unit cost)
=
Target selling price
$56
+
(30% X $56)
=
$72.80
BRIEF EXERCISE 8-3
ROI per unit
=
(Total investment X Desired ROI percentage)
Number of units
=
($10,000,000 X 16%)
=
$32
50,000
BRIEF EXERCISE 8-4
The markup percentage would be:
$30
=
18.75%
$36 + $24 + $18 + $40 + $14 + $28
BRIEF EXERCISE 8-5
The markup percentage is equal to Desired ROI per unit divided by total
unit cost. The desired ROI per unit is computed as follows:
Desired ROI per unit =
$1,500,000 X 24%
=
$36
10,000 units
Total unit cost =
$1,100,000 + $100,000
=
$120
10,000 units
The markup percentage is computed as follows:
Desired ROI per unit
=
$36
= 30%
Total unit cost
$120
BRIEF EXERCISE 8-6
Rooney’s total bill would equal:
BRIEF EXERCISE 8-7
case is:
Minimum transfer price = $20 + ($45 – $20) = $45.
BRIEF EXERCISE 8-8
case, the minimum transfer price is:
Minimum transfer price = $20 + $0 = $20.
BRIEF EXERCISE 8-9
The minimum transfer price is equal to the division’s variable cost plus its
opportunity cost. In this case the minimum transfer price is:
*BRIEF EXERCISE 8-10
added back in the numerator.
Markup percentage
=
$30 + ($14 + $28)
=
61.02%
$36 + $24 + $18 + $40
*BRIEF EXERCISE 8-11
Markup percentage
=
$30 + ($40 + $28)
=
106.52%
$36 + $24 + $18 + $14
SOLUTIONS TO DO IT! REVIEW EXERCISES
DO IT! 8-1
The desired profit for this new product line is $360,000 ($2,000,000 X 18%)
DO IT! 8-2
Direct materials ………………………………………………………
$18
Direct labor …………………………………………………………….
9
Variable manufacturing overhead …………………………...
5
Fixed manufacturing overhead ………………………………..
6
Variable selling and administrative expenses …………..
3
Fixed selling and administrative expenses ……………….
7
Total unit costs ………………………………………………….
$48
$48 + ($48 X 30%) = $62.40
DO IT! 8-3
Total Cost /
Total Hours =
Per Hour
Charge
Repair-technicians’ wages
$120,000
5,000
$24
Fringe benefits
40,000
5,000
8
Overhead
50,000
5,000
10
$210,000
5,000
$42
Profit margin
20
Rate charged per hour of labor
$62
Materials cost …………………………..………….. $ 80
Materials loading charge ($80 X 60%) …….. 48
Total materials cost ………………………………. $128
DO IT! 8-4
$2.80 = $2.80 ($3 – $.20) + $0
SOLUTIONS TO EXERCISES
EXERCISE 8-1
In this case, the market price is $20 and the desired profit is $6
(30% X $20). Therefore the target cost is $14 ($20 – $6).
(b) Target costing is particularly helpful when a company faces a competi-
EXERCISE 8-2
The following formula may be used to determine return on investment
Return on investment per unit is then $16 ($1,600,000 ÷ 100,000)
Target cost = Market price – Desired profit
EXERCISE 8-3
costs. Thus if the company can cover its variable costs, it might want
to sell at the $100 level.
(b) In this case, the amount would be the selling price of $100.