CHAPTER 8

PRICING
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY
Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT
True-False Statements
a
1. 1 C 6. 2 C 11. 3 K 16. 4 K 21. 6 C
a
2. 1 K 7. 2 C 12. 4 K 17. 4 C 22. 6 K
a
3. 1 K 8. 3 K 13. 4 K 18. 4 K 23. 6 K
a
4. 2 K 9. 3 K 14. 4 C 19. 5 K 24. 6 K
a
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
a
31. 1 K 55. 2 C 79. 3 AP 103. 4 AP 127. 6 K
a
32. 1 K 56. 2 K 80. 3 AP 104. 4 AP 128. 6 K
a
33. 1 K 57. 2 K 81. 3 K 105. 4 AP 129. 6 K
a
34. 1 K 58. 2 C 82. 3 K 106. 4 AP 130. 6 K
a
35. 1 C 59. 2 AP 83. 3 K 107. 4 C 131. 6 K
a
36. 1 AP 60. 2 AP 84. 3 AP 108. 4 K 132. 6 C
a
37. 1 AP 61. 2 C 85. 3 AP 109. 4 K 133. 6 K
a
38. 1 AP 62. 2 K 86. 3 AP 110. 4 C 134. 6 K
a
39. 1 AP 63. 2 AP 87. 4 K 111. 4 K 135. 6 K
a
40. 1 AP 64. 2 AP 88. 4 K 112. 4 C 136. 6 C
a
41. 2 K 65. 3 K 89. 4 K 113. 4 K 137. 6 AP
a
42. 2 K 66. 3 K 90. 4 C 114. 4 C 138. 6 AP
a
43. 2 AP 67. 3 C 91. 4 AP 115. 4 K 139. 6 AP
a
44. 2 AP 68. 3 C 92. 4 K 116. 4 C 140. 6 AP
a
45. 2 AP 69. 3 K 93. 4 K 117. 4 C 141. 6 AP
a
46. 2 AP 70. 3 AP 94. 4 K 118. 4 K 142. 6 AP
a
47. 2 AP 71. 3 AP 95. 4 K 119. 4 C 143. 6 AP
a
48. 2 AP 72. 3 AP 96. 4 K 120. 4 K 144. 6 AP
a
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
a
147. 2 AP 150. 2 AP 153. 4 AP 156. 6 AP
a
148. 2 AP 151. 3 AP 154. 4 AP 157. 6 AP
Exercises
a
158. 1 AP 161. 2 AP 164. 3 AP 167. 4 AN 170. 6 AP
159. 1 AP 162. 2 AP 165. 4 AN 168. 4 AN
a
160. 2 AP 163. 3 AP 166. 4 AN 169. 6 AP
a
This question covers a topic in an Appendix to the chapter.
8-2 Test Bank for ISV Managerial Accounting, Fourth Edition

Completion Statements
171. 1 K 173. 2 K 175. 4 K 177. 4 K 179. 5 K
a
172. 2 K 174. 3 K 176. 4 K 178. 4 K 180. 6 K

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 27. MC 31. MC 35. MC 39. MC 159. Ex
2. TF 28. MC 32. MC 36. MC 40. MC 171. C
3. TF 29. MC 33. MC 37. MC 146. BE
26. MC 30. MC 34. MC 38. MC 158. Ex
Study Objective 2
4. TF 43. MC 49. MC 55. MC 61. MC 149. BE 173. C
5. TF 44. MC 50. MC 56. MC 62. MC 150. BE
6. TF 45. MC 51. MC 57. MC 63. MC 160. Ex
7. TF 46. MC 52. MC 58. MC 64. MC 161. Ex
41. MC 47. MC 53. MC 59. MC 147. BE 162. Ex
42. MC 48. MC 54. MC 60. MC 148. BE 172. C
Study Objective 3
8. TF 66. MC 71. MC 76. MC 81. MC 86. MC 174. C
9. TF 67. MC 72. MC 77. MC 82. MC 151. BE
10. TF 68. MC 73. MC 78. MC 83. MC 152. BE
11. TF 69. MC 74. MC 79. MC 84. MC 163. Ex
65. MC 70. MC 75. MC 80. MC 85. MC 164. Ex
Study Objective 4
12. TF 88. MC 96. MC 104. MC 112. MC 120. MC 165. Ex
13. TF 89. MC 97. MC 105. MC 113. MC 121. MC 166. Ex
14. TF 90. MC 98. MC 106. MC 114. MC 122. MC 167. Ex
15. TF 91. MC 99. MC 107. MC 115. MC 123. MC 168. Ex
16. TF 92. MC 100. MC 108. MC 116. MC 124. MC 175. C
17. TF 93. MC 101. MC 109. MC 117. MC 153. BE 176. C
18. TF 94. MC 102. MC 110. MC 118. MC 154. BE 177. C
87. MC 95. MC 103. MC 111. MC 119. MC 155. BE 178. C
Study Objective 5
19. TF 20. TF 125. MC 126. MC 179. C
Study Objective 6a
21. TF 127. MC 132. MC 137. MC 142. MC 157. BE
22. TF 128. MC 133. MC 138. MC 143. MC 169. Ex
23. TF 129. MC 134. MC 139. MC 144. MC 170. Ex
24. TF 130. MC 135. MC 140. MC 145. MC 180. C
25. TF 131. MC 136. MC 141. MC 156. 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 8-3

CHAPTER STUDY 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 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 cost 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).
8-4 Test Bank for ISV Managerial Accounting, Fourth Edition

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.

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.
 Pricing 8-5

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.
a
21. The absorption-cost approach is consistent with generally accepted accounting principles
because it defines the cost base as the manufacturing cost.
a
22. The first step in the absorption-cost approach is to compute the markup percentage used
in setting the target selling price.
a
23. Because absorption cost data already exists in general ledger accounts, it is cost effective
to use it for pricing.
a
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.
a
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.
a
1. F 6. F 11. F 16. T 21. T
a
2. T 7. T 12. T 17. F 22. F
a
3. T 8. T 13. F 18. T 23. T
a
4. F 9. F 14. F 19. F 24. T
a
5. T 10. T 15. T 20. T 25. F
8-6 Test Bank for ISV Managerial Accounting, Fourth Edition

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.

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.
 Pricing 8-7

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.

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 600,000 units
Desired profit per unit $0.25
Target cost $168,000
What is the target selling price per unit?
a. $0.28
b. $0.50
c. $0.25
d. $0.53

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 $80,000
The target cost per bottle is
a. $0.24.
b. $0.40.
c. $0.16.
d. $0.60.

38. Larry Cable Inc. plans to introduce a new product and is using the target cost approach.
Projected sales revenue is $810,000 ($4.50 per unit) and target costs are $748,800. What
is the desired profit per unit?
a. $0.34
b. $2.08
c. $4.16
d. None of the above

39. Wasson Widget Company is contemplating the production and sale of a new widget.
Projected sales are $187,500 (or 75,000 units) and desired profit is $22,500. What is the
target cost per unit?
a. $2.50
b. $2.20
c. $2.80
d. $3.00
8-8 Test Bank for ISV Managerial Accounting, Fourth Edition

40. Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit
per unit is $2.30. The expected unit sales price is $27.50 based on 10,000 units. What is
the total target cost?
a. $252,000
b. $275,000
c. $23,000
d. $298,000

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 $250 each. If the company
uses cost-plus pricing and applies a markup percentage of 60%, what is the sales price
per suit?
a. $417
b. $400
c. $350
d. $625

Use the following information for questions 44–47.

Custom Shoes Co. has gathered the following information concerning one model of shoe:
Variable manufacturing costs $50,000
Variable selling and administrative costs $25,000
Fixed manufacturing costs $200,000
Fixed selling and administrative costs $150,000
Investment $2,125,000
ROI 30%
Planned production and sales 5,000 pairs

44. What is the total cost per pair of shoes?

a. $50
b. $85
c. $210
d. $120

45. What is the desired ROI per pair of shoes?

a. $85.00
b. $210.00
c. $127.50
d. $212.50
 Pricing 8-9

46. What is the target selling price per pair of shoes?

a. $177.50
b. $212.50
c. $142.50
d. $197.50

47. What is the markup percentage?

a. 150%
b. 255%
c. 850%
d. 182%

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 10,000 units
Unit cost $115
Total investment $1,200,000

48. The ROI percentage is

a. 20%.
b. 30%.
c. 35%.
d. 25%.

49. The markup percentage is

a. 26.09%.
b. 20.69%.
c. 25%.
d. 22.59%.

50. A company using cost-plus pricing has an ROI of 24%, total sales of 12,000 units and a
desired ROI per unit of $30. What was the amount of investment?
a. $86,400
b. $1,500,000
c. $273,600
d. $473,685

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 15%
Investment $1,400,000
Sales 200,000 units
8 - 10 Test Bank for ISV Managerial Accounting, Fourth Edition

51. What is the target selling price per unit?

a. $4.55
b. $3.50
c. $2.30
d. $3.30

52. What is the markup percentage?

a. 84%
b. 15%
c. 40%
d. 30%

53. What would the markup percentage be if only 150,000 units were sold and Brislin still
wanted to earn the desired ROI?
a. 24.71%
b. 40.0%
c. 26.25%
d. 32.94%

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.

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.
 Pricing 8 - 11

59. The following per unit information is available for a new product of Red Ribbon Company:
Desired ROI $ 50
Fixed cost 80
Variable cost 120
Total cost 200
Selling price 250
Red Ribbon Company's markup percentage would be
a. 20%.
b. 25%.
c. 40%.
d. 60%.

60. Bryson Company has just developed a new product. The following data is available for
this product:
Desired ROI per unit $ 24
Fixed cost per unit 40
Variable cost per unit 60
Total cost per unit 100
The target selling price for this product is
a. $124.
b. $100.
c. $84.
d. $64.

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.

62. In the cost-plus pricing approach, the desired ROI per unit is computed by multiplying the
ROI percentage by
a. fixed costs.
b. total assets.
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 $150
Variable cost per unit 450
Total cost per unit 600
Desired ROI per unit 180
63. Red Grass Company's markup percentage would be
a. 120%.
b. 60%.
c. 40%.
d. 30%.
8 - 12 Test Bank for ISV Managerial Accounting, Fourth Edition

64. The target selling price for this television is

a. $330.
b. $600.
c. $630.
d. $780.

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.

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 2008:
Repair technicians’ wages $270,000
Fringe benefits 60,000
Overhead 45,000
Total $375,000
The desired profit margin is $30 per labor hour. The material loading charge is 40% of invoice
cost. It is estimated that 5,000 labor hours will be worked in 2008.

70. Wheels ‘N Spokes’ labor charge in 2008 would be

a. $75.
b. $84.
c. $96.
d. $105.
 Pricing 8 - 13

71. In January 2008, Wheels ‘N Spokes repairs a bicycle that uses parts of $120. Its material
loading charge on this repair would be
a. $48.
b. $72.
c. $120.
d. $168.

72. In March 2008, Wheels ‘N Spokes repairs a bicycle that takes two hours to repair and
uses parts of $180. The bill for this repair would be
a. $390.
b. $420.
c. $444.
d. $462.

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.
Consultant’s 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 $10
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. $32.50.
b. $26.00.
c. $31.50.
d. $36.00.

75. The material loading charge is

a. 25%.
b. 40%.
c. 55%.
d. 15%.

76. A consulting job takes 20 hours of consulting time and $180 of supplies. The client’s bill
would be
a. $972.
b. $772.
c. $945.
d. $745.
8 - 14 Test Bank for ISV Managerial Accounting, Fourth Edition

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 $400
Labor profit margin $10
Materials profit margin 20%
Total labor charges $260
Cost of materials used $100
Total hourly cost $22.50

77. What was the material loading charge?

a. 20%
b. 25%
c. 35%
d. 40%

78. How many hours were billed on the job?

a. 13.0
b. 12.3
c. 11.5
d. 8.0

79. Lawrence Legal Services recently billed a customer $750. 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. 40%
b. 50%
c. 100%
d. 80%

80. Dudly Drafting Services uses a 45% material loading charge and a labor rate of $40 per
hour. How much will be charged on a job that requires 3.5 hours of work and $80 of
materials?
a. $256
b. $220
c. $176
d. $266

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
 Pricing 8 - 15

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 $15 per labor hour is
a. $22.
b. $31.
c. $33.
d. $37.

85. The material loading charge to be used next year assuming a 40% markup on material
cost is
a. 65%.
b. 40%.
c. 80%.
d. 20%.

86. Jaycee estimates that the repairs to a Cadillac Escalade damaged in a rollover will take
45 hours of labor and $3,500 in parts and materials. The total cost of the repairs is
a. $5,165.
b. $7,440.
c. $5,365.
d. $6,390.

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.
8 - 16 Test Bank for ISV Managerial Accounting, Fourth Edition

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

Use the following information for questions 90 and 91.

The Selling Division’s unit sales price is $15 and its unit variable cost is $9. Its capacity is 10,000
units. Fixed costs per unit are $4. 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. $6
b. $15
c. $2
d. $0

91. What is the Selling Division’s opportunity cost per unit from selling 3,000 units to the
Purchasing Division?
a. $6
b. $15
c. $2
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.

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.
 Pricing 8 - 17

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 $2.00
Variable production cost per bd. ft. $1.00
Variable selling cost per bd. ft. $0.40
Construction Division:
Board feet needed 60,000
Outside price paid per bd. ft. $1.60

If the Lumber Division sells to the Construction Division, $0.30 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. $1.00
b. $1.10
c. $1.40
d. $2.00

99. If current outside sales are 150,000 board feet, what is the minimum transfer price that the
Lumber Division could accept?
a. $1.60
b. $1.30
c. $1.10
d. $1.70

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 $24,000
b. Decrease by $18,000
c. Increase by $30,000
d. Increase by $27,000
8 - 18 Test Bank for ISV Managerial Accounting, Fourth Edition

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 $700 a unit. The Engine Division, currently operating at capacity, has a unit sales price
of $1,700 and unit variable costs and fixed costs of $700 and $500, respectively. The Production
Division is currently paying $1,600 per unit to an outside supplier. $60 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. $1,640
b. $1,700
c. $1,600
d. $1,000

102. What is the increase/decrease in overall company profits if this transfer takes place?
a. Decrease $800,000
b. Increase $1,680,000
c. Decrease $2,000,000
d. Increase $18,000,000

Use the following information for questions 103 and 104.

The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.50 per
can. Its unit variable costs and unit fixed costs are $0.20 and $0.07, respectively. The Packaging
Division wants to purchase 50,000 cans at $0.27 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. $0.20
b. $0.27
c. $0.18
d. $0.25

104. Assuming the Can Division is already operating at full capacity, what is the minimum
transfer price it should accept?
a. $0.48
b. $0.55
c. $0.24
d. $0.28

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 250,000 gallons of milk a year. Last year’s operating
results were as follows:
Sales (200,000) gallons $500,000
Variable costs 312,000
Contribution margin 188,000
Fixed costs 100,000
Net Income $ 88,000
 Pricing 8 - 19

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. $0.94 per gallon.
c. $1.56 per gallon.
d. $0.44 per gallon.

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. $2.50 per gallon
b. $0.94 per gallon
c. $1.56 per gallon
d. $0.44 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.
b. full cost.
c. variable cost.
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.
8 - 20 Test Bank for ISV Managerial Accounting, Fourth Edition

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. Variable costs of units sold internally may be 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.

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.
 Pricing 8 - 21

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 $110. Its variable cost is $50 per unit, and its fixed cost per unit is $14. Fir's president wants
the Wood Division to transfer 5,000 units to another company division at a price of $64.

121. Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer
price it should accept is
a. $14.
b. $50.
c. $64.
d. $110.

122. Assuming the Wood Division does not have any available capacity, the minimum transfer
price it should accept is
a. $14.
b. $50.
c. $64.
d. $110.

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 $80. The Food Division sells the product to customers
for $140 per unit. The Food Division’s variable cost per unit is $70 and its fixed cost per unit is
$20.

123. If the Food Division is currently operating at full capacity, what is the minimum transfer
price the Food Division should accept?
a. $20
b. $70
c. $90
d. $140

124. If the Food Division has 10,000 units available capacity, what is the minimum transfer
price the Food Division should accept?
a. $20
b. $70
c. $90
d. $140
8 - 22 Test Bank for ISV Managerial Accounting, Fourth Edition

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 are correct.
a
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
a
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.
a
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.
a
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.
a
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.
 Pricing 8 - 23
a
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.
a
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.
a
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.
a
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.
a
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.
a
137. Maggie Co. has variable manufacturing costs per unit of $40, and fixed manufacturing
cost per unit is $30. Variable selling and administrative costs per unit are $8, while fixed
selling and administrative costs per unit are $12. Maggie desires an ROI of $15 per unit.
If Maggie Co. uses the absorption-cost approach, what is its markup percentage?
a. 8.33%
b. 50%
c. 16.67%
d. 25%
a
138. Maggie Co. has variable manufacturing costs per unit of $40, and fixed manufacturing
cost per unit is $20. Variable selling and administrative costs per unit are $10, while fixed
selling and administrative costs per unit are $4. Maggie desires an ROI of $16 per unit. If
Maggie Co. uses the variable-cost approach, what is its markup percentage?
a. 50%
b. 80%
c. 30%
d. 100%
8 - 24 Test Bank for ISV Managerial Accounting, Fourth Edition

Use the following information for questions 139–144.

Papillon Co. has determined the following per unit amounts:

Direct materials $10 Fixed selling and administrative $20
Direct labor 12 Variable overhead 8
Desired ROI 11 Variable selling and administrative 5
Fixed overhead 15
a
139. The cost base using the absorption-cost approach is
a. $30.
b. $35.
c. $65.
d. $45.
a
140. The markup percentage using the absorption-cost approach is
a. 80%.
b. 102%.
c. 131%.
d. 90%.
a
141. The target selling price using the absorption-cost approach is
a. $117.
b. $81.
c. $54.
d. $123.50.
a
142. The cost base using the variable-cost approach is
a. $30.
b. $35.
c. $65.
d. $45.
a
143. The markup percentage using the variable-cost approach is
a. 80%.
b. 102%.
c. 131%.
d. 90%.
a
144. The target selling price using the variable-cost approach is
a. $103.95.
b. $69.30.
c. $70.70.
d. $80.85.
a
145. Alfredo Co. has collected the following per unit data:
Direct labor $15 Variable selling and admin. $ 6
Direct materials 10 Fixed overhead 20
Variable overhead 8 Fixed selling and admin. 14
The markup percentage is 120%. What is the target selling price under the variable-cost
approach?
 Pricing 8 - 25

a. $54.20
b. $46.80
c. $39.60
d. $87.60

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a
26. d 44. b 62. b 80. a 98. b 116. c 134. b
a
27. b 45. c 63. d 81. d 99. d 117. d 135. d
a
28. c 46. b 64. d 82. b 100. c 118. c 136. c
a
29. d 47. a 65. d 83. c 101. a 119. a 137. b
a
30. d 48. d 66. c 84. d 102. a 120. c 138. b
a
31. c 49. a 67. b 85. a 103. c 121. b 139. d
a
32. a 50. b 68. d 86. b 104. a 122. d 140. a
a
33. d 51. a 69. d 87. c 105. c 123. d 141. b
a
34. c 52. d 70. d 88. d 106. a 124. b 142. b
a
35. b 53. d 71. a 89. b 107. d 125. d 143. c
a
36. d 54. a 72. d 90. d 108. d 126. c 144. d
a a
37. b 55. b 73. c 91. a 109. a 127. a 145. b
a
38. a 56. c 74. d 92. d 110. d 128. c
a
39. b 57. b 75. b 93. c 111. d 129. d
a
40. a 58. c 76. a 94. a 112. d 130. c
a
41. b 59. b 77. d 95. b 113. d 131. b
a
42. a 60. a 78. d 96. d 114. c 132. d
a
43. b 61. c 79. c 97. b 115. b 133. c

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 250,000 and the minimum required rate of return on all investments is 15%.

Instructions
Compute the target cost per iron.

Solution 146 (5 min)

Sales (250,000 × $85) $21,250,000
Less desired ROI ($3,500,000 × 15%) 525,000
Target cost 20,725,000
Number of irons ÷ 250,000
Target cost per iron $ 82.90
8 - 26 Test Bank for ISV Managerial Accounting, Fourth Edition

BE 147
Talia Corp. produces digital cameras. For each camera produced, direct materials are $24, 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.

Solution 147 (5 min)

Direct materials........................................................ $24
Direct labor............................................................... 16
Variable manufacturing overhead............................. 12
Fixed manufacturing overhead................................. 28
Variable selling and administrative expenses........... 10
Fixed selling and administrative expenses............... 24
Total unit cost..................................................... $114

Total unit cost + (Markup percentage × Total unit cost) = Target selling price
$114 + (40% × $114) = $159.60

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 12%.

Instructions
What is Tina’s ROI per unit?

Solution 148 (3 min)

(Total investment  Desired ROI percentage ) ($20,000,000  12%)
ROI per unit = = =
Number of units 100,000
$24

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 $96.

Instructions
Compute NayTag’s markup percentage using a total cost approach.
 Pricing 8 - 27

Solution 149 (5 min)

$96
The markup percentage would be: = 30%
$72  $48  $36  $84  $24  $56

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, $450,000; variable costs, $2,400,000; fixed
costs, $200,000.

Instructions
Compute each of the following:
1. Budgeted ROI.
2. Markup percentage using a total cost approach.

Solution 150 (5 min)

1. ROI is equal to net income divided by invested assets. For MAC Company, budgeted ROI is:
Budgeted ROI = $450,000 ÷ $3,000,000 = 15%

Net income
2. The markup percentage is equal to:
Total cost
$450,000
For MAC Company, the budgeted markup percentage is: = 17.3%
$2,400,000  $200,000

BE 151
On a recent job repairing a small boat engine, Marine Repairs Company worked 21 hours and
used parts with a cost of $1,400. 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.

Solution 151 (5 min)

The total bill would equal: (21 hours × $80) + $1,400 + ($1,400 × 60%) = $3,920

BE 152
Alma and Associates, a new consulting service, recently received a bill for repairs on its
computers totaling $2,350. 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.
8 - 28 Test Bank for ISV Managerial Accounting, Fourth Edition

Solution 152 (5 min)

Total repair bill $2,350
Less labor charges (15 hours × $75) 1,125
Total charge for parts 1,225
Less parts cost 700
Cost of loading charge 525
Parts cost ÷ 700
Loading charge percentage 75%

BE 153
Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the
batteries to its customers for $82 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.

Solution 153 (5 min)

The minimum transfer price is equal to Freberg’s variable cost plus its opportunity cost. The
opportunity cost is equal to its contribution margin on goods sold to external parties. Thus, the
minimum transfer price in this case is: $42 + ($82 – $42) = $82.

BE 154
Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the
batteries to its customers for $82 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 has sufficient excess capacity to
provide the 30,000 batteries to the other division.

Instructions
Compute the minimum transfer price that Freberg should accept.

Solution 154 (5 min)

If Freberg has excess capacity, then its opportunity cost is zero. In this case, the minimum
transfer price is: $42 + $0 = $42.

BE 155
Freberg Company, a division of Dudge Cars, produces automotive batteries. Freberg sells the
batteries to its customers for $82 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 special, high-
performance batteries to another division within the company. Freberg’s variable cost on these
special batteries is $52 per unit. Freberg is operating at full capacity.
 Pricing 8 - 29

BE 155 (cont.)
Instructions
Compute the minimum transfer price that Freberg should accept.

Solution 155 (5 min)

The minimum transfer price is equal to Freberg’s variable cost plus its opportunity cost. In this
case, the minimum transfer price is: $52 + ($82 – $42) = $92.

a
BE 156
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 $10; and fixed selling &
administrative expenses $20. The desired ROI per unit is $25.

Instructions
Compute the markup percentage using the absorption-cost approach.

a
Solution 156 (5 min)
$25  ($10  $20)
Markup percentage = = 73.33%
$15  $18  $12  $30

a
BE 157
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 $20;
fixed manufacturing overhead $25; and fixed selling & administrative costs $35. The markup
percentage is 125%.

Instructions
Compute the target selling price.

a
Solution 157 (5 min)
$20  $25  $35
Markup percentage = = 125%
Cost base

Cost base = $80 ÷ 125% = $64

Target selling price = $64 + ($64 × 125%) = $144
8 - 30 Test Bank for ISV Managerial Accounting, Fourth Edition

EXERCISES
Ex. 158
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 500,000 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.

Solution 158 (6-10 min.)

Sales (500,000 × $45) $22,500,000
Less desired ROI ($4,000,000 × 16%) 640,000
Target cost for 500,000 units $21,860,000

Target cost per unit = $21,860,000 ÷ 500,000 = $43.72

Ex. 159
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 200,000 units with a required $5,000,000
investment.

Instructions
Compute the required minimum rate of return.

Solution 159 (5–10 min.)

Sales (200,000 × $200) $40,000,000
Less target cost (200,000 × $195) 39,000,000
Desired ROI (in dollars) 1,000,000
Investment ÷ 5,000,000
Minimum ROI 20%

Ex. 160
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 $42
Direct labor 54
Variable manufacturing overhead 72
Fixed manufacturing overhead $12,000,000
Variable selling and administrative expenses 64
Fixed selling and administrative expenses 7,200,000
 Pricing 8 - 31

Ex. 160 (cont.)

The company has a desired ROI of 25%. 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.

Solution 160 (12 min.)

1. Total cost per unit:
Per Unit
Direct materials $ 42
Direct labor 54
Variable manufacturing overhead 72
Fixed manufacturing overhead ($12,000,000 ÷ 400,000 30
Variable selling and administrative expenses 64
Fixed selling and administrative expenses ($7,200,000 ÷ 400,000) 18
$280

2. Desired ROI per unit = (25% × $120,000,000) ÷ 400,000 = $75

$75  $0
3. Markup percentage using total cost per unit = = 26.79%
$280

4. Target selling price = $280 + ($280 × 25%) = $350

Ex. 161
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 $20
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.
8 - 32 Test Bank for ISV Managerial Accounting, Fourth Edition

Solution 161 (18 min.)

1. Direct materials $20
Direct labor 40
Variable manufacturing overhead 10
Variable selling and administrative expenses 6
Variable cost per unit $76

Budgeted Cost
Total Costs Volume Per Unit
Fixed manufacturing overhead $1,800,000 ÷ 60,000 = $30
Fixed selling and administrative expenses 1,440,000 ÷ 60,000 = 24
Fixed cost per unit $54

Variable cost per unit $ 76

Fixed cost per unit 54
Total cost per unit $130

2. Total cost per unit $130

Markup × 30%
Desired ROI per unit $ 39

3. Total cost per unit $130

Desired ROI per unit 39
Target selling price $169

Ex. 162
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 $18
Direct labor 13
Variable manufacturing overhead 4
Variable selling and administrative expenses 5
$40

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 16 percent return on its investment (ROI)
of $250,000.

Instructions
Compute the selling price that would provide Skyhigh a 16 percent ROI.
 Pricing 8 - 33

Solution 162 (6–10 min.)

Variable cost per unit $40
Fixed cost per unit 25
Desired ROI per unit 2*
Target selling price $67
*$250,000 × .16 = $40,000; $40,000 ÷ 20,000 = $2 per unit

Ex. 163
Silver Spoon Service repairs commercial food preparation equipment. The following budgeted
cost data is available for 2008:
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 $64 profit margin per hour of labor and a 50% profit margin on parts. Silver Spoon estimates the
total invoice cost of parts and materials in 2008 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.

Solution 163 (18-20 min.)

1. Per Hour
Total Cost Total Hours Charge
Hourly labor rate for repairs
Technicians' wages and benefits $500,000 ÷ 10,000 = $ 50.00
Overhead costs
Office manager's salary and benefits 112,000 ÷ 10,000 = 11.20
Other overhead 48,000 ÷ 10,000 = 4.80
$660,000 ÷ 10,000 = 66.00
Profit margin 64.00
Rate charged per hour of labor $130.00
8 - 34 Test Bank for ISV Managerial Accounting, Fourth Edition

Solution 163 (cont.)

2. Material
Material Total Invoice Cost,Loading
Charges Parts and Materials Charge
Overhead costs
Parts manager's salary and benefits $ 72,000
Office manager's salary and benefits 18,000
$ 90,000 ÷ $500,000 = 18%
Other overhead 135,000 ÷ $500,000 = 27%
45%
Profit margin 50%
Material loading charge 95%

3. Job: Lime Corporation

Labor charges
20 hours @ $130 $ 2,600
Material charges
Cost of parts and materials $8,000
Material loading charge (95% × $8,000) 7,600 15,600
Total price of labor and materials $18,200

Ex. 164
Forrest Painting Service has budgeted the following time and material for 2008:

BUDGETED COSTS FOR 2008

Time Material
Charges Charges
Painters' wages and benefits $ 36,000
Service manager's salary and benefits $21,000
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 $82,500

Forrest budgets 4,000 hours of paint time in 2008 and will charge a profit of $12 per hour, in
addition to a 30% markup on the cost of paint.

On February 15, 2008, Forrest is asked to prepare a price estimate to paint a building. Forrest
estimates that this job will take 12 labor hours and $600 in paint.

Instructions
1. Compute the labor rate for 2008.
2. Compute the material loading charge rate for 2008.
3. Prepare a time-and-material price estimate for painting the building.
 Pricing 8 - 35

Solution 164 (18-20 min.)

1. Computation of labor rate
Total Cost Total Hours Per Hour Charge
Hourly labor rate
Painters' wages and benefits $36,000 ÷ 4,000 = $9
Overhead costs
Office employee's salary and benefits 12,000 ÷ 4,000 = 3
Other overhead 16,000 ÷ 4,000 = 4
$64,000 ÷ 4,000 = 16
Profit margin 12
Rate charged per hour of labor $28

2. Computation of material loading charge

Material
Material Total Invoice Cost Loading
Charges of Paint Charge
Overhead costs
Service manager's salary and benefits $21,000
Office employee's salary and benefits 3,000
24,000 ÷ $50,000 = 48%
Other overhead 8,500 ÷ 50,000 = 17%
$32,500 ÷ 50,000 = 65%
Profit margin 30%
Material loading charge 95%

3. Price estimate for time and materials

Job: Paint building

Labor charges: 12 hours @ $28 $ 336

Material charges
Cost of paint $600
Material loading charge (95% × $600) 570 1,170
Total price of labor and materials $1,506

Ex. 165
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 $200; fixed costs
per unit $150; and a selling price of $500 to outside customers. Vany currently purchases DVD
players from an outside supplier for $460 each. Top management of Vany would like Pert to
provide 50,000 DVD players per year at a transfer price of $200 each.

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.
8 - 36 Test Bank for ISV Managerial Accounting, Fourth Edition

Solution 165 (9 min.)

1. The minimum transfer price is $500 [$200 + ($500 – $200)], the outside market price, since
Pert is operating at full capacity.

2. The minimum transfer price is $200, the variable cost of the DVD players, since Pert has
excess capacity. However, since the market price is $460 (Vany's current cost), Pert should
be able to negotiate a price much higher than $200.

Ex. 166
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 $180
Variable cost per unit 120
Selling price per unit 450

Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for $400. 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 $400 per unit. Green Yard is
currently operating at full capacity. It could avoid $8 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.

Solution 166 (9 min.)

1. The minimum transfer price that Green Yard should accept is:
($120 – $8 + ($450 – $120) = $442

2. The decrease in contribution margin per unit to Lawn Supplies, Inc. is:

Contribution margin lost by Green Yard ($450 – $120) $330

Increased contribution margin to Lawn Supplies ($400 – $112) 288
Net decrease in contribution margin $ 42

Total contribution margin decrease is: $42 × 100,000 units = $4,200,000

Ex. 167
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:
 Pricing 8 - 37

Ex. 167 (cont.)

Selling price of regular cell phone $80
Variable cost of regular cell phone 40
Additional variable cost of special cell phone 30

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 $90 per phone. Spirit has available capacity.

2. The marketing vice president offers to pay Spirit $90 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 $140 per phone. Spirit has no available
capacity and would have to forgo sales of 30,000 phones to existing customers to meet this
request.

Solution 167 (13 min.)

1. Assuming that Spirit Manufacturing has available capacity, variable cost would be ($40 + $30)
or $70 and the opportunity cost would be zero. Therefore, the minimum transfer price would
be $70 = $70 + $0. Since the $90 transfer price being offered exceeds the $70 minimum
transfer price, the offer should be accepted.

2. Assuming no available capacity, and that the new units produced would be equal to the
number of standard units forgone, variable cost of the special cell phone would be ($40 +
$30) or $70 and the opportunity cost would be ($80 – $40) or $40. Therefore, the minimum
transfer price would be $110 = $70 + $40. Since this is higher than the $90 transfer price,
Spirit Manufacturing should reject the offer.

3. Assuming no available capacity, and that in order to produce the 20,000 special cell phones,
30,000 standard cell phones would be forgone, the minimum variable cost would be ($40 +
$30) or $70 and the opportunity cost would be:

Total contribution margin on standard cell phones ($80 – $40) × 30,000

—————————————————————— = —————————— = $60
Number of special cell phones $20,000

Therefore, the minimum transfer price would be $130 = ($40 + $30) + $60. Since the $140
transfer price being offered exceeds the minimum transfer price of $130, Spirit Manufacturing
should accept the offer.
8 - 38 Test Bank for ISV Managerial Accounting, Fourth Edition

Ex. 168
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 $0.04 per page and a typical textbook
requires 600 pages of print. A developmental editor from Pubworld approached the printing
operation manager offering to pay $0.024 per page for 5,000 copies of a 600-page textbook.
Outside printers are currently charging $0.03 per page. Printpro's variable cost per page is $0.02.

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 $0.024 transfer price when it has no available capacity.

Solution 168 (13 min.)

1a. Assuming that the printing operation has available capacity, the printing operation's variable
cost is $0.02 and its opportunity cost is $0. The minimum transfer price would be $0.02 =
$0.02 + $0. Therefore, in this case, the printing operation should accept the offer to print
internally. The $0.024 transfer price would provide a contribution margin of $0.004 ($0.024 –
$0.02) per page. Depending on its bargaining strength, the printing operation might want to
ask for a transfer price higher than $0.024, since the company is saving money at any price
below the $0.03 price charged by outside printers.

1b. Assuming no available capacity, the printing operation's variable cost is $0.02 per page and
its opportunity cost is $0.02 ($0.04 – $0.02) per page. The minimum transfer price would be
$0.04 = $0.02 + $0.02. Therefore, the printing operation would not accept the internal
transfer price of $0.024.

2. Printpro would lose: ($0.04 – $0.02) × 600 pages × 5,000 copies = $60,000

Pubworld would save: ($0.03 – $0.024) × 600 pages × 5,000 copies = $18,000

a
Ex. 169
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
 Pricing 8 - 39
a
Ex. 169 (cont.)
Gardenia has a desired ROI of 16%. It has invested assets of $8,250,000 and expects to produce
2,500 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.

a
Solution 169 (12–14 min.)
$250,000
1. Fixed manufacturing overhead = ———— = $100 per unit
2,500
$55,000
Fixed selling and administrative expenses per unit = ———— = $22 per unit
2,500

16% × $8,250,000
2. Desired ROI per unit = ————————— = $528 per unit
2,500

$528 + ($10 + $22)

3. Absorption-cost markup percentage = ——————————— = 249%
$62 + $48 + $15 + $100

$528 + ($100 + $22)

4. Variable-cost markup percentage = ——————————— = 481%
$62 + $48 + $15 + $10

a
Ex. 170
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 $200
Direct labor 120
Variable manufacturing overhead 80
Fixed manufacturing overhead $500,000
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.
8 - 40 Test Bank for ISV Managerial Accounting, Fourth Edition
a
Ex. 170 (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.

a
Solution 170 (12–14 min.)
1. Absorption-cost approach
a. Computation of unit manufacturing cost:
Per Unit
Direct materials $200
Direct labor 120
Variable manufacturing overhead 80
Fixed manufacturing overhead ($500,000 ÷ 5,000) 100
Total manufacturing cost $500

Computation of markup percentage to provide a 25% ROI:

Markup [25% × ($4,000,000 ÷ 5,000)] + [$25 + ($375,000 ÷ 5,000)] $300

Percentage = —————————————————————————— = —— = 60%
$500 $500

b. Computation of target price:

Target price: $500 + (60% × $500) = $800

2. Variable-cost approach
a. Computation of unit variable cost:
Per Unit
Direct materials $200
Direct labor 120
Variable manufacturing overhead 80
Variable selling and administrative expenses 25
Total variable cost $425

Computation of markup percentage to provide a 25% ROI:

Markup [25% × ($4,000,000 ÷ 5,000)] + [($500,000 ÷ 5,000) + ($375,000 ÷ 5,000)]

Percentage = —————————————————————————————————
$425
$375
= —— = 88.24%
$425

b. Computation of target price:

Target price: $425 + (88.24% × $425) = $800
 Pricing 8 - 41

COMPLETION STATEMENTS
171. The difference between the target price and the desired profit is the _________________
cost of the product.

172. In the cost-plus pricing formula, the target selling price equals cost + (________________
× cost).

173. The _______________ pricing approach has a major advantage: it is simple to compute.

174. 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.

175. The transfer of goods between divisions of the same company is termed _____________
sales.

176. The three approaches for determining a transfer price are negotiated, ________________
based, and _________________ based transfer prices.

177. To ensure that the selling division attempts to control its costs, the transfer price should be
based on _________________ cost instead of actual cost.

178. The formula for the minimum transfer price is: Minimum transfer price = Variable cost +
___________________.

179. __________________ involves contracting with an external party to provide a good or

service, rather than performing the work internally.

a
180. The __________________ approach is consistent with generally accepted accounting
principles because it defines the cost base as the manufacturing cost.

Answers to Completion Statements

171. target
172. markup percentage
173. cost-plus
174. loading charge
175. internal
176. cost, market
177. standard
178. Opportunity cost
179. Outsourcing
a
180. absorption-cost
8 - 42 Test Bank for ISV Managerial Accounting, Fourth Edition

MATCHING
181. 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
1. E 5. H
2. G 6. C
3. A 7. F
4. D 8. B
 Pricing 8 - 43

SHORT-ANSWER ESSAY QUESTIONS

S-A E 182
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.

Solution 182
The time-and-material pricing approach is used often in service industries, especially professional
firms and consulting firms. This approach involves three steps: (1) calculate the labor charge per
hour, (2) calculate the charge for obtaining and holding materials, and (3) calculate the charges
for a particular job. The material loading charge covers the costs of purchasing, handling, and
storing materials, plus any desired profit margin on the materials. It is expressed as a percentage
of the total estimated costs of parts and materials.

S-A E 183
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.

Solution 183
Under the negotiated transfer price approach, the transfer price will range between the external
purchase price per unit and the sum of unit variable cost and unit opportunity cost. In the cost-
based approach, the transfer price is based on either the full cost or the variable cost of the
selling division. Under the market-based approach, the minimum transfer price is the unit variable
cost plus the unit opportunity cost.