Chapter 8

5/3/13Chapter 8. Pricing Print this page EXERCISES E8-1 Compute target cost. (LO 1), AP Jarlsberg Cheese Company has developed a new cheese slicer called Slim Slicer. The company plans to sell this slicer through its catalog, which it issues monthly. Given market research, Jarlsberg believes that it can charge $20 for the Slim Slicer. Prototypes of the Slim Slicer, however, are costing $22. By using cheaper materials and gaining efficiencies in mass production, Jarlsberg believes it can reduce Slim Slicer's cost substantially. Jarlsberg wishes to earn a return of 30% of the selling price. Instructions (a) Compute the target cost for the Slim Slicer. (b) When is target costing particularly helpful in deciding whether to produce a given product? E8-2 Compute target cost. (LO 1), AP Eckert Company 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, Eckert does not believe that it can charge more than $90 for LittleLaser. At this price, Eckert believes it can sell 100,000 of these laser guns. Eckert will require an investment of $8,000,000 to manufacture, and the company wants an ROI of 20%. Instructions Determine the target cost for one LittleLaser. E8-3 Compute target cost and cost-plus pricing. (LO 1, 2), AP Hannon Company makes swimsuits and sells these suits directly to retailers. Although Hannon has a variety of suits, it does not make the All-Body suit used by highly skilled swimmers. The market research department believes that a strong market exists for this type of suit. The department indicates that the All-Body suit would sell for approximately $100. Given its experience, Hannon believes the All-Body suit would have the following manufacturing costs. Direct materials Direct labor Manufacturing overhead Total costs $ 25 30 45 $100 Instructions (a) Assume that Hannon uses cost-plus pricing, setting the selling price 20% above its costs. (1) What would edugen.wiley.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0.enc?course=crs64… 1/10 ) E8-4 Use cost-plus pricing to determine selling price. The following information is available for Kaspar Corporation's anticipated annual volume of 30. Per Unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $ 7 $ 9 $15 $3.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0. The following information is available for Paige Corporation's anticipated annual volume of 500.5/3/13 Chapter 8.000 units. (b) Compute the target selling price.000. Pricing be the price charged for the All-Body swimsuit? (2) Under what circumstances might Hannon consider manufacturing the All-Body swimsuit given this approach? (b) Assume that Hannon uses target costing.000 Total Instructions (a) Compute the total cost per unit. What is the price that Hannon would charge the retailer for the AllBody swimsuit? (c) What is the highest acceptable manufacturing cost Hannon would be willing to incur to produce the AllBody swimsuit. Per Unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses The company uses a 40% markup percentage on total cost. $ 4 $150. AP Kaspar Corporation makes a commercial-grade cooking griddle. if it desired a profit of $20 per unit? (Assume target costing.000 units.000 $17 $ 8 $11 $300.wiley. E8-5 Use cost-plus pricing to determine various amounts. (LO 2). AP Paige Corporation makes a mechanical stuffed alligator that sings the Martian national anthem.000 2/10 Total edugen.enc?course=crs64… . (LO 2). CDs.000. Per Unit Total 3/10 edugen. Instructions (a) Compute the total cost per unit.352.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0. E8-7 Use cost-plus pricing to determine various amounts. AP Pargo Corporation produces industrial robots for high-precision manufacturing. The company has invested $2. Each session includes the use of the studio facilities. (d) Compute the target selling price. E8-6 Use cost-plus pricing to determine various amounts. (b) Compute the desired ROI per unit. It has invested assets of $26.000.wiley.500.000 Total Instructions (a) Determine the total cost per session. AP Alma's Recording Studio rents studio time to musicians in 2-hour blocks. a digital recording of the performance.000 $ 20 $400 $ 50 $950.000 in the studio and expects a return on investment (ROI) of 20%. Pricing Variable selling and administrative expenses Fixed selling and administrative expenses $14 $1. Anticipated annual volume is 1.000 sessions.000 The company has a desired ROI of 25%. (LO 2). and a professional music producer/mixer. (d) Calculate the target price per session.enc?course=crs64… . Per Session Direct materials (tapes. The following information is given for Pargo Corporation. Budgeted costs for the coming year are as follows. (c) Calculate the markup percentage on the total cost per session.5/3/13 Chapter 8. (LO 2). etc) Direct labor Variable overhead Fixed overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 40 $500. (b) Determine the desired ROI per session. (c) Compute the markup percentage using total cost per unit. (Round to the nearest dollar.) (c) Compute the target selling price.800. E8-9 edugen. It has invested assets of $51. E8-8 Use time-and-material pricing to determine bill.000.000.200 $281.000. Second Chance estimates that it would require 40 hours of labor and $2.enc?course=crs64… 4/10 . (b) Compute the material loading percentage. Time Charges Technicians' wages and benefits Parts manager's salary and benefits Office employee's salary and benefits Other overhead Total budgeted costs $228. Instructions (a) Compute the cost per unit of the fixed manufacturing overhead and the fixed selling and administrative expenses. (b) Compute the desired ROI per unit.000 units per year.5/3/13 Chapter 8.000 $75. It anticipates production of 3.500 The company desires a $30 profit margin per hour of labor and a 20% profit margin on parts. (LO 3). It has budgeted for 7.600 hours of repair time in the coming year. Instructions (a) Compute the rate charged per hour of labor. The following budgeted cost data for 2014 is available for Second Chance.000 $ 55 $  324.500 9.) (c) Pace Corporation has requested an estimate to rebuild its spot welder. AP Second Chance Welding rebuilds spot welders for manufacturers.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0. (Round to three decimal places.wiley. and estimates that the total invoice cost of parts and materials in 2014 will be $400.000 15.000 The company has a desired ROI of 20%.200 Material Loading Charges —   $42.000 —   38. Compute the total estimated bill. Pricing Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $380 $290 $ 72 $1.000 of parts.000 24. ) (c) ICE has just received a request for a bid from Buil Builders on a $1. Compute the total estimated bill.000. computer.950 Material Loading Charges edugen. AP Wasson's Classic Cars restores classic automobiles to showroom status.enc?course=crs64… 5/10 .250 hours of technician time during the coming year. Budgeted data for the current year are: Time Charges Restorers' wages and fringe benefits Purchasing agent's salary and fringe benefits Administrative salaries and fringe benefits Other overhead costs Total budgeted costs 54.wiley.000 15.000 new home. AP Ignatenko's Custom Electronics (ICE) sells and installs complete security. Pricing Use time-and-material pricing to determine bill.000 The company has budgeted for 6.960 77.000 of parts. audio. and video systems for homes. (LO 3).000 $270.200. Time Charges Technicians' wages and benefits Parts manager's salary and benefits Office employee's salary and benefits Other overhead Total budgeted costs $150.500 21.000 —   28.000 $348.5/3/13 Chapter 8. (Round to two decimal places.000 $ 67. (Round to two decimal places. It estimates the total invoice cost of parts and materials in 2014 will be $700.000 $91.000 $193. It desires a $38 profit margin per hour of labor and a 100% profit on parts.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0.000 Material Loading Charges —   $34.000 42. Instructions (a) Compute the rate charged per hour of labor. (LO 3). The following budgeted cost data are available.000 15. E8-10 Use time-and-material pricing to determine bill. On newly constructed homes it provides bids using time-and-material pricing. The company estimates that it would require 80 hours of labor and $40.) (b) Compute the material loading percentage.000 24.490 $166. Selling price Variable cost of goods sold Body frame Other variable costs Contribution margin $300 900 1.200 Presently. Instructions (a) Determine the profit margin per hour on labor. In late January.000 hours this year.000. (LO 4). that makes body frames for other cycle companies. (b) Assuming that the Small Motor Division does not have excess capacity.25%.000 $2. compute the minimum acceptable price for the transfer of the small motor to the Household Division. (c) E8-12 Explain why the level of capacity in the Small Motor Division has an effect on the transfer price. Expected parts and materials were $1.000 in parts and materials.enc?course=crs64… 6/10 . The Cycle Division believes that edugen.wiley. (c) Determine the total price of labor and materials on a job that was completed after the fire that required 150 hours of labor and $60.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0. (b) Determine the profit margin on materials.260. E8-11 Determine minimum transfer price. AP Wellstone Company's Small Motor Division manufactures a number of small motors used in household and office appliances. compute the minimum acceptable price for the transfer of small motor LN233 to the Household Division. The accountant remembers that the hourly labor rate was $70. Determine effect on income from transfer price.5/3/13 Chapter 8.200 $1. AN The Cycle Division of Ayala Company has the following per unit data related to its most recent cycle called Roadbuster. The Household Division of Wellstone then assembles and packages such items as blenders and juicers.00 and that the material loading charge was 83. Pricing The company anticipated that the restorers would work a total of 12. The following costs relate to small motor LN233 on a per unit basis. the Cycle Division buys its body frames from an outside supplier. FrameBody. (LO 4). However Ayala has another division. Both divisions are free to buy and sell any of their components internally or externally. the company experienced a fire in its facilities that destroyed most of the accounting records. Fixed cost per unit Variable cost per unit Selling price per unit $ 5 $ 9 $30 Instructions (a) Assuming that the Small Motor Division has excess capacity. 000 units per year at a transfer price of $35 per unit. and (3) effect on the income of Ayala.5/3/13 Chapter 8.000 frames from FrameBody. The variable cost for FrameBody is $270. (LO 4). Berna currently purchases a standard unit from an outside supplier for $80. It is a division of Berna Motors. The Bathtub Division would like to make a special “ivory” tub with gold-plated fixtures for the company's 50-year anniversary. If the Cycle Division buys 1.wiley.000 of these units. It would like the Faucet Division to make the fixtures and provide them to the Bathtub Division at a transfer price of $160. AP edugen. (2) effect on the income of FrameBody. E8-13 Determine minimum transfer price. the top management of Berna has ordered Venetian to provide 200. (LO 4). The following information is available for Venetian's standard unit: variable cost per unit $35. fixed cost per unit $23. If the Cycle Division buys 1. which manufactures vehicles. Instructions Compute the minimum transfer price that the Faucet Division should be willing to accept. (2) effect on the income of FrameBody. Pricing FrameBody's product is suitable for its new Roadbuster cycle.000 frames from FrameBody. Instructions Answer each of the following questions. The Cycle Division is willing to pay $280 to purchase the frames from FrameBody. by selling internally. and discuss whether it should accept this offer. determine the following: (1) effect on the income of the Cycle Division. Venetian sells car stereos to Berna. If sold externally. and (3) effect on the income of Ayala.enc?course=crs64… 7/10 . Because of quality concerns and to ensure a reliable supply. Instructions (a) Assume that FrameBody has excess capacity and is able to meet all of the Cycle Division's needs. as well as to other vehicle manufacturers and retail stores. It would make only 5. (b) Assume that FrameBody does not have excess capacity and therefore would lose sales if the frames were sold to the Cycle Division. The Faucet Division is currently operating at full capacity. AP The Bathtub Division of Kirk Plumbing Corporation has recently approached the Faucet Division with a proposal. Its standard unit sells for $50 per unit and has variable costs of $29. AP Venetian Corporation manufactures car stereos.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0. determine the following: (1) effect on the income of the Cycle Division. (a) What is the minimum transfer price that Venetian should accept? (b) What is the potential loss to the corporation as a whole resulting from this forced transfer? (c) How should the company resolve this situation? E8-14 Compute minimum transfer price. Venetian is already operating at full capacity. and selling price to outside customer $86. E8-15 Determine minimum transfer price. However. the Faucet Division would save $6 per unit on variable selling expenses. the estimated variable cost per unit would be $140. Presently. (LO 4). FrameBody sells its frames for $350 per frame. Venetian can avoid $4 per unit of variable selling costs by selling the unit internally. (b) Suppose Division B could use the excess capacity to produce and sell externally 15.200 for Divisions A and B.5/3/13 Chapter 8. which is $1. Variable costs are $1. Instructions (a) Determine the minimum transfer price.000. Bank management feels that the cost of these appraisals to the Home-Loan Department should be $150. what should be the minimum transfer price accepted by Division B and the maximum transfer price paid by Division A? Justify your answer. Pricing The Appraisal Department of Bonita Bank performs appraisals of business properties for loans being considered by the bank and appraisals for home buyers that are financing their purchase through some other financial institution. Division A needs 10. should management force the department to charge the Home-Loan Department only $150? Discuss. Division A produces a subassembly part for which there is a competitive market. (LO 4).000 units of a new product at a price of $7 per unit. and its variable costs are $130 per appraisal. Division B has the capacity to manufacture 50.500 per unit. (LO 4). Division A can purchase reading lamps at a cost of $10 from an outside vendor. The department charges $162 per home appraisal. Division B currently uses this subassembly for a final product that is sold outside at $2.200 appraisals on all Bonita Bank–financed home loans. assuming the Appraisal Department has excess capacity.000 lamps for the coming year. Instructions Consider the following independent situations.000 lamps and the maximum transfer price paid by Division A? Justify your answer.000 lamps annually. The variable cost per appraisal to the HomeLoan Department would be $6 less than those performed for outside customers due to savings in administrative costs. (CGA adapted) E8-17 Determine minimum transfer price under different situations. Recently.wiley. Sales to outside customers are estimated at 40.000 lamps and the maximum transfer price paid by Division A? Justify your answer. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0. AP The Pacific Company is a multidivisional company. Bonita Bank has opened its own Home-Loan Department and wants the Appraisal Department to perform 1. assuming the Appraisal Department has no excess capacity. Division A makes and sells student desks. Reading lamps are sold at $12 each.enc?course=crs64… 8/10 . Each desk has a reading lamp as one of its components.400. (b) Determine the minimum transfer price. E8-16 Determine minimum transfer price under different situations. (a) What should be the minimum transfer price accepted by Division B for the 10. The total amount of fixed costs for Division B is $80. has two divisions. The variable cost for this new product is $5 per unit. (c) If Division A needs 15.000 during the next year.050 and $1.000 lamps for the next year. edugen. respectively. AP Crede Inc. (c) Assuming the Appraisal Department has no excess capacity. Division A charges Division B market price for the part. Variable costs are $7 per lamp and include $1 of variable sales costs that are not incurred if lamps are sold internally to Division A. What should be the minimum transfer price accepted by Division B for the 10.000 lamps instead of 10. Division B manufactures and sells reading lamps. fixed manufacturing overhead $21. Instructions Using the information given in E8-5. The following per unit cost information is available: direct materials $20. (b) Compute the desired ROI per unit. AP Information for Pargo Corporation is given in E8-7. answer the following. AP Information for Paige Corporation is given in E8-5. variable selling and administrative expenses $9. compute the markup percentage.5/3/13 Chapter 8.000 units that it can produce every month. variable manufacturing overhead $14. Should transfers be made? If so. Should Division A transfer the goods to Division B? If so. how many units should the division transfer and at what price? To support your decision. Instructions Compute Rensing Corporation's markup percentage using (a) absorption-cost pricing and (b) variable-cost pricing. (LO 6). edugen. (CMA-Canada adapted) *E8-18 Compute total cost per unit. (b) Assume that Division A can sell all its production in the open market. *E8-19 Compute markup percentage using absorption-cost pricing and variablecost pricing.wiley. (d) Using variable-cost pricing.500 per unit out of the 1.enc?course=crs64… 9/10 . *E8-20 Compute various amounts using absorption-cost pricing and variablecost pricing. The company's ROI per unit is $20.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0. (a) Compute the total cost per unit. and markup percentages using absorption-cost pricing and variablecost pricing. Assume also that a 20% reduction in price is necessary to sell all 1. compute the markup percentage.000 units each month. AP Rensing Corporation produces outdoor portable fireplace units. and calculate the company's total contribution margin. Division B is unable to make a profit. (LO 6). direct labor $25. (LO 6). and fixed selling and administrative expenses $11. submit a schedule that compares the contribution margins under three different alternatives. Instructions (a) Calculate Division B's contribution margin if transfers are made at the market price. (c) Using absorption-cost pricing. ROI. Pricing The manager of Division B feels that Division A should transfer the part at a lower price than market because at market. at what price? (c) Assume that Division A can sell in the open market only 500 units at $1. at www.) EXERCISES: SET B AND CHALLENGE EXERCISES Visit the book's companion website. (b) Compute the desired ROI per unit. (Round the markup percentage to three decimal places. Inc.com/college/weygandt. (Round the markup percentage to three decimal places. Copy right © 2012 John Wiley & Sons. A ll rights reserv ed.wiley.) (c) Compute the markup percentage and target selling price using absorption-cost pricing.wiley. answer the following. and choose the Student Companion site to access Exercise Set B and Challenge Exercises.com/edugen/courses/crs6428/weygandt9781118096895/c08/d2V5Z2FuZHQ5NzgxMTE4MDk2ODk1YzA4XzE0XzAueGZvcm0.enc?course=crs6… 10/10 .) (d) Compute the markup percentage and target selling price using variable-cost pricing.5/3/13 Chapter 8. edugen. (Round to the nearest dollar. (a) Compute the cost per unit of the fixed manufacturing overhead and the fixed selling and administrative expenses. Pricing Instructions Using the information given in E8-7.