Problem 1 – Nancy Company has budgeted sales of $300,000 with the following budgeted costs:
Direct materials $60,000
Direct manufacturing labor 40,000
Factory overhead
Variable 30,000
Fixed 50,000
Selling and administrative expenses
Variable 20,000
Fixed 30,000
Question 1: Compute the average markup percentage for setting prices as a percentage of the full cost of the product. (five points)
Question 2: Compute the average markup percentage for setting prices as a percentage of the variable cost of the product. (five points)
Question 3: Compute the average markup percentage for setting prices as a percentage of the variable manufacturing costs. (five points)
Problem 2 – Better Food Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter. The purpose of the acquisition was to furnish oil for the cooking division. The cooking division needs 800,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows:
Direct materials per liter
$1.00
Direct processing labor
0.50
Variable processing overhead
0.24
Fixed processing overhead
0.40
Total
$2.14
Management is trying to decide what transfer price to use for sales from the newly acquired company to the cooking division. The manager of the olive oil division argues that $4, the market price, is appropriate. The manager of the cooking division argues that the cost of $2.14 should be used, or perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any output of the olive oil division not sold to the cooking division can be sold to outsiders for $4 per liter.
Question 1: Compute the operating income for the olive oil division using a transfer price of $4. (five points)
Question 2: Compute the operating income for the olive oil division using a transfer price of $2.14. (five points)
Question 3: What transfer price(s) do you recommend? Compute the operating income for the olive oil division using your recommendation. (five points)
Quiz
1. (TCO 7) Major influences of competitors, costs, and customers on pricing decisions are factors of (Points : 3)
supply and demand.
activity-based costing and activity-based management.
key management themes that are important to managers attaining success in their planning and control decisions.
the value-chain concept.
2. (TCO 7) The price of movie tickets for opening day and the few days following compared to the price six months later is an example of (Points : 3)
price gouging.
peak-load pricing.
dumping.
demand elasticity.
3. (TCO 7) The amount of markup percentage is usually higher if (Points : 3)
demand is elastic.
competition is intense.
there is idle capacity.
demand is strong.
4. (TCO 7) Life-cycle costing is the name given to (Points : 3)
a method of cost planning to reduce manufacturing costs to targeted levels.
the process of examining each component of a product to determine whether its cost can be reduced.
the process of managing all costs along the value chain.
a system that focuses on reducing costs during the manufacturing cycle.
5. (TCO 7) Pritchard Company manufactures a product that has a variable cost of $30 per unit. Fixed costs total $1,500,000, allocated on the basis of the number of units produced. Selling price is computed by adding a 20% markup to full cost. How much should the selling price be per unit for 300,000 units? (Points : 3)
$49.
$43.75.
$42.
$35.
6. (TCO 8) The benefits of a decentralized organization are greater when a company (Points : 3)
is large and unregulated.
is facing great uncertainties in their environment.
has few interdependencies among division.
All of the above
7. (TCO 8) A transfer-pricing method leads to goal congruence when managers (Points : 3)
always act in their own best interest.
act in their own best interest and the decision is in the long-term best interest of the manager’s subunit.
act in their own best interest and the decision is in the long-term best interest of the company.
act in their own best interest and the decision is in the short-term best interest of the company.
8. (TCO 8) Transferring products or services at market prices generally leads to optimal decisions when (Points : 3)
the market for the intermediate product is perfectly competitive.
the interdependencies of the subunits are minimal.
there are no additional costs or benefits to the company in buying or selling in the external market.
All of the above
9. (TCO 8) An advantage of using budgeted costs for transfer pricing among divisions is that (Points : 3)
it promotes subunit autonomy.
the divisions know the transfer price in advance.
it usually provides a basis for optimal decision making.
overall corporate profitability is usually higher.
10. (TCO 8) Division A sells soybean paste internally to Division B, which in turn, produces soybean burgers that sell for $5 per pound. Division A incurs costs of $0.75 per pound while Division B incurs additional costs of $2.50 per pound.
What is Division A’s operating income per pound, assuming the transfer price of the soybean paste is set at $1.25 per pound?
(Points : 3)
$0.50
$0.875
$1.250
$1.625
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