Pricing Kimmel Ch.21 Full Test Bank - Practice Test Bank | Accounting for Decisions 8e by Paul D. Kimmel. DOCX document preview.
CHAPTER 21
PRICING
CHAPTER LEARNING 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 equation 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 costs.
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. The advantage of the cost-based system is its simplicity. 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. 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: Unit variable cost + (Markup percentage × Unit variable cost).
*6. 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.
TRUE-FALSE STATEMENTS
1. In most cases, a company sets the selling 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 selling 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 whether demand will dictate that customers pay the target selling price.
7. Sales volume plays a large role in determining 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 in 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 unit variable cost.
15. One 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 calculation of 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 cost-based approach is the most commonly used method to establish a transfer price.
a19. The markup percentage in the variable-cost approach is computed by dividing the desired ROI per unit plus the unit fixed cost by the unit variable cost.
a20. 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.
a21. The absorption-cost approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost.
a22. The first step in the absorption-cost approach is to compute the markup percentage used in setting the target selling price.
a23. Because absorption cost data already exists in general ledger accounts, it is cost effective to use it for pricing.
a24. The number of transfers between divisions that are located in different countries has decreased as companies rely more on outsourcing.
a25. Differences in tax rates between countries can complicate the determination of the appropriate transfer price when transferring goods between divisions in different countries.
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. no other producers are manufacturing a similar item.
c. a company can effectively differentiate its product from others.
d. the product is not easily distinguished from competing products.
30. All of the following are factors that can affect pricing decisions except
a. cost considerations.
b. demand.
c. environment.
d. All of these are factors.
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 be unable to set the prices of its products?
a. The product is not easily differentiated from competing products.
b. The product is custom made for a customer.
c. There are few or no other producers capable of making a similar product.
d. 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. market price – desired profit.
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 is as follows:
Expected annual sales 400,000 units
Desired profit per unit $0.35
Target cost $168,000
What is the unit selling price?
a. $0.42
b. $0.70
c. $0.35
d. $0.77
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:
Projected annual sales 50,000 bottles
Projected selling and administrative costs $8,000
Desired profit $70,000
The target cost per bottle is
a. $0.44.
b. $0.60.
c. $0.16.
d. $0.40.
38. Larry Cable Inc. plans to introduce a new product and is using the target cost approach. Projected sales revenue is $810,000 ($4.05 per unit) and target costs are $730,000. What is the desired profit per unit?
a. $0.40
b. $2.03
c. $3.65
d. None of the above
39. Wasson Widget Company is contemplating the production and sale of a new widget. Projected sales are $300,000 (or 75,000 units) and desired profit is $36,000. What is the target unit cost?
a. $4.00
b. $3.52
c. $4.48
d. $4.80
40. Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit per unit is $1.84. The expected unit selling price is $22 based on a volume of 10,000 units. What is the total target cost at this sales volume?
a. $201,600
b. $220,000
c. $18,400
d. $238,400
42. The desired ROI per unit is calculated by
a. multiplying the ROI by the investment and dividing by the estimated sales number of units produced.
b. multiplying the unit selling price by the ROI.
c. dividing the total cost by the estimated sales volume and multiplying by the ROI.
d. dividing the ROI by the estimated sales volume and subtracting the result from the unit cost.
43. Bellingham Watersports Co. has received a shipment of wet suits that cost $200 each. If the company uses cost-plus pricing and applies a markup percentage of 60%, what is the selling price per suit?
a. $333
b. $320
c. $280
d. $500
44. Smoky Mountain Shoe Company has gathered the following information for one model of its hiking boots:
Variable manufacturing costs $40,000
Variable selling and administrative costs $20,000
Fixed manufacturing costs $160,000
Fixed selling and administrative costs $120,000
Investment $1,700,000
ROI 30%
Planned production and sales 5,000 pairs
What is the total cost per pair of boots?
a. $40
b. $68
c. $168
d. $96
45. Smoky Mountain Shoe Company has gathered the following information for one model of its hiking boots:
Variable manufacturing costs $40,000
Variable selling and administrative costs $20,000
Fixed manufacturing costs $160,000
Fixed selling and administrative costs $120,000
Investment $1,700,000
ROI 30%
Planned production and sales 5,000 pairs
What is the desired ROI per pair of boots?
a. $68
b. $168
c. $102
d. $170
46. Smoky Mountain Shoe Company has gathered the following information for one model of its hiking boots:
Variable manufacturing costs $40,000
Variable selling and administrative costs $20,000
Fixed manufacturing costs $160,000
Fixed selling and administrative costs $120,000
Investment $1,700,000
ROI 30%
Planned production and sales 5,000 pairs
What is the target selling price per pair of boots?
a. $142
b. $170
c. $114
d. $158
47. Smoky Mountain Shoe Company has gathered the following information for one model of its hiking boots:
Variable manufacturing costs $40,000
Variable selling and administrative costs $20,000
Fixed manufacturing costs $160,000
Fixed selling and administrative costs $120,000
Investment $1,700,000
ROI 30%
Planned production and sales 5,000 pairs
What is the markup percentage?
a. 150%
b. 255%
c. 850%
d. 130%
48. Lock Inc. has collected the following data concerning one of its electronic keypad deadbolt:
Unit selling price $145
Total sales 15,000 units
Unit cost $115
Total investment $1,800,000
The ROI percentage is
a. 20%.
b. 25%.
c. 30%.
d. 35%.
Ex. 160
Sterling Company is considering introducing a new line of filtration products. Sterling believes that if the filters can be priced competitively at $45 then approximately 300,000 units can be sold. The controller has determined that an investment in new equipment totaling $4,000,000 will be required. Sterling requires a minimum rate of return of 16% on all investments.
Instructions
Compute the target unit cost of the filter.
Ex. 161
Mellie Computer Devices Inc. is considering the introduction of a new printer. The company’s accountant had prepared an analysis computing the target unit cost but misplaced his working papers. From memory he remembers the estimated unit sales price was $200 and the target unit cost was $195. Sales were projected at 100,000 units with a required $5,000,000 investment.
Instructions
Compute the required minimum rate of return.
Ex. 162
Laserspot produces and sells 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 large potential market. Because of competition, Laserspot does not believe that it can charge more than $80 for LittleLaser. At this price, Laserspot believes it can sell 100,000 of these laser guns. LittleLaser will require an investment of $7,500,000 to manufacture, and the company wants an ROI of 16%.
Instructions
Determine the target cost for one LittleLaser.
Ex. 163
Joey’s Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,000,000 in the studio and expects a return on investment (ROI) of 16.5%. Budgeted costs for the coming year are as follows.
Per Session Total
Direct materials $60
Direct labor $400
Variable overhead $50
Fixed overhead $850,000
Variable selling and administrative expenses $40
Fixed selling and administrative expenses $800,000
Instructions
(a) Determine the total unit cost per session.
(b) Determine the desired ROI per session.
(c) Calculate the mark-up percentage on the total unit cost per session.
(d) Calculate the target selling price per session.
Ex. 164
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 $32
Direct labor 54
Variable manufacturing overhead 72
Fixed manufacturing overhead $12,000,000
Variable selling and administrative expenses 34
Fixed selling and administrative expenses 7,200,000
The company has a desired ROI of 20%. It’s investment in assets is $120,000,000.
Instructions
Compute each of the following:
1. Total unit cost.
2. Desired ROI per unit.
3. Markup percentage using total unit cost.
4. Target selling price.
Ex. 165
Goliath Corporation is in the process of setting a selling price for a recently designed product. The following data relate to this product at a budgeted volume of 60,000 units.
Per Unit Total
Direct materials $30
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 and has a markup on total unit cost of 30%.
Instructions
Compute each of the following for the new product:
1. Total unit variable cost, total unit fixed cost, and total unit cost.
2. Desired ROI per unit.
3. Target selling price.
Ex. 166
Skyhigh Company is in the process of setting a selling price for its newest model stunt kite, the Looper. The controller of Skyhigh estimates unit variable cost for the model to be as follows:
Direct materials $15
Direct labor 8
Variable manufacturing overhead 4
Variable selling and administrative expenses 5
$32
In addition, Skyhigh anticipates incurring the following unit fixed cost at a budgeted sales volume of 20,000 units:
Total Costs ÷ Budget Volume = Unit cost
Fixed manufacturing overhead $240,000 20,000 $12
Fixed selling and administrative expenses 260,000 20,000 13
Unit fixed cost $25
Skyhigh uses cost-plus pricing and would like to earn a 10-percent ROI of $400,000.
Instructions
Compute the target selling price that would provide Skyhigh a 10-percent ROI.
Ex. 167
Silver Spoon Service repairs commercial food preparation equipment. The following budgeted cost data is available for 2022:
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 $54 profit margin per hour of labor and a 40% profit margin on parts. Silver Spoon estimates the total invoice cost of parts and materials in 2022 will be $500,000.
Instructions
1. Compute the rate charged per hour of labor.
2. Compute the material loading charge.
Ex. 167 (Cont’d)
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.
Ex. 168
Forrest Painting Service has budgeted the following time and material for 2022:
BUDGETED COSTS FOR 2022
Time Material
Charges Charges
Painters’ wages and benefits $ 36,000
Service manager’s salary and benefits $23,000
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 $84,500
Ex. 168 (Cont’d)
Forrest budgets 4,000 hours of paint time in 2022 and will charge a profit of $12 per hour in addition to a 25% markup on the cost of paint.
On February 15, 2022, Forrest is asked to prepare a price estimate to paint a small building. Forrest estimates that this job will take 12 labor hours and $500 in paint.
Instructions
1. Compute the labor rate for 2022.
2. Compute the material loading charge rate for 2022.
3. Prepare a time-and-material price estimate for painting the building.
Ex. 169
Chuck’s Classic Cars restores classic automobiles to showroom status. Budgeted data for the current year are as follows:
Material
Time Loading
Charges Charges
Restorers’ wages and benefits $270,000
Purchasing agent’s salary and benefits $ 67,500
Administrative salaries and benefits 60,000 22,500
Other overhead costs 20,000 75,600
Total budgeted costs $350,000 $165,600
The company anticipated that the restorers would work a total of 10,000 hours this year. Expected parts and materials were $1,200,000.
In late January, the company experienced a fire in its facilities that destroyed most of the accounting records. The accountant remembers that the hourly labor rate was $60 and that the material loading charge was 83.80%.
Instructions
(a) Determine the profit margin per hour on labor.
(b) Determine the profit margin on materials.
(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 $60,000 in parts and materials.
Ex. 170
The Appraisal Department of Easy Mortgage 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. The department charges $280 per home appraisal and its variable costs are $220 per appraisal.
Recently, Easy Mortgage Bank has opened its own Home-Loan Department and wants the Appraisal Department to perform 1,500 appraisals on all Easy Mortgage Bank-financed home loans. Bank management feels that the cost of these appraisals to the Home-Loan Department should be $265. The variable cost per appraisal to the Home-Loan Department would be $10 less than those performed for outside customers due to savings in administrative costs.
Instructions
(a) Determine the minimum transfer price assuming that the Appraisal Department has excess capacity.
(b) Determine the minimum transfer price assuming that the Appraisal Department has no excess capacity.
(c) Assuming that the Appraisal Department has no excess capacity, should management force the department to charge the Home-Loan Department only $265? Discuss.
Ex. 171
The Pacific Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $1,200. Division A charges Division B the market price of $700 per unit of the part.t. Unit variable costs are $530 and $600 for Divisions A and B, respectively.
The manager of Division B feels that Division A should transfer the part at a lower price than market because at market, Division B is unable to make a profit.
Instructions
(a) Calculate Division B’s contribution margin if transfers are made at the market price, and calculate the company’s total contribution margin.
(b) Assume that Division A can sell all its production in the open market. Should Division A transfer the goods to Division B? If so, at what price?
(c) Assume that Division A can sell only 500 units externally at $700 per unit out of the 1,000 units that it can produce every month. Assume also that a 20% reduction in price is necessary to sell all 1,000 units each month. Should transfers be made? If so, how many units should the division transfer and at what price? To support your decision, submit a schedule that compares the contribution margins under three different alternatives.
Ex. 172
Pert Corporation manufactures wireless soundbar speakers. It is a division of Vany TV, which manufactures televisions. Pert sells the speakers to Vany as well as to retail stores. The following information is available for Pert’s speaker: unit variable cost $60; unit fixed cost $45; and a unit selling price of $150 to outside customers. Vany currently purchases speakers from an outside supplier for $140 each. Top management of Vany would like Pert to provide 50,000 speakers per year at a transfer price of $60 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 speakers to Vany.
Ex. 173
Green Yard Company, a division of Lawn Supplies, Inc., produces electric 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:
Unit fixed cost $150
Unit variable cost 100
Unit selling price 375
Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for $340. 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 $340 per unit. Green Yard is currently operating at full capacity. It could avoid $6 of unit 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.
Ex. 174
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:
Selling price of regular cell phone $100
Variable cost of regular cell phone 50
Additional variable cost of special cell phone 35
Instructions
Calculate the minimum transfer price and indicate whether the internal transfer should occur for each of the following scenarios:
1. The marketing vice president offers to pay Spirit $110 per phone. Spirit has available capacity.
2. The marketing vice president offers to pay Spirit $110 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 $175 per phone. Spirit has no available capacity and would have to forgo sales of 30,000 phones to existing customers to meet this request.
Ex. 175
Pubworld is a textbook publishing company that has contracts with a number of 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 $0.06 per page and a typical textbook requires 600 pages of print. A developmental editor from Pubworld approached the printing operation manager offering to pay $0.045 per page for 5,000 copies of a 600-page textbook. Outside printers are currently charging $0.05 per page. Printpro’s variable cost per page is $0.04.
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 $0.045 transfer price when it has no available capacity.