Target Pricing With Answers
Target Pricing With Answers
Target Pricing With Answers
160
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 P45, approximately
300,000 units can be sold. The controller has determined that an investment in new equipment
totaling P4,000,000 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 160 (6-10 min.)
Sales (300,000 × P45) P13,500,000
Less desired ROI (P4,000,000 × 16%) 640,000
Target cost for 300,000 units P12,860,000
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 cost per unit but misplaced his
working papers. From memory he remembers the estimated unit sales price was P200 and the
target unit cost was P195. Sales were projected at 100,000 units with a required P5,000,000
investment.
Instructions
Compute the required minimum rate of return.
Ex. 162
Laserspot 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, Laserspot does not believe that it can charge more than P80
for LittleLaser. At this price, Laserspot believes it can sell 100,000 of these laser guns.
LittleLaser will require an investment of P7,500,000 to manufacture, and the company wants an
ROI of 16%.
Instructions
Determine the target cost for one LittleLaser.
DL
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
P2,000,000 in the studio and expects a return on investment (ROI) of 16.5%. Budgeted costs for
the coming year are as follows.
Instructions
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 P32
Direct labor 54
Variable manufacturing overhead 72
Fixed manufacturing overhead P12,000,000
Variable selling and administrative expenses 34
Fixed selling and administrative expenses 7,200,000
The company has a desired ROI of 20%. It has invested assets of P120,000,000.
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 164 (12 min.)
1. Total cost per unit:
Per Unit
Direct materials P 32
Direct labor 54
Variable manufacturing overhead 72
Fixed manufacturing overhead (P12,000,000 ÷ 400,000) 30
Variable selling and administrative expenses 34
Fixed selling and administrative expenses (P7,200,000 ÷ 400,000) 18
P240
$60
3. Markup percentage using total cost per unit = $240 = 25%
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.
Solution 165 (18 min.)
1. Direct materials P30
Direct labor 40
Variable manufacturing overhead 10
Variable selling and administrative expenses 6
Variable cost per unit P86
Budgeted Cost
Total Costs Volume Per Unit
Fixed manufacturing overhead P1,800,000 ÷ 60,000 = P30
Fixed selling and administrative expenses 1,440,000 ÷ 60,000 = 24
Fixed cost per unit P54
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 variable cost per unit for the new model to be as
follows:
Direct materials P15
Direct labor 8
Variable manufacturing overhead 4
Variable selling and administrative expenses 5
P32
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 P240,000 20,000 P12
Fixed selling and administrative expenses 260,000 20,000 13
Fixed cost per unit P25
Skyhigh uses cost-plus pricing and would like to earn a 10 percent return on its investment
(ROI) of P400,000.
Instructions
Compute the 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 2016:
Time Material
Charges Charges
Technicians’ wages and benefits P500,000
Parts manager’s salary and benefits P 72,000
Office manager’s salary and benefits 112,000 18,000
Other overhead 48,000 135,000
Total budgeted costs P660,000 P225,000
Silver Spoon has budgeted for 10,000 hours of technician time during the coming year. It
desires a P54 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 2016 will be P500,000.
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 P8,000 of
parts. Compute the total estimated bill.
Solution 167 (18-20 min.)
1. Per Hour
Total Cost Total Hours Charge
Hourly labor rate for repairs
Technicians’ wages and benefits P500,000 ÷ 10,000 = P 50.00
Overhead costs
Office manager’s salary and benefits 112,000 ÷ 10,000 = 11.20
Other overhead 48,000 ÷ 10,000 = 4.80
P660,000 ÷ 10,000 = 66.00
Profit margin 54.00
Rate charged per hour of labor P120.00
2.
Material
Material Total Invoice Cost,
Loading
Charges Parts and Materials
Charge
Overhead costs
Parts manager’s salary and benefits P 72,000
Office manager’s salary and benefits 18,000
P 90,000 ÷ P500,000 = 18%
Other overhead 135,000 ÷ P500,000 = 27%
45%
Profit margin 40%
Material loading charge 85%
Labor charges
20 hours @ P120 P 2,400
Material charges
Cost of parts and materials P8,000
Material loading charge (85% × P8,000) 6,800 14,800
Total price of labor and materials P17,200
Ex. 168
Forrest Painting Service has budgeted the following time and material for 2016:
Forrest budgets 4,000 hours of paint time in 2016 and will charge a profit of P12 per hour, in
addition to a 25% markup on the cost of paint.
On February 15, 2016, Forrest is asked to prepare a price estimate to paint a building. Forrest
estimates that this job will take 12 labor hours and P500 in paint.
Instructions
1. Compute the labor rate for 2016.
2. Compute the material loading charge rate for 2016.
3. Prepare a time-and-material price estimate for painting the building.
Solution 168 (18-20 min.)
1. Computation of labor rate
Total Cost Total Hours Per Hour Charge
Hourly labor rate
Painters’ wages and benefits P36,000 ÷ 4,000 = P9
Overhead costs
Office employee’s salary and benefits 12,000 ÷ 4,000 = 3
Other overhead 16,000 ÷ 4,000 = 4
P64,000 ÷ 4,000 = 16
Profit margin 12
Rate charged per hour of labor P28
The company anticipated that the restorers would work a total of 10,000 hours this year.
Expected parts and materials were P1,200,000.
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 P60 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 P60,000 in parts and materials.
Solution 169 (10–12 min.)
(a)
Total Cost ÷ Total Hours Hourly Charge
Hourly labor rate:
Restorers’ wages and fringes P270,000 ÷ 10,000 = P27
Overhead costs:
Administrative salaries & fringes 60,000 ÷ 10,000 = 6
Other overhead costs 20,000 ÷ 10,000 = 2
Total hourly cost P350,000 ÷ 10,000 = P35
(b)
Material Total Invoice Material
Loading Cost, Parts & Loading
Charges ÷ Materials = Percentage
Overhead costs:
Purchasing agent’s
salary and fringes P 67,500
Administrative salaries & fringes 22,500
90,000 ÷ P1,200,000 = 7.50%
Other overhead costs 75,600 ÷ P1,200,000 = 6.30%
Total P165,600 ÷ P1,200,000 = 13.80%
(c)
Labor charges: 150 hours @ P60 P 9,000
Material charges:
Cost of parts & materials P60,000
Material loading charge (P60,000 × 83.80%) 50,280 110,280
Total price of labor and materials P119,280
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 P280 per home
appraisal, and its variable costs are P220 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 P265. The variable cost per appraisal to the Home-Loan Department would be P10
less than those performed for outside customers due to savings in administrative costs.
Instructions
(a) Determine the minimum transfer price, assuming the Appraisal Department has excess
capacity.
(b) Determine the minimum transfer price, assuming the Appraisal Department has no excess
capacity.
(c) Assuming the Appraisal Department has no excess capacity, should management force the
department to charge the Home-Loan Department only P265? Discuss.
(c) No. By forcing the Appraisal Department to accept the P265 per appraisal price,
management is penalizing the Appraisal department. If the department was allowed to sell
its services to outside customers it could earn P60 (P280 P220) in contribution margin per
appraisal. Forcing them to sell their services internally would allow them to earn only P55
(P265 P210) in contribution margin. A loss of P5 per appraisal or a total of P7,500 (1,500
P5) would result.
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 P1,200. Division A charges Division
B market price for the part, which is P700 per unit. Variable costs are P530 and P600 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 in the open market only 500 units at P700 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.
(b) The opportunity cost is the market price. Transfers should be made at market prices less
any avoidable costs. In the current situation, it would appear that no transfers would be
made.
The firm is better off by maintaining the current market price for Division A’s product and
transferring 500 units to Division B. A transfer price within the range of P530 to P600 would be
needed to motivate both divisional managers to engage in the transfers. An optimal transfer
price cannot be determined from the information given (even with full information, the best
transfer price in the range may not be determinable).
Ex. 172
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 P60; fixed costs
per unit P45; and a selling price of P150 to outside customers. Vany currently purchases DVD
players from an outside supplier for P140 each. Top management of Vany would like Pert to
provide 50,000 DVD players per year at a transfer price of P60 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.
2. The minimum transfer price is P60, the variable cost of the DVD players, since Pert has
excess capacity. However, since the market price is P140 (Vany’s current cost), Pert should
be able to negotiate a price much higher than P60.
Ex. 173
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 P150
Variable cost per unit 100
Selling price per unit 375
Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for P340.
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 P340 per unit. Green Yard
is currently operating at full capacity. It could avoid P6 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.
2. The decrease in contribution margin per unit to Lawn Supplies, Inc. is:
Contribution margin lost by Green Yard (P375 – P100) P275
Increased contribution margin to Lawn Supplies (P340 – P94) 246
Net decrease in contribution margin P 29
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:
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 P110 per phone. Spirit has available
capacity.
2. The marketing vice president offers to pay Spirit P110 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 P175 per phone. Spirit has no available
capacity and would have to forgo sales of 30,000 phones to existing customers to meet this
request.
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 (P50 +
P35) or P85 and the opportunity cost would be (P100 – P50) or P50. Therefore, the
minimum transfer price would be P135 = P85 + P50. Since this is higher than the P110
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 (P50 +
P35) or P85 and the opportunity cost would be:
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 P0.045 transfer price when it has no available capacity.
1b. Assuming no available capacity, the printing operation’s variable cost is P0.04 per page
and its opportunity cost is P0.02 (P0.06 – P0.04) per page. The minimum transfer price
would be P0.06 = P0.04 + P0.02. Therefore, the printing operation would not accept the
internal transfer price of P0.045.
2. Printpro would lose: (P0.06 – P0.04) × 600 pages × 5,000 copies = P60,000
Pubworld would save: (P0.05 – P0.045) × 600 pages × 5,000 copies = P15,000
a
Ex. 176
The following information is available for a product manufactured by Gardenia Corporation:
Per Unit Total
Direct materials P62
Direct labor 48
Variable manufacturing overhead 15
Fixed manufacturing overhead P250,000
Variable selling and admin. expenses 10
Fixed selling and admin. expenses 55,000
Gardenia has a desired ROI of 16%. It has invested assets of P8,250,000 and expects to
produce 5,000 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 176 (12–14 min.)
P250,000
1. Fixed manufacturing overhead = ———— = P50 per unit
5,000
P55,000
Fixed selling and administrative expenses per unit = ———— = P11 per unit
5,000
16% × P8,250,000
2. Desired ROI per unit = ————————— = P264 per unit
5,000
a
Ex. 177
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 P100
Direct labor 170
Variable manufacturing overhead 80
Fixed manufacturing overhead P750,000
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
P4,000,000 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.
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 177 (12–14 min.)
1. Absorption-cost approach
a. Computation of unit manufacturing cost:
Per Unit
Direct materials P100
Direct labor 170
Variable manufacturing overhead 80
Fixed manufacturing overhead (P750,000 ÷ 5,000) 150
Total manufacturing cost P500
2. Variable-cost approach
a. Computation of unit variable cost:
Per Unit
Direct materials P100
Direct labor 170
Variable manufacturing overhead 80
Variable selling and administrative expenses 25
Total variable cost P375