ch08 Cost Control
ch08 Cost Control
ch08 Cost Control
Pricing
Brief A
Learning Objectives Questions Exercises Do It! Exercises Problems
4. Determine a transfer price 10, 11, 12, 7, 8, 9 4 11, 12, 13, 4A, 5A, 6A
using the negotiated, cost- 13, 14, 14, 15,
based, and market-based 15, 16 16, 17
approaches.
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the
chapter.
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ASSIGNMENT CHARACTERISTICS TABLE
*7A* Compute the target price using absorption-cost pricing and Moderate 30–40
variable-cost pricing.
*8A* Compute various amounts using absorption-cost pricing and Complex 40–50
variable-cost pricing.
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Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
1. The first type of pricing environment is where the company is a price taker; that is, the company
does not set the price, but instead the price is set by a competitive market. In the second type of
situation, the company sets the price. This happens most often when the product is specially made
for a customer or there are few or no other producers capable of manufacturing a similar item.
LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis
2. A company focuses on target cost when it cannot influence the market price. The target cost is
determined by subtracting the desired profit per unit from the market-determined selling price.
LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis
3. The basic formula to determine the target selling price in cost-plus pricing is:
4. The basic formula to determine the target selling price in cost-plus pricing is:
6. Total cost base per unit, excluding selling and administrative expenses.......................... $60
Selling and administrative expenses per unit................................................................... 15
Total unit cost................................................................................................................... $75
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[($16 + $9 + $6 = $31); ($6 ÷ ($16 + $9)= 24%)]
[(VC/unit + FC/unit + Desired ROI/unit = Target sell. price); (Desired ROI/unit ÷ (VC/unit + FC/unit) = Markup %)]
Chapter 8 Questions (Continued)
8. Time-and-material pricing is most often used in service industries. It involves two pricing rates,
one for the labor used on a job, while the other involves the materials used. Each typically has a
profit rate factored into it.
LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis
9. The material loading charge is a fee added to each bill to cover the costs of purchasing, receiving,
handling, and storing materials, plus any desired profit margin on the materials themselves. The
material loading charge is expressed as a percentage of the total estimated costs of parts and
materials for the year.
LO3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis
*10. A transfer price is the price used to record the transfer of goods or services between two divisions
in the same company. Setting a fair transfer price is important because an improper price will
benefit one division while hurting the other.
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*11. The objective of an appropriate transfer price is to maximize the return to the whole company
and not cause divisional performance to decline.
LO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis
*13. When a cost-based transfer price is used, the exchange of goods between divisions is recorded
by using the costs incurred by the selling division. This may either be the variable costs or
the variable costs with an additional markup to cover fixed costs. The primary advantage of this
approach is that it is relatively simple to use. The disadvantage is that it understates the selling
division’s contribution to the company’s total contribution margin. Finally, it reduces the selling
division’s incentive to control cost.
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*14. The general formula for determining the minimum transfer price that the selling division should
be willing to accept is:
Minimum transfer price = Variable cost + Opportunity cost
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*15. When determining the minimum transfer price, the opportunity cost is the contribution margin
that would be received if the goods were sold externally.
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*16. A company is likely to use a negotiated transfer price rather than a market-based price when the
selling division has excess capacity, and is therefore eager to expand production, or when a
market price does not exist (e.g., for a special order).
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*17. The absorption-cost approach defines the cost base as manufacturing cost. Therefore, it excludes
variable and fixed selling and administrative costs.
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*19. A company with divisions in different countries will set the transfer price so that more profit is
allocated to the division located in the country with the lower tax rate. This is improper. The
proper (and legal) treatment is to base the transfer price on the market value of the goods
transferred.
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SOLUTIONS TO BRIEF EXERCISES
In order to obtain a profit of $10 per drive, Ortega must set its target cost at
$35 per drive ($45 – $10). It will then need to form a design team that will
design a product that will meet quality specifications without exceeding the
target cost.
LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Decision Analysis
Total unit cost + (Markup percentage X Total unit cost) = Target selling price
$56 + (30% X $56) = $72.80
LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
[($12 + $8 + $6 + $14 + $4 + $12 = $56); ($56 + (30% x $56) = $72.80)]
[(DM/unit + DL/unit + Var. mfg. OH/unit + Fix. mfg. OH/unit + Var. S&A exp./unit + Fix. S&A exp./unit = Tot. unit
cost); (Tot. unit cost + (Markup % x Tot. unit cost) = Target sell. unit price)]
($10,000,000 X 12%)
= = $24
50,000
LO2 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
[($10,000,000 x 12%) ÷ 50,000 = $24]
[(Tot. invest. x Desired ROI %) ÷ No. of units = ROI/unit]
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BRIEF EXERCISE 8-4
$30 18.75%
=
$36 + $24 + $18 + $40 + $14 + $28
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Analysis
[$30 ÷ ($36 + $24 + $18 + $40 + $14 + $28) = 18.75%]
[Desired ROI/unit ÷ (DM/unit + DL/unit + VOH/unit + FOH/unit + Var. S&A/unit + Fix. S&A/unit) = Markup %]
The markup percentage is equal to Desired ROI per unit divided by total
unit cost. The desired ROI per unit is computed as follows:
$1,500,000 X 20%
Desired ROI per unit = = $30
10,000 units
[($1,500,000 x 20%) ÷ 10,000 = $30]
[(Investment x Bud. ROI %) ÷ Est. units of prod. = Desired ROI/unit]
The total unit cost is computed as follows:
$1,100,000 + $100,000
Total unit cost = = $120
10,000 units
[($1,100,000 + $100,000) ÷ 10,000 = $120]
[(VC + FC) ÷ Est. units of prod. = Tot. unit cost]
The markup percentage is computed as follows:
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BRIEF EXERCISE 8-7
The minimum transfer price is equal to the division’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:
If the division has excess capacity, then its opportunity cost is zero. In this
case, the minimum transfer price is:
The minimum transfer price is equal to the division’s variable cost plus its
opportunity cost. In this case the minimum transfer price is:
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$30 + ($14 + $28)
Markup percentage = = 61.02%
$36 + $24 + $18 + $40
LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
[($30 + ($14 + $28)) ÷ ($36 + $24 + $18 + $40) = 61.02%]
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SOLUTIONS TO DO IT! EXERCISES
DO IT! 8-1
The desired profit for this new product line is $320,000 ($2,000,000 X 16%)
DO IT! 8-2
Total unit cost + (Total unit cost X Markup percentage) = Target selling price
$48 + ($48 X 30%) = $62.40
LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
[($18 + $9 + $5 + $6 + $3 + $7) + ($48 x 30%) = $62.40]
[(DM/unit + DL/unit + VOH/unit + Fix. OH/unit + Var. S&A/unit + Fix. S&A/unit) + (Tot. unit cost x Markup %) =
Traget sell. price]
DO IT! 8-3
Per Hour
Total Cost ÷ Total Hours = Charge
Repair-technicians’ wages $110,000 5,000 $22
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Fringe benefits 40,000 5,000 8
Overhead 50,000 5,000 10
$200,000 5,000 $40
Profit margin 20
Rate charged per hour of labor $60
Materials cost................................................ $ 70
Materials loading charge ($70 X 60%)......... 42
Total materials cost...................................... $112
DO IT! 8-4
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SOLUTIONS TO EXERCISES
EXERCISE 8-1
(a) The target cost formula is: Target cost = Market price – Desired profit.
In this case, the market price is $20 and the desired profit is $8
(40% X $20). Therefore the target cost is $12 ($20 – $8).
[$20 – ($20 x 40%) = $12]
[Mkt. price/unit – (Mkt. price/unit x Markup %) = Target cost/unit]
EXERCISE 8-2
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EXERCISE 8-3
(a) (1) In this case the selling price would be $125 ($100 + [$100 X 25%]).
The problem with the $125 is that it is unlikely that Leno will be able to
sell any All-Body suits at that price. Market research seems to
indicate that it will sell for only $100. (2) One way that Leno might
consider manufacturing the All-Body swimsuit is if it has excess
capacity and therefore manufacturing
EXERCISE 8-3 (Continued)
the All-Body will not affect fixed costs. Thus if the company can cover
its variable costs, it might want to sell at the $100 level.
(b) In this case, the amount would be the selling price of $100.
(c) The highest acceptable cost would be the target cost. The target cost
is $75 as shown below:
EXERCISE 8-4
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Analysis
EXERCISE 8-5
EXERCISE 8-6
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Per Session
Direct materials................................................... $ 20
Direct labor.......................................................... 400
Variable overhead............................................... 50
Fixed overhead ($950,000 ÷ 1,000).................... 950
Variable selling & administrative expenses..... 40
Fixed selling & administrative expenses
($500,000 ÷ 1,000)............................................ 500
Total cost per session................................ $1,960
EXERCISE 8-6 (Continued)
($20 + $400 + $50 + $950 + $40 + $500 = $1,960)
(DM/session + DL/ session + VOH/ session + FOH/ session + Var. S&A/ session + Fix. S&A/ session = Tot. cost/
session)
(c) Mark-up percentage on total cost per session = $470.40 ÷ $1,960 = 24%
[(($2,352,000 x 20%) ÷ 1,000) ÷ $1,960 = 24%]
[((Investment x Desired ROI %) ÷ Ann. no. of sessions) ÷ Tot. cost/session = Markup % on tot. cost/session]
EXERCISE 8-7
$1,500,000
(a) Fixed manufacturing overhead per unit = = $500 per unit
3,000
20% X $54,000,000
(b) Desired ROI per unit = = $3,600 per unit
3,000
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Variable selling and administrative expenses.......................... 55
Fixed selling and administrative expenses.............................. 108
Total cost per unit....................................................................... 1,405
Desired ROI per unit................................................................... 3,600
Target selling price..................................................................... $5,005
[($380 + $290 + $72 + ($1,500,000 ÷ 3,000) + $55 + ($324,000 ÷ 3,000) + (($54,000,000 x 20%) ÷ 3,000) =
$5,005][(DM/unit + DL/unit + VOH/unit + FOH/unit + Var. S&A/unit + Fix. S&A/unit) + Desired ROI/unit = Target
sell. price/unit]
LO2 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
EXERCISE 8-8
(b) Total
Material Invoice Cost, Material
Loading Parts and Loading
Charges ÷ Materials = Percentage
Overhead costs
Parts manager’s salary and
benefits $42,500
Office employee’s salary
and benefits 9,000
51,500 ÷ $400,000 = 12.875%
Other overhead 24,000 ÷ $400,000 = 6.000%
$75,500 ÷ $400,000 = 18.875%
Profit margin 20.000%
Material loading percentage 38.875%
[(($42,500 + $9,000) ÷ $400,000)+ ($24,000 ÷ $400,000) + 20.000% = 38.875%]
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[((Parts mgr. sal. & bene. + Off. emp. sal. & bene.) ÷ Tot. cost mat. & parts) + (Other OH ÷ Tot. cost mat. & parts) +
Profit margin = Mat. loading %]
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EXERCISE 8-8 (Continued)
Labor charges
40 hours @ $67............................................. $2,680.00
Material charges
Cost of parts and materials......................... $2,000.00
Material loading charge
(38.875% X $2,000).................................... 777.50 2,777.50
Total price of labor and material........... $5,457.50
LO3 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
EXERCISE 8-9
(b) Total
Material Invoice Cost, Material
Loading Parts and Loading
Charges ÷ Materials = Percentage
Overhead costs
Parts manager’s salary and
benefits $34,000
Office employee’s salary
and benefits 15,000
49,000 ÷ $700,000 = 7.00%
Other overhead 42,000 ÷ $700,000 = 6.00%
$91,000 ÷ $700,000 13.00%
Profit margin
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Material loading percentage 80.00%
93.00%
EXERCISE 8-9 (Continued)
[(($34,000 + $15,000) ÷ $700,000) + ($42,000 ÷ $700,000) + 80.00% = 93.00%]
[((Parts mgr.’s sal. & bene. + Off. emp. sal. & bene.) ÷ Tot. cost parts & mat.) + (Other OH ÷ Tot. cost parts &
mat.) + Profit margin = Mat. loading %]
Labor charges
80 hours @ $69.20................................. $ 5,536
Material charges
Cost of parts and materials.................. $40,000
Material loading charge
(93% X $40,000).................................. 37,200 77,200
Total price of labor and material.... $82,736
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Analysis
EXERCISE 8-10
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EXERCISE 8-10 (Continued)
(b)
EXERCISE 8-11
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Given that the Small Motor Division has excess capacity, the minimum
transfer price is the variable cost of $11 per unit.
(b) Given no excess capacity, the minimum transfer price is $35, which is
its variable cost plus the lost contribution margin.
[$11 + ($35 - $11) = $35]
(VC + Opp. cost)
(c) The level of capacity plays a significant role in determining the appro-
priate transfer price. If a division has no excess capacity, why should
it sell its product below a selling price it can obtain in an outside
market? Conversely, if it has excess capacity, as long as it receives
more than its variable cost, it has a net gain.
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Analysis
EXERCISE 8-12
Purchase from
Present Situation FrameBody
Selling price $2,200 $2,200
Variable cost of goods sold
Body frame $300 $280
Other variable costs 900 1,200 900 1,180
Contribution margin $1,000 $1,020
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Variable cost 270
$ 10
EXERCISE 8-12 (Continued)
(b) 1. The answer would not change from (a)(1). Cycle Division would
gain $20,000 if it purchased the frames from FrameBody.
2. However, FrameBody would incur a loss of $70,000 as computed
below:
EXERCISE 8-13
(a) The minimum transfer price that Benson should accept is:
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EXERCISE 8-13 (Continued)
(b) The lost contribution margin per unit to the company is:
Contribution margin lost by Benson
[($86 – $37) – ($35 – $34)]...................................................... $48
Increased contribution margin to
vehicle division ($80 – $35)................................................... 45
Net loss in contribution margin................................................ $ 3
(c) If management insists that it wants Benson to provide the stereo units,
and Benson is operating at full capacity, then it must be willing to pay
the minimum transfer price for those units. Otherwise it will be penalizing
the managers of Benson by not giving them adequate credit for their
contribution to the corporation’s contribution margin.
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Analysis
EXERCISE 8-14
Since the $160 price offered by the Bathtub Division exceeds this minimum
price, the offer should probably be accepted. However, given that the
division is operating at full capacity, it should give some consideration to
the chance that it may anger existing customers if it has to turn away
business.
LO4 BT: AP Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
[($140 - $6) + ($50 - $29) = $155]
[(External UVC – Var. sell. exp/unit saved) + (Outside USP – Outside UVC) = Min. transfer price/unit]
EXERCISE 8-15
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[(Outside UVC – Admin. exp./unit saved) + Opp. cost = Min. transfer price/unit]
(c) No. By forcing the Appraisal Department to accept the $150 per
appraisal price, management is penalizing the Appraisal department. If
the department was allowed to sell its services to outside customers,
it could earn $30 ($160 – $130) in contribution margin per appraisal.
Forcing them to sell their services internally would allow them to earn
only $28 ($150 – $122) in contribution margin. A loss of $2 per appraisal
or a total of $2,400 (1,200 X $2) would result.
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Analysis
EXERCISE 8-16
(a) The minimum transfer price for Division B would be variable costs,
which are $6 per unit ($7, variable cost – $1, variable selling expense).
The maximum price would still be the external price paid by Division A,
which is $10 per unit.
[((($7 - $5) x 15,000) ÷ 10,000 = $3); ($6 + $3 = $9); (Max. = $10)]
[(((USP new product – UVC new product) x No. units sold) ÷ No. of lamps) = Opp. cost/unit); (UVC + Opp.
cost/unit = Min. transfer price/unit); (Max. unit transfer price = Current USP)]
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The maximum price would still be the external price paid by Division A,
which is $10 per unit.
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Analysis
EXERCISE 8-17
(b) The transfer price 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 $1,100 to $1,200 would be needed to
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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).
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Analysis
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*EXERCISE 8-18
*EXERCISE 8-19
(b) The cost base of variable-cost pricing includes only variable costs. All
fixed costs are excluded from the cost base and are added back in the
numerator of the markup percentage.
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*EXERCISE 8-19 (Continued)
*EXERCISE 8-20
20% X $54,000,000
(b) Desired ROI per unit = = $3,600 per unit
3,000
[(20% x $54,000,000) ÷ 3,000 = $108]
[(Desired ROI % x Investment) ÷ Ann. vol. in units = Desired ROI/unit]
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SOLUTIONS TO PROBLEMS
PROBLEM 8-1A
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PROBLEM 8-2A
25% X $1,000,000
Desired ROI per unit = = $5
50,000
$5
Markup percentage = = 3.70%
$135
Total cost per unit....................................................................... $135
Desired ROI per unit................................................................... 5
Target selling price..................................................................... $140
[((25% x $1,000,000) ÷ 50,000 = $5); ($5 ÷ $135 = 3.70%); ($135 + $5 = $140)]
[((Desired ROI % x Investment) ÷ Bud. vol. = Desired ROI/unit); (Desired ROI/unit ÷ Tot. cost/unit = Markup %);
(Tot. cost/unit + Desired ROI/unit = Target sell. price)]
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PROBLEM 8-2A (Continued)
25% X $1,000,000
Desired ROI per unit = = $6.25
40,000
$6.25
Markup percentage = = 4.46%
$140
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PROBLEM 8-3A
Overhead costs
Office employee’s salary and benefits 23,500 ÷ 5,000 = 4.70
Other overhead 26,000 ÷ 5,000 = 5.20
Total $157,500 ÷ 5,000 = 31.50
Profit margin 10.00
Rate charged per hour of labor $41.50
[($108,000 ÷ 5,000) + ($23,500 ÷ 5,000) + ($26,000 ÷ 5,000) + $10.00 = $41.50]
[(Shop emp. wages & bene. ÷ Tot. hrs.) + (Off. emp. sal. & bene. ÷ Tot. hrs.) + (Other OH ÷ Tot. hrs.) + Profit
margin = Labor rate/hr.]
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PROBLEM 8-3A (Continued)
Material charges
Cost of parts and materials......................... $200
Material loading charge (80% X $200)........ 160 360
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PROBLEM 8-4A
(b) Assuming that the printing operation has available capacity, the
printing operation’s variable cost is $0.004 and its opportunity cost is
$0. The minimum transfer price would be $0.004 ($0.004 + $0).
Therefore, in this case, the printing operation should accept the offer
to print internally. The $0.007 transfer price would provide a contribution
margin of $0.003 ($0.007 – $0.004) per page. Depending on its
bargaining strength, the printing operation might want to ask for a
transfer price higher than $0.007, since the company is saving money
at any price below the $0.009 price that the line pays to outside
printers.
($0.004 + $0 = $0.004)
(VC/page + Opp. Cost/page = Min. transfer price)
(c) The advantages of having all of the company’s printing done intern-
ally include: (1) ensuring that the company’s quality expectations are
met, (2) ensuring that all projects are completed on a timely basis, and
(3) ensuring that jobs are scheduled in a manner consistent with the
company’s priorities. The primary disadvantages of forcing the printing
operation to print internal work when it doesn’t feel it is in its best
interest are: (1) the division manager loses control over the division’s
performance, resulting in a loss of morale, and (2) the profitability of
the division, as well as the company as a whole, will decline.
(d) The printing operation would lose:
($0.01 – $0.007) X 500 pages X 1,500 copies = ($2,250)
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 8-35
LO4 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
8-36 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
PROBLEM 8-5A
(a) The minimum transfer price is based on the variable cost of units
transferred internally, plus the opportunity cost of units sold externally.
The variable cost of internal sales would be $10 ($14.50 – $4.50). The
opportunity cost would be $8 ($22.50 – $14.50). Therefore, the minimum
transfer price would be $18 ($10 + $8). Since the $21 transfer price
offered by the Board Division exceeds this minimum transfer price, the
Chip Division should sell the chip internally. Since it is already at
capacity, it probably needs to consider the implications to its existing
customers.
(b) If the Chip Division rejects the offer, each division will suffer a loss of
contribution margin, as well as the company as a whole. The amount
of this loss is calculated as:
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LO4 BT: AP Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
8-38 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
PROBLEM 8-6A
(c) Assuming that the CD Division has available capacity, variable cost
would be $80 ($50 + $30) and the opportunity cost would be zero.
Therefore, the minimum transfer price would be $80 ($80 + $0). Since
the $100 transfer price being offered exceeds the $80 minimum
transfer price, the offer should be accepted.
LO4 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 8-39
*PROBLEM 8-7A
The markup of $45 per unit must cover selling and administrative
expenses (variable and fixed) plus provide a desired return on
investment.
[$20 + $40 + $10 + ($1,600,000 ÷ 80,000) + (50% x $90) = $135]
[DM/unit + DL/unit + VOH/unit + (Fix. OH ÷ Bud. vol.) + (Markup % x Mfg. cost/unit) = Target sell. price]
The markup of $60 per unit must cover fixed manufacturing and fixed
selling and administrative costs plus provide a desired return on
investment.
[$20 + $40 + $10 + $5 + (80% x $75) = $135]
[DM/unit + DL/unit + VOH/unit + Var. S&A/unit + (Markup % x Tot. VC/unit) = Target sell. price]
LO5 BT: AP Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
8-40 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
*PROBLEM 8-8A
Absorption-cost pricing
$254,000
Desired ROI = = 25%
$1,016,000
$254,000 + $142,000
Markup percentage = = 45%
*$880,000*
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 8-41
*$220 X 4,000
*PROBLEM 8-8A (Continued)
Variable-cost pricing
8-42 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
$1,016,000
(e) Both absorption-cost pricing and variable-cost pricing are used because
they have differing merits.
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CD8 CURRENT DESIGNS
Per Hour
Total Cost Total Hours Charge
Repair-technician’s wages $30,000 2,000 $15
Fringe benefits 10,000 2,000 5
Overhead 10,000 2,000 5
$50,000 2,000 25
Profit margin 20
Rate charged per hour of labor $45
8-44 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
CT 8-1 DECISION-MAKING ACROSS THE ORGANIZATION
(b) Frequently the buying division will be required to buy from within the
company as long as the selling division can provide goods of compara-
ble quality and price. A selling division should not normally be forced
to sell to an internal division if it doesn’t want to. If top management
really wants the division to sell internally, it should provide proper
financial incentives to make it in the division’s best interest to sell
internally.
(c) If the Bearing Division is forced to sell internally to the Wheel Division,
the Wheel Division’s contribution margin will increase, however, the
Bearing Division and the company as a whole will both lose
contribution margin. The per set amounts are shown below:
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Due to cost savings 3
Overall lost contribution margin for the company $11
CT 8-1 (Continued)
(d) One possible solution is to continue on with the current situation. As
pointed out in (c), the current situation is clearly better than forcing the
Bearing division to sell its high quality bearings to a division that
doesn’t need the quality. A second possible solution is for the Bearing
division to begin to manufacture a lower quality bearing that would be
suitable for the Wheel division. Given that the Bearing division is
currently operating at full capacity, this would only make sense if the
Bearing division would still maintain the same profit per set. It would
either have to give up business to existing customers or expand
capacity.
LO4 BT: E Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
8-46 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
CT 8-2 MANAGERIAL ANALYSIS
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 8-47
[($117,000 ÷ 45,000) + ($130,500 ÷ 45,000) = $5.50]
[(Fix. OH ÷ Bud. vol.) + (Fix. S&A ÷ Bud. vol.) = FC/unit]
8-48 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
CT 8-2 (Continued)
(c) Revenues
Basic 3,000 X $ 7.75 = $ 23,250
Deluxe 31,000 X $ 8.75 = 271,250
Premium 9,000 X $11.05 = 99,450
Total revenues $393,950
Variable expenses
Basic 3,000 X $ 0.50 = $ 1,500
Deluxe 31,000 X $ 1.50 = 46,500
Premium 9,000 X $ 3.80 = 34,200
Total variable expenses 82,200
Contribution margin 311,750
Fixed expenses ($117,000 + $130,500) 247,500
Net income $ 64,250
(d) Clearly, the basic wash does not use much of the more complex
capabilities of the equipment. The equipment is expensive and the
overhead related to depreciation would be a big component of the
fixed cost. Therefore, the accuracy of the product cost would be signifi-
cantly improved with an activity-based costing approach. It would
appear that the traditional approach of overhead allocation resulted in
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 8-49
product costs (and consequently prices) that were too high for the
basic wash and too low for the premium.
LO2 BT: S Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
8-50 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
CT 8-3 REAL-WORLD FOCUS
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CT 8-3 (Continued)
(c) In arriving at a price for a drug, the company would need to take into
account market factors as well as its costs. Ultimately, the price will be
arrived at through a combination of cost-plus pricing, market considera-
tions, and consideration of the other factors discussed in (a). When
considering its costs, it will also have to consider the cost of unsuccess-
ful research. That is, eventually, it must cover the cost of both its
successful and unsuccessful research projects. In determining what
the market will be willing to pay, the company must consider what
other treatments are available and what those cost, and how the
effectiveness of this product compares to those.
LO2 BT: S Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
8-52 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
CT 8-4 REAL-WORLD FOCUS
(b) One concern is the security of providing credit card information over
the Internet. While most security issues related to payment have been
addressed, it still remains a threat. In addition, many people have
concerns about lost privacy when they give out information, such as
credit information, over the Internet.
(c) In the same way that sometimes consumers will choose a brick-and-
mortar retailer even though its prices are higher, the same is true of
the Web. For brick-and-mortar stores, the reasons for this often have
to do with location. It would appear that this would not be an issue
with Web retailers, but in fact it can be when one takes into account
the potential for having to deal with returned goods. Name recognition
also is important on the Web. Studies have shown that people
frequently buy books from Amazon.com even when the price of the
book is lower from a different Web site. Consumers are familiar with
the Amazon name and have more confidence in the process when
dealing with a well-known company.
(d) These shopping “robot” sites have tremendous implications for retailers.
These sites make it incredibly easy for a customer to price shop. No
retailer can afford to be too far out of line under these conditions.
Ultimately, as people become more familiar with these sites, they will
likely cut into the profit margins of retailers.
LO N/A BT: C Difficulty: Moderate TOT: 30 min. AACSB: Technology, Reflective Thinking AICPA FC: Decision
Modeling AICPA PC: Communication IMA: Decision Analysis
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 8-53
CT 8-5 COMMUNICATION ACTIVITY
From: Student
3. Jane should gather information regarding what she would pay to other
suppliers as well as documenting other issues (perceived quality,
reliability, and convenience) in addition to price. She should also
develop a business plan which identifies who her competitors will be,
how large the potential market is, and whether there is a need for
another company such as hers in her community.
LO4 BT: S Difficulty: Moderate TOT: 25 min. AACSB: Reflective Thinking AICPA FC: Decision Modeling
AICPA PC: Communication IMA: Decision Analysis
8-54 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
CT 8-6 ETHICS CASE
(b) Most small airlines can keep their costs down (and therefore have a
lower break-even point) because they fly used aircraft, they pay their
employees (in particular their pilots) less, and they have lower overhead
costs because of smaller operations. These differences result in lower
fixed costs and a higher contribution margin, both of which contribute
to a lower break-even point.
(c) Jumbo services many different locations. If it loses money for a while
on one location, it can make it up on other locations. Econo doesn’t
have this luxury. This same phenomenon has been observed with
large discount stores that move into a community and initially offer
low prices until the local competition goes out of business.
(d) If it feels that Jumbo’s actions are anti-competitive, it can take Jumbo
to court. The problem is that anti-competitive behavior is difficult to
prove, and legal remedies are slow. It is likely that Econo will be out of
business by the time the court acts. Ironically, one possibility would
have been to not offer a price that was so much below Jumbo’s. This
way, it might not have caused Jumbo to act so aggressively. It also
might have tried to target destinations that were not so critical to a
large airline. That is, use its comparative advantage as a small airline
to service regional communities.
(e) Whether this is ethical behavior is difficult to say. On the one hand, it
can be argued that Jumbo is simply acting to protect its interests by
maintaining its market share. And it can be argued that the flying
public benefited because of the lower fares. Unfortunately, the fares
are only lower as long as the competitor stays in business. Cases such
as this have been very difficult for regulators and the courts to resolve.
LO2 BT: E Difficulty: Moderate TOT: 35 min. AACSB: Ethics, Reflective Thinking AICPA FC: Decision
Modeling AICPA PC: Professional Demeanor, Communication IMA: Decision Analysis, Business Applications
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 8-55
CT 8-7 CONSIDERING YOUR COSTS AND BENEFITS
(a) A low-priced product is a product with a low initial purchase price. The
authors contrast this to a low-cost product by explaining that the initial
purchase price is just one of a potentially long list of costs that a
company can incur when using a piece of equipment.
(b) Clarus Technologies often charges significantly higher prices for its
equipment when compared to competitive products. In order for the
company to compete, one option would be for the company to lower
its price. It has chosen instead to keep its prices high, and then to
educate its customers on how its products are actually less expensive
when all costs of use are considered. In effect, rather than take the
market price as given, its sets its own price, and then uses incremental
analysis to justify this price.
(c) The five categories of costs used by the authors to evaluate the
Tornado and examples of each type of cost are:
(d) Full-cost accounting, as developed by the EPA, looks at all costs incurred
using a product over its life-cycle. It focuses on including environmental
costs and benefits, as well as other “social costs of doing business” that
other approaches ignore. By considering these costs when they develop
their products, and then referring to these costs when they justify the
price of their products, they make consideration of these issues a
more common aspect of business decisions.
LO2 BT: S Difficulty: Moderate TOT: 45 min. AACSB: Technology AICPA FC: Decision Modeling AICPA PC:
Communication IMA: Decision Analysis
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