Brief Exercise 104
Talia Corp. produces digital cameras. For each camera produced, direct materials are $27, direct labour is $15, variable manufacturing overhead is $18, fixed manufacturing overhead is $32, variable selling and administrative expenses are $7, and fixed selling and administrative expenses are $22.
Instructions
Calculate the target selling price assuming that a 40% mark-up on total per unit cost.
Solution Brief Exercise 104
Direct materials...$27 Direct labour... 15 Variable manufacturing overhead...18 Fixed manufacturing overhead...32 Variable selling and administrative expenses...7 Fixed selling and administrative expenses...22 Total unit cost...$121 Total unit cost + (Mark-up percentage X Total unit cost) = Target selling price
$121 + (40% X $121) = $169.40
Brief Exercise 105
Tina Co. expects to produce 75,000 products in the coming year and has invested $15,000,000 in the equipment needed to produce the products. Tina requires a return on investment of 10%.
Instructions
What is Tina Co’s ROI per unit?
Solution Brief Exercise 105
ROI per unit = (Total investment X Desired ROI percentage) Number of units
= ($15,000,000 X 10%)
= $20
75,000
Brief Exercise 106
MagTag produces washing machines and dryers. The following per unit information is available for washing machines: direct materials, $35; direct labour, $30; variable manufacturing overhead,
$18; fixed manufacturing overhead, $103; variable selling and administrative expenses, $17; fixed selling and administrative expenses, $97. MagTag desires an ROI per unit of $75.
Instructions
Calculate MagTag’s mark-up percentage using a total cost approach.
Solution Brief Exercise 106
The mark-up percentage would be:
$75 = 25%
$35 + $30 + $18 + $103 + $17 + $97
Brief Exercise 107
Ivy Company has invested $4,000,000 in assets to produce 25,000 units of its finished product.
Ivy’s budget for the year is as follows: net income, $750,000; variable costs, $2,625,000; fixed costs, $500,000.
Instructions
Calculate each of the following:
a. Budgeted ROI.
b. Mark-up percentage using a total cost approach.
Solution Brief Exercise 107
a. ROI is equal to net income divided by invested assets. For Ivy Company budgeted ROI is:
Budgeted ROI = $750,000 ÷ $4,000,000 = 18.75%
b. The mark-up percentage is equal to:
Net income Total cost
For Ivy Company the budgeted mark-up percentage is:
$750,000
= 24%
$2,625,000 + $500,000
Brief Exercise 108
On a recent job repairing a small boat engine, Marine Repairs Company worked 16 hours and used parts with a cost of $750. Marine Repairs Company charges $75 per hour of labour and has a material loading charge of 55%.
Instructions
Calculate the total bill for repairing the small boat engine.
Solution Brief Exercise 108 The total bill would equal:
(16 hours X $75) + $750 + ($750 X 55%) = $2,362.50
Brief Exercise 109
Two Wheel Green Machines manufactures and sells bicycles. The tire manufacturing division sells its product to customers for $15 each. The variable cost per tire is $7.50, and fixed costs per tire are $3.00. The bicycle assembly division has been buying tires from an outside source for
$14 each. Upper management wants the tire division to transfer 50,000 tires to the assembly division within the company at a price of $12 per tire. The tire division is operating at full capacity.
Instructions
Calculate the minimum transfer price that the tire division should accept.
Solution Brief Exercise 109
The minimum transfer price is equal to the tire 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:
Minimum transfer price = $7.50 + ($15 – $7.50) = $15.
Brief Exercise 110
Two Wheel Green Machines manufactures and sells bicycles. The tire manufacturing division sells its product to customers for $15 each. The variable cost per tire is $7.50, and fixed costs per tire are $3.00. The bicycle assembly division has been buying tires from an outside source for
$14 each. Upper management wants the tire division to transfer 50,000 tires to the assembly division within the company at a price of $12 per tire. The tire division has sufficient excess capacity to provide the 50,000 tires to the assembly division.
Instructions
Calculate the minimum transfer price that the tire division should accept.
Solution Brief Exercise 110
If the tire division has excess capacity, then its opportunity cost is zero. In this case, the minimum transfer price is:
Minimum transfer price = $7.50 + $0 = $7.50.
Brief Exercise 111
Sandbar Company, a division of Dudge Cars, produces automotive batteries. Sandbar sells the batteries to its customers for $82 per unit. The variable cost per unit is $38, and fixed costs per unit are $16. Top management of Dudge Cars would like Sandbar to transfer 30,000 special, high-performance batteries to another division within the company. Sandbar’s variable cost on these special batteries is $52 per unit. Sandbar is operating at full capacity.
Instructions
Calculate the minimum transfer price that Sandbar should accept.
Solution Brief Exercise 111
The minimum transfer price is equal to Sandbar’s variable cost plus its opportunity cost. In this case the minimum transfer price is:
Minimum transfer price = $52 + ($82 – $38) = $96.
Brief Exercise 112
Fragmented Company has two divisions, A and B. Division A makes a part that Division B currently purchases from an outside supplier for $80. Division B approaches Division A to purchase the product internally.
Cost information on this part for Division A is as follows:
Variable manufacturing cost $60 per unit
Variable selling costs $20 per part
Fixed costs $15 per unit
Division A is operating at full capacity and sells all of its output to external customers for $102 per part.
Instructions
Calculate the minimum amount that Division A would accept to transfer the part to Division B.
Solution Brief Exercise 112
Outside selling price includes variable selling costs of $20.
Therefore transfer at $102 – 20 = $82 and Division A is in the same position as if it sold to its outside customer
Brief Exercise 113
Using the information above to calculate what the maximum price that Division B would accept from Division A for the part.
Solution Brief Exercise 113
Outside purchasing price of the part is currently $80. Division B would therefore not accept a price higher than that.
EXERCISES
Exercise 114
Trout Company is considering introducing a new line of pagers targeting the preteen population.
Trout believes that if the pagers can be priced competitively at $30, approximately 750,000 units can be sold. The controller has determined that an investment in new equipment totalling
$3,750,000 will be required. Trout requires a minimum rate of return of 10% on all investments.
Instructions
Calculate the target cost per unit of the pager.
Solution Exercise 114 (6-10 min.)
Sales (750,000 × $30) $22,500,000
Less desired ROI ($3,750,000 × 10%) 375,000 Target cost for 750,000 units $22,125,000 Target cost per unit = $22,125,000 ÷ 750,000 = $29.50
Exercise 115
Rita Corporation produces commercial fertilizer spreaders. The following information is available for Rita's anticipated annual volume of 600,000 units.
Per Unit Total
Direct materials $37
Direct labour 43
Variable manufacturing overhead 65
Fixed manufacturing overhead $15,000,000
Variable selling and administrative expenses 73
Fixed selling and administrative expenses 11,400,000 The company has a desired ROI of 20%. It has invested assets of $325,000,000.
Instructions
Calculate each of the following:
a. Total cost per unit.
b. Desired ROI per unit.
c. Mark-up percentage using total cost per unit.
d. Target selling price.
Solution Exercise 115 (12 min.) a. Total cost per unit:
Per Unit
Direct materials $ 37
Direct labour 43
Variable manufacturing overhead 65
Fixed manufacturing overhead ($15,000,000 ÷ 600,000) 25
Variable selling and administrative expenses 73
Fixed selling and administrative expenses ($11,400,000 ÷ 600,000) 19
$262
b Desired ROI per unit = (20% × $325,000,000) ÷ 600,000 = $108.33 $108.33 + $0
c. Mark-up percentage using total cost per unit =———— = 41 %
$262 d. Target selling price = $262 + ($262 × 41%) = $369.42
Exercise 116
Goliath Corporation is in the process of setting a selling price for a new product it has just designed. The following data relate to this product for a budgeted volume of 40,000 units.
Per Unit Total
Direct materials $15
Direct labour 35
Variable manufacturing overhead 12
Fixed manufacturing overhead $2,100,000
Variable selling and administrative expenses 8
Fixed selling and administrative expenses 1,300,000
Goliath uses cost-plus pricing to set its target selling price. The mark-up on total unit cost is 15%.
Instructions
Calculate each of the following for the new product:
a. Total variable cost per unit, total fixed cost per unit, and total cost per unit.
b. Desired ROI per unit.
c. Target selling price.
Solution Exercise 116 (18 min.)
a. Direct materials $15
Direct labour 35
Variable manufacturing overhead 12
Variable selling and administrative expenses 8
Variable cost per unit $70
Budgeted Cost
Total Costs Volume Per Unit Fixed manufacturing overhead $2,100,000 ÷ 40,000 = $52.50 Fixed selling and administrative expenses 1,300,000 ÷ 40,000 = 32.50
Fixed cost per unit $85
Variable cost per unit $70
Fixed cost per unit 85
Total cost per unit $155
b. Total cost per unit $155
Mark-up × 15%
Desired ROI per unit $ 23.25 c. Total cost per unit $155.00
Desired ROI per unit 23.25
Target selling price $178.25
Exercise 117
Tree Top Company is in the process of setting a selling price for its newest model stunt kite, the Looper. The controller of Tree Top estimates variable cost per unit for the new model to be as follows:
Direct materials $15
Direct labour 13
Variable manufacturing overhead 4
Variable selling and administrative expenses 5
$37
In addition, Tree Top 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 $240,000 20,000 $12
Fixed selling and administrative expenses 260,000 20,000 13
Fixed cost per unit $25
Tree Top uses cost-plus pricing and would like to earn a 12 percent return on its investment (ROI) of $250,000.
Instructions
Calculate the selling price that would provide Tree Top a 12 percent ROI.
Solution Exercise 117 (6 - 10 min.)
Variable cost per unit $ 37.00
Fixed cost per unit 25.00
Desired ROI per unit 1.50 Target selling price $ 63.50
*$250,000 × .12 = $30,000; $30,000 ÷ 20,000 = $1.50 per unit
Exercise 118
Greasy Spoon Service repairs commercial food preparation equipment. The following budgeted cost data is available for 2012:
Time Material
Charges Charges Technicians' wages and benefits $600,000
Parts manager's salary and benefits $ 72,000
Office manager's salary and benefits 112,000 18,000
Other overhead 48,000 110,000
Total budgeted costs $760,000 $200,000
Greasy Spoon has budgeted for 10,000 hours of technician time during the coming year. It desires a $64 profit margin per hour of labour and a 50% profit margin on parts. Greasy Spoon estimates the total invoice cost of parts and materials in 2012 will be $500,000.
Instructions
a. Calculate the rate charged per hour of labour.
b. Calculate the material loading charge.
c. Greasy 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 labour and $8,000 of parts. Calculate the total estimated bill.
Solution Exercise 118 (18-20 min.)
a. Per Hour
Total Cost Total Hours Charge Hourly labour rate for repairs
Technicians' wages and benefits $600,000 ÷ 10,000 = $60.00 Overhead costs
Office manager's salary and benefits 112,000 ÷ 10,000 = 11.20
Other overhead 48,000 ÷ 10,000 = 4.80
$760,000 ÷ 10,000 = 76.00
Profit margin 64.00
Rate charged per hour of labour $140.00
b. Material
Material Total Invoice Cost,Loading
Charges Parts and Materials Charge
Overhead costs
Parts manager's salary and benefits $72,000 Office manager's salary and benefits 18,000
$90,000 ÷ $500,000 = 18%
Other overhead 110,000 ÷ $500,000 = 22%
40%
Cost of parts and materials $8,000
Material loading charge (90% × $8,000) 7,200 15,200
Total price of labour and materials $18,000
Exercise 119
Forrest Painting Service has budgeted the following time and material for 2012:
BUDGETED COSTS FOR 2012
Time Material
Charges Charges Painters’ wages and benefits $36,000
Service manager's salary and benefits $21,000
Office employee's salary and benefits 12,000 3,000
Cost of paint 50,000
Overhead (supplies, utilities, etc.) 10,000 8,500
Total budgeted costs $58,000 $82,500
Forrest budgets 4,000 hours of paint time in 2012 and will charge a profit of $12 per hour, in addition to a 25% mark-up on the cost of paint.
On February 15, 2012, Forrest is asked to prepare a price estimate to paint a building. Forrest estimates that this job will take 12 labour hours and $600 in paint.
Instructions
a. Calculate the labour rate for 2012.
b. Calculate the material loading charge rate for 2012.
c. Prepare a time and materials price estimate for painting the building.
Solution Exercise 119 (18-20 min.) a. Computation of labour rate
Total Cost Total Hours Per Hour Charge Hourly labour rate for repairs
Painters' wages and benefits $36,000 ÷ 4,000 = $9.00 Overhead costs
Office employee's salary and benefits 12,000 ÷ 4,000 = 3.00
Other overhead 10,000 ÷ 4,000 = 2.50
$58,000 ÷ 4,000 = 14.50
Profit margin 12.00
Rate charged per hour of labour $26.50
b. Computation of material loading charge
Material Material Total Invoice Cost Loading
Charges of Paint Charge
Overhead costs
Service manager's salary and benefits $21,000 Office employee's salary and benefits 3,000
24,000 ÷ $50,000 = 48%
Other overhead 8,500 ÷ 50,000 = 17%
$32,500 ÷ 50,000 = 65%
Profit margin 25%
Material loading charge 90%
c. Price estimate for time and materials Job: Paint building
Labour charges: 12 hours @ $26.50 $ 318
Material charges
Cost of paint $600
Material loading charge (90% × $600) 540 1,140
Total price of labour and materials $1,458
Exercise 120
Rose Corporation manufactures state-of-the-art DVD players. It is a division of Sany TV, which manufactures televisions. Rose sells the DVD players to Sany, as well as to retail stores. The following information is available for Rose's DVD player: variable cost per unit $150; fixed costs
per unit $75; and a selling price of $400 to outside customers. Sany currently purchases DVD players from an outside supplier for $390 each. Top management of Sany would like Rose to provide 20,000 DVD players per year at a transfer price of $150 each.
Instructions
Calculate the minimum transfer price that Rose should accept under each of the following assumptions:
a. Rose is operating at full capacity.
b. Rose has sufficient excess capacity to provide the 20,000 players to Sany.
Solution Exercise 120 (9 min.)
a. The minimum transfer price is $400 [$150 + ($400 – $150)], the outside market price, since Rose is operating at full capacity.
b. The minimum transfer price is $150, the variable cost of the DVD players, since Rose has excess capacity. However, since the market price is $390 (Sany's current cost); Rose should be able to negotiate a price much higher than $150.
Exercise 121
Green Grass Co., a division of Lawn Supplies, Inc., produces lawn mowers. Green Grass sells its lawn mowers to home improvement stores, as well as to Lawn Supplies, Inc. The following information is available for Green Grass’ mowers:
Fixed costs per unit $ 230
Variable cost per unit 150
Selling price per unit 500
Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for $475. In order to ensure a reliable supply, the management of Lawn Supplies, Inc. ordered Green Grass to provide 65,000 lawn mowers per year at a transfer price of $475 per unit. Green Grass is
currently operating at full capacity. It could avoid $10 per unit of variable selling costs by selling internally.
Instructions
a. Calculate the minimum transfer price that Green Grass should be required to accept.
b. Calculate the increase (decrease) in contribution margin for Lawn Supplies, Inc. for this transfer.
Solution Exercise 121 (9 min.)
a. The minimum transfer price that Green Grass should accept is:
[($150 – $10 + ($500 – $150)]= $490
b. The decrease in contribution margin per unit to Lawn Supplies, Inc. is:
Contribution margin lost by Green Grass ($500 – $150) $350 Increased contribution margin to Lawn Supplies ($475 – $140) 335
Net decrease in contribution margin $ 15
Total contribution margin decrease is:
$15 × 65,000 units = $975,000
Exercise 122
Canada’s Tires is a division of the Wheels To Go Company. Canada’s Tires produces bicycle tires in its automated plant in Canada. Fixed costs per tire are $5, and variable costs are $2 per tire.
The tires are shipped to Wheels To Go’s plant in Africa where bicycles are assembled and sold locally at a sales price of $50 each. Fixed costs to make the bicycles are $10 per unit and variable costs per unit are $15 plus the cost of the tires. Wheels To Go has a tax rate of 30% in Canada, and 20% in Africa.
Instructions
a. Calculate the after tax income for Canada’s Tires, the African assembly division, and the company as a whole if 100,000 tires are transferred at Canada’s Tires’ full cost. Assume the 100,000 tires are all used to produce 50,000 bicycles.
b. Calculate the after tax income for Canada’s Tires, the African assembly division, and the company as a whole if 100,000 tires are transferred at 110% of Canada’s Tires’ full cost.
Assume the 100,000 tires are all used to produce 50,000 bicycles.
c. What would be your recommendation to Wheels To Go?
Solution Exercise 122 (13 min.) a. Canada’s Tires
Sales (100,000 tires X $7/tire) $700,000
Less expenses (100,000 X $7/tire) 700,000
Net Income $ 0
Assembly Division
Sales (50,000 bicycles X $50/bicycle) $2,500,000
Less expenses
Tires (100,000 tires X $7/tire) $700,000 Other Variable (50,000 bicycles X $15/bicycle) 750,000
Fixed Costs (50,000 bicycles X $10/bicycle) 500,000 1,950,000
Income before tax 550,000
Income tax at 20% 110,000
Net Income $440,000
Wheels To Go’s Net Income $0 + $440,000 = $440,000.
b. Canada’s Tires
Sales (100,000 tires X $7/tire X 1.10) $770,000
Less expenses (100,000 X $7/tire) 700,000
Income before tax 70,000
Income tax at 30% 21,000
Net Income $49,000
Assembly Division
Sales (50,000 bicycles X $50/bicycle) $2,500,000
Less expenses
Tires (100,000 tires X $7.70/tire) $770,000 Other Variable (50,000 bicycles X $15/bicycle) 750,000
Fixed Costs (50,000 bicycles X $10/bicycle) 500,000 2,020,000
Income before tax 480,000
Income tax at 20% 96,000
Net Income $384,000
Wheels To Go’s Net Income $49,000 + $384,000 = $433,000.
c. Wheels To Go should transfer the tires at full cost resulting in zero net income in Canada and therefore no tax owing in Canada. By “locating the profit” in the location with the lower tax rate, Wheels To Go will pay a lower total tax amount, resulting in a larger after tax income.
Exercise 123
International Chemicals is a division of World Wide Chemicals. It produces HDL which is a ingredient used in many products. Variable costs to produce HDL include $7 per litre manufacturing costs, and $2/litre selling expense. International Chemicals’ fixed costs are
$100,000. It currently sells 75,000 litres of HDL to customers for $12/litre.
EKP is another division of World Wide Chemicals. It uses HDL, and has been sourcing its needs from an outside supplier for $10/litre.
Instructions
a. What is the minimum price International Chemicals would be willing to sell HDL to EKP if it has sufficient capacity to satisfy demand from both EKP and other customers?
b. What is the highest price EKP would be willing to pay International Chemicals for HDL?
c. If the transfer does occur, what would be the transfer price?
d. If International Chemicals has capacity to produce 75,000 litres of HDL, and EKP needs 10,000 litres, what is the minimum price International Chemicals would be willing to accept?
Solution Exercise 123 (13 min.)
a. International Chemicals should be willing to sell HDL to EKP at its variable cost of $9/litre.
b. EKP will not be willing to pay International Chemicals more than $10/litre, which is the price it can purchase HDL from other sources.
c. The transfer would occur, with a price somewhere in the $9 to $10 per litre range.
d. In order to satisfy EKP’s demand for 10,000 litres, International Chemicals would lose sales of 10,000 litres. Therefore, the minimum transfer price would be variable cost + opportunity cost, or $9/litre + ($12 - $9)/litre = $12 per litre.
Exercise 124
The following information is available for a product manufactured by Gardenia Corporation:
Per Unit Total
Direct materials $62.50
Direct labour 47.50
Variable manufacturing overhead 15.00
Fixed manufacturing overhead $250,000
Variable selling and admin. expenses 10.00
Fixed selling and admin. expenses 55,000
Gardenia has a desired ROI of 16%. It has invested assets of $8,250,000 and expects to produce 2,000 units per year.
Instructions
Calculate each of the following:
a. Cost per unit of fixed manufacturing overhead and fixed selling and administrative expenses.
b. Desired ROI per unit.
c. Mark-up percentage using the absorption cost approach.
d. Mark-up percentage using the variable cost-plus approach.
Solution Exercise 124 (12-14 min.)
$250,000
a. Fixed manufacturing overhead = ———————— = $125 per unit 2,000
$55,000
Fixed selling and administrative expenses per unit = ———— = $27.50 per unit
2,000
16% × $8,250,000
b. Desired ROI per unit = ————————— = $660 per unit 2,000
$660 + ($10 + $27.50)
c. Absorption cost mark-up percentage = —————————————— = 279%
$62.50 + $47.50 + $15 + $125
$660 + ($125 + $27.50)
d. Variable cost-plus mark-up percentage =—————————————— = 602%
$62.50 + $47.50 + $15 + $10
Exercise 125
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 $250
Direct labour 170
Variable manufacturing overhead 80
Fixed manufacturing overhead $500,000
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
$4,000,000 in assets is committed to production of the new door.
Instructions
a. Calculate each of the following under the absorption approach:
i. Mark-up percentage needed to provide desired ROI.
ii. Target price of the patio door.
b. Calculate each of the following under the variable cost-plus approach:
i. Mark-up percentage needed to provide desired ROI.
ii. Target price of the patio door.
Solution Exercise 125 (12-14 min.) a. Absorption approach
i. Computation of unit manufacturing cost:
Per Unit
Direct materials $250
Direct labour 170
Variable manufacturing overhead 80
Fixed manufacturing overhead ($500,000 ÷ 5,000) 100
Total manufacturing cost $600
Computation of mark-up percentage to provide a 25% ROI:
Mark-up [25% × ($4,000,000 ÷ 5,000)] + [$25 + ($375,000 ÷ 5,000)] $300
Percentage = —————————————————————————— = —— = 50%
$600 $600
ii. Computation of target price:
Target price: $600 + (50% × $600) = $900 b. Variable cost-plus approach
i. Computation of unit variable cost:
Per Unit
Direct materials $250
Direct labour 170
Variable manufacturing overhead 80
Variable selling and administrative expenses 25
Total variable cost $525
Computation of mark-up percentage to provide a 25% ROI:
Mark-up [25% × ($4,000,000 ÷ 5,000)] + [($500,000 ÷ 5,000) + ($375,000 ÷ 5,000)]
ii. Computation of target price:
Target price: $525 + (71.43% × $525) = $900
Exercise 126
Sani Sanukesh operates a catering company. Sani provides food and servers for parties; she also
Sani Sanukesh operates a catering company. Sani provides food and servers for parties; she also