Pricing Decision

PROBLEMS ON PRICING DECISIONS

EXTERNAL PRICING
P – 1. The ABC Co. Ltd. provides the following information to you for output of 1,000
units of product.
Variable Costs:
Manufacturing Rs.200,000
Selling and Administrative 50,000
Total Variable Cost 250,000
Fixed Costs:
Manufacturing 150,000
Selling & Administrative 100,000
Total Fixed Cost 250,000
Total Cost 500,000
The company required 20% return on its investment of Rs. 300,000
Required:
a. Required Mark up % to earn required return on investment.
b. Selling price per unit.
c. Income statement under absorption costing system.

P – 2. A manufacturing company has an installed capacity of 150,000 units per annum.

The cost structure of products manufactured is as under.
Variable Manufacturing Costs per unit –
Materials – Re.1
Labour – Re. 1
Overhead – Rs. 0.5
Manufacturing Semi–variable overhead is Rs. 50,000 per annum at 60% level of capacity
which increases Rs. 10,000 per annum for increase in every 10% of capacity utilization.
Fixed overhead Rs. 150,000 per annum.
The company is planning to have return of 25% on its average investment.
Required:
a. Mark Up % to earn required return on average investment of Rs, 500,000 at 75%
Capacity Level and Rs. 600,000 at 80% Capacity Level.
b. Price of the product at 75% and 80% level of activity.
c. Income statement under absorption costing.
d. Price quotation sheet.

P – 3. The following information is provided to you.

Normal Capacity – 50,000 units
Production and Sales – 45,000 units
Variable cost per unit:
Materials cost Rs.10
Labour Cost Rs 5
Selling & Administrative Cost Rs. 1
Fixed Costs:
Manufacturing overhead Rs. 50,000
Selling & Administrative cost Rs. 30,000
The firm required Rs. 500,000 as initial investment and expect 20% return on investment.
Required:
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 Pricing Decision

a. Mark up % on variable costs.

b. Selling price per unit.
c. Income statement for 45,000 units

P – 4. The Edmunt Company and the Elelamp Company both make television sets. The Edmunt Company purchases
most of the parts and subassemblies and assembles them into a final product, whereas the Elelamp Company
manufactures almost all the product's components. Each Company sells 10,000 units per year.
Cost per unit Edmunt Elelamp
Direct material $ 50 $ 20
Direct labour 20 30
Overhead* 10 30
Total $ 80 $ 80
* Overhead for both companies is fixed.
Required:
a. If companies each charge 200 percent of variable cost, what would be their
tentative prices?
b. If the companies each charge 150 percent of full cost, what would be their tentative
prices?
c. What mark ups on variable costs will allow each company to earn $ 200,000 per
year ?

P – 5. Assume that a firm makes two products X and Y. Data for the period are given below;
Particulars Product Product
X Y
Output in units............................................... 2,500 25,000
Machine hour per unit.................................... 2 2
Direct labour hour per unit............................ 4 4
Material cost per unit..................................... Rs. 20 Rs. 25
Direct labour cost per hour............................ Rs. 10 Rs. 10
Number of purchase order............................. 80 160
Number of set ups.......................................... 40 60
Overhead Costs
Short term variable cost Rs. 110,000
Material purchasing and ordering.............................................. Rs. 120,000
Set–up costs............................................................................... Rs. 210,000
Total overhead costs.................................................................. Rs. 440,000
Cost Cost Drivers
Short term variable costs Machine hours
Material purchasing & No. of orders
ordering
Set–up costs No. of set ups
Required: Pricing by adding mark up of 20% on cost under
a. Traditional costing system using direct labour hours
b. Activity–based costing system.

P – 6. Assume that a firm makes for products w, x, y and z. Data for the past period are as follows:
Produ Outp Production Direct MH Material Material
ct ut runs in labour per Cost per component
Unit period. per unit unit unit per unit
W 125 15 4 4 20 18
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X 125 20 8 8 25 20
Y 1,250 35 4 4 30 10
Z 1,250 50 8 8 40 15
Direct labour cost Rs. 10 per hour.
Overhead costs
Short run variable costs Rs. 115,500
Long run variable costs:
Scheduling costs 42,000
Set up costs 18,000
Material handling costs 72,000
Total 247,500
The selling price is determined by adding mark up 25% on cost.
Required:
(a) Using conventional product costing using a machine hour, calculate selling price.
(b) Using ABC with the following cost drivers, calculate selling price.
Short term variable costs Machine hours.
Scheduling costs runs No. of production
Set up costs No. of production runs
Material handling costs No. of components.

P – 7. Having attended a CIMA course on activity based costing (ABC), you decide to experiment by applying the
principle of ABC to the four products. Currently made and sold by your company. Details of four products and relevant
information are given below for one period.
Product A B C D
Output units 120 100 80 120
Cost per unit
Direct materials 40 50 30 60
Direct labour 28 21 14 21
Machine hr. per unit 4 3 2 3
The four products are similar and usually produced in production runs of 20 units and sold
in batches of 10 units by adding 20% mark up on total cost. The production overhead is
currently absorbed by using a machine hour rate and total of the production cost is given
below:
Dept. costs Rs. 10,430
Set up costs 5,250
Stores receiving 3,600
Quality control 2,100
Material handling 4,620
26,000
The following cost drivers are as
Cost Cost Driver
Set up costs No. of production runs
Stores receiving Requisition raised
Quality control No. of production run
Material handling Orders executed.
The number of requisition raised on the store was 21 for each period and number of orders
executed was 42, each order being for a batch of 10 of a product.
Required:
(a) To calculate the selling price for each product, if all overhead cost are absorbed on
machine hour basis.
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(b) To calculate the selling price for each product, using activity based costing system.

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P – 8. The budgeted overhead and cost driver volume of a factory is given below.
Cost Pool Budgeted Cost Driver Budgeted
Overhead Volume
Material purchasing Rs. 9,000 No. of orders 45
Material handling 13,200 No. of movements 22
Set–up 7,500 No. of set ups 15
Maintenance 10,000 Maintenance hrs. 200
Quality control 2,400 No. of Inspections 80
Machinery expenses 3,600 No. of machine hrs. 1200
The cost driver rates are used to trace the appropriate amount of overheads and selling
price of the product named Q-50, which contains direct materials of Rs. 80,000 and direct
labour of Rs. 120,000. The company uses 20% mark up adding on total cost. The usage of
activities are as follows.
Materials orders................. 10
Material movement........... 5
Set ups............................... 3
Maintenance hrs................ 50
Inspection.......................... 8
Machine hrs....................... 400
Required: Compute the selling price of product Q-50.

P – 9. Assume that a firm makes two products A and B. Data for the period are as
follows:
Product A Product B
Output in units 1,000 10,000
Machine hour per unit 2 2
Direct labour hour per unit 4 4
Material cost per unit Rs. 20 Rs. 25
Direct labour cost per hour Rs. 10 Rs. 10
Number of purchase orders 80 160
Number of set-ups 40 60
Overhead Costs:
Short term variable cost Rs. 110,000
Material purchasing and ordering Rs. 120,000
Set-up costs Rs.210,000
Total overhead costs Rs. 440,000
The cost drivers to be used are as listed below for the overhead cost shown:
Costs Cost Driver
Short term variable costs Machine hours
Material purchasing & ordering No. of orders
Set-ups No. of set-ups
Required: Pricing by adding mark-up of 20% on cost under:
a. Traditional Costing System using Direct Labour Hours
b. Activity-based Cost Pricing System
P – 10. A firm invested Rs. 500,000 as fixed capital for production of product X. Average
fixed cost of production is Rs. 250,000 for 50,000 units of product and variable cost per
unit is Rs. 4.
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 Pricing Decision

Required:
(a) Total cost per unit
(b) Mark up percentage with 25% ROI
(c) Unit selling price with 25% ROI
P – 11. A firm invested Rs. 500,000 as fixed capital and Rs. 4 as working capital in a
project to produce 50,000 units of output. The total fixed manufacturing cost is Rs.
200,000 and selling and administrative expenses are Rs. 150,000 annually.
Variable cost per unit requires Rs. 5
Required:
(a) Total capital employed
(b) Total cost per unit
(c) Mark up% with 30% ROI
(d) Unit selling price.

P – 12. Kantipur Manufacturing Company Ltd. is producing a new product named Barina
hair dye which requires an initial outlay Rs.100,000. The cost of producing and selling
100,000 units of product are estimated as follows:
Variable Cost per unit
Materials Rs. 3
Labour 5
Variable factory cost. 1
Selling & Administrative expenses 0.5
Total 9.5
Fixed factory expenses 100,000
Fixed selling & Administrative expenses 80,000
The company requires your help for setting its selling price. The management wants to
maintain 20% rate of return on its investment.
Required:
(a) Cost per unit
(b) Mark up percentage
(c) Selling price per unit

P – 13. Nepal Beltronics product Ltd. is a highly competitive industry in which mark up
are about 45% of cost to manufacture. The company is anxious to introduce a new product
line (now being sold by several competitors) that would require Rs.1,500,000 investment
for the acquisition of needed equipment and for working capital purpose. The following
estimated costs have been developed for the new product.
Per unit Total
Direct materials Rs. 12
Direct labour 20
Variable overhead 3
Fixed overhead 10 Rs. 300,000
Variable selling & Adm. 5
Fixed selling & Adm. 14 Rs. 420,000
These costs are based on the production and sales of 30,000 units per year. The company
will not introduce a new product unless it is able to provide at least a 16% ROI.
Required:
a. Selling price per unit with regular mark up.
b. Mark up to meet required ROI (16%).

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 Pricing Decision

c. Would you recommend that the company take up on the new line of product?
Explain. (TU 2058)

P – 14. An organization producing a product wishes to obtain Return on Capital Employed of 15%. The organization
bases selling prices on normal production levels; and it wishes to know the selling price that will produce this required
rate of return. The following estimates have been made:
Variable cost per unit Rs4
Fixed cost per year Rs400,000
Normal production units 25,000
Normal Capital employed:
Fixed Capital Rs750,000
Working Capital per unit Rs2
Required: Determine the selling price needed to achieve the planned Return on Capital
Employed (ROCE) to match the organization’s objectives.

P – 15. The accounting department of Koshi Co. has accumulated the following cost data for a product:
Cost Items Per Unit
(Rs.)
Direct materials 30
Direct labour 20
Variable Manufacturing Overhead 20
Fixed Manufacturing overhead, based on 10,000 units 40
Variable Selling & Administrative cost 6
Fixed Selling & Administrative cost, based on 10,000 5
units
The company has a general policy of adding a mark up equal to 20% of cost in order to
obtain selling price:
Required:
a. A price quotation sheet for the company on absorption basis.
b. Income statement for 10,000 units.
TARGET PRICING

P – 16. A company is going to produce hair dye product. The marketing manager of the
company estimates the following costs for production and sale of the hair dye into market.
Direct materials Rs.40
Direct labour 30
Overheads 20
Estimated Total Cost 90
Add: Mark up 40% 36
Estimated selling price 126
The market research department reveals that the similar types of hair dye is selling at Rs.
100 by the competitors in to market.
Required:
a. Should the company produce hair dye, if it is using target pricing?
b. Should the company expand this product line, if standard mark up 40% is applied
with decreasing of Rs. 6 and Rs. 7 on materials and labour respectively?

P – 17. A company makes part for a variety of home appliances. The company sells the
parts to appliances makers, who assemble and sell the appliances to retail outlets. Although
company makes dozens of different parts, it does not currently make one to be used in a

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new appliance. The company’s market research department has discovered a market for
such a part.
The market research department has indicated that the new part would likely sell for Rs. 450. A similar part currently
being produced has the following manufacturing cost:
Particular Per unit
(Rs.)
Variable manufacturing cost 280
Variable selling and administrative cost 20
Fixed manufacturing cost (based on 10,000 units) 70
Fixed Selling and Administrative Cost (based on 10,000 20
units)
Required:
a. Should the company manufacture the part, if it is using Target Pricing?
b. What price would the company charge for the product if the company wants 20%
profit on cost?

P – 18. The management of a company present you the following estimates of cost for
sales of one unit of its proposed product X.
Direct materials Rs. 50
Direct labour (4 hrs. @ Rs. 10) 40
Overheads (50% of DL) 20
Estimated Total Cost 110
Add: Mark up 30% 33
Selling price 143
The sales agent and middlemen have reported that similar type of product is selling into
market by the competitors at Rs. 125.
Required:
1. Should the product be expanded by the company if it used target pricing?
2. What would be the selling price if it charges 15% profit on cost?
3. Should the company expand the product at 15% margin on cost?

5-A4Target Costing
Lowest Cost Corporation uses target costing to aid in the final decision to release new products to production. A new
product is being evaluated. Market research has surveyed the potential market for this product and believes that its unique
features will generate a total demand over the product's life of 70,000 units at an average price of $360. The target
costing team has members from market research, design, accounting, and production engineering departments. The team
has worked closely with key customers and suppliers. A value analysis of the product has determined that the total cost
for the various value-chain functions using the existing process technology are as follows:
Value-Chain Function Total cost over Product Life
Research and development $2,500,000
Design 950,000
Manufacturing (70% outsourced to suppliers) 8,000,000
Marketing 1,800,000
Distribution 2,400,000
Customer service 950,000
Total cost over product life $16,600,000
Management has a target contribution to profit percentage of 40% of sales. This contribution provides sufficient funds to
cover corporate support costs, taxes, a reasonable profit.
1. Should the new product be released to production? Explain.
2. Approximately 70% of manufacturing costs for this product consists of materials and parts that are purchased from
suppliers. Key suppliers on the target-costing team have suggested process improvements that will reduce supplier
cost by 20%. Should the new product be released to production? Explain.
3. New process technology can be purchased at a cost of $220,000 that will reduce nonoutsourced manufacturing costs
by 25%. Assuming the supplier's process improvements and new process technology are implemented, should the
new product be released to production? Explain.
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5-41 Target Selling Price

Consider the following data from Blackmar Company's budgeted income statement (in thousands of dollars).
Target sales $60,000
Variable costs
Manufacturing 30,000
Selling and administrative 6,000
Total variable costs 36,000
Fixed costs
Manufacturing 8,000
Selling and administrative 6,000
Total of all fixed costs 14,000
Total of all costs 50,000
Operating income $10,000
Compute the following markup formulas that would be used for obtaining the same target sales as a percentage of (1)
total variable costs, (2) full costs, (3) variable manufacturing costs.

5-43 Target Costing

Quality Corporation believes that there is a market for a portable electronic toothbrush that can be easily carried by
business travelers. Quality's market research department has surveyed the features and prices of electronic brushes
currently on the market. Based on this research, Quality believes that $65 would be about the right price. At this price,
marketing believes that about 80,000 new portable brushes can be sold over the product's life cycle. It will cost about
$1,000,000 to design and develop the portable brush. Quality has a target profit of 20% of sales.
Determine the total and unit target cost to manufacture, sell, distribute, and service each portable brush.

5-44 Target Costing

Best Cost Corporation has an aggressive R&D program and uses target costing to aid in the final decision to release new
products to production. A new product is being evaluated. Market research has surveyed the potential market for this
product and believes that its unique features will generate a total demand of 50,000 units at an average price of $230.
Design and production engineering departments have performed a value analysis of the product and have determined that
the total cost for the various value-chain functions using the existing process technology are as follows:
Value-Chain Function Total cost over Product Life
Research and development $1,500,000
Design 750,000
Manufacturing 5,000,000
Marketing 800,000
Distribution 1,400,000
Customer service 750,000
Total cost over product life $10,200,000
Management has a target profit percentage of 20% of sales. Production engineering indicates that new process
technology can reduce the manufacturing cost by 40% but it will cost $1,000,000.
1. Assume the existing process technology is used, should the new product be released to production? Explain.
2. Assume the new process technology is purchased, should the new product be released to production? Explain.

5-59 Target Costing

Memphis Electrical, Inc., makes small electric motors for a variety of home appliances. Memphis sells the motors to
appliance makers, who assemble and sell the appliances to retail outlets. Although Memphis makes dozens of different
motors, it does not currently make one to be used in garage-door openers. The company's market research department has
discovered a market for such a motor.
The market research department has indicated that a motor for garage-door openers would likely sell for $25. A similar
motor currently being produced has the following manufacturing costs:
Direct materials $ 13.00
Direct labor 6.00
Overhead 8.00
Total $ 27.00
Memphis desires a gross margin of 15% of the manufacturing cost.
1. Suppose Memphis used cost-plus pricing, setting the price 15% above the manufacturing cost. What price would be
charged for the motor? Would you produce such a motor if you were a manager at Memphis? Explain.

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2. Suppose Memphis uses target costing. What price would the company charge for a garage-door-opener motor?
What is the highest acceptable manufacturing cost for which Memphis would be willing to produce the motor?
3. As a user of target costing, what steps would Memphis managers take to try to make production of this product
feasible?
Best Cost Corporation has an aggressive R&D program and uses target costing to aid in the final decision to release new
products to production. A new product is being evaluated. Market research has surveyed the potential market for this
product and believes that its unique features will generate a total demand of 50,000 units at an average price of $230.
Design and production engineering departments have performed a value analysis of the product and have determined that
the total cost for the various value-chain functions using the existing process technology are as follows:
Value-Chain Function Total cost over Product Life
Research and development $1,500,000
Design 750,000
Manufacturing 5,000,000
Marketing 800,000
Distribution 1,400,000
Customer service 750,000
Total cost over product life $10,200,000
Management has a target profit percentage of 20% of sales. Production engineering indicates that new process
technology can reduce the manufacturing cost by 40% but it will cost $1,000,000.
1. Assume the existing process technology is used, should the new product be released to production? Explain.
2. Assume the new process technology is purchased, should the new product be released to production? Explain.
4.

COST BASED TRANSFER PRICING

P – 19. Division Y of a decentralised company has a capacity of producing 100,000 units

of components which sells to outsider division X. Division X requires similar components
20,000 units which can be purchased from market Rs. 3 per unit. Division Y expects to
produce 90,000 units of components with total variable cost Rs. 225,000.
Required:
a. Determine whether the company as a whole benefited if division X purchased from the
outsider market for Rs. 3 per unit.
b. If the market price of the component is dropped to Rs. 2.40 per unit, should the
division X purchase from outside supplier?

P – 20. Division Y of a company received 10,000 units from division X @ Rs. 5 per unit.
The division paid Rs. 4 variable cost per unit and Rs. 20,000 as fixed cost. The division
transfers its product to division Z at 120% of the full cost which is ultimately sold to
external market.
Required:
a. Transfer price of division Y
b. Selling price that division Z should set, if division incurred variable cost per unit
Rs. 6 and fixed cost of Rs. 10,000 and price is fixed at 130% of full costs.

TRANSFER PRICING UNDER GENERAL PRICING RULE

P – 21. A company has three departments; Department A, Department B and Department
C. The finished product of Department A is the raw material for Department B and
Department C is an independent department with indigenous product. All the departments
are under decentralized conditions, and have their autonomy in decision making.
Therefore, Department A either can sell its product to department B or in the open market.
The variable manufacturing cost of Department A is Rs.200 and its selling price in the
market is Rs.240. Similarly, Department B can wither buy product from the market or
receive a transfer from Department A. The market price of the raw material used in
Department B is also Rs.240. Department C also buys the raw material needed for the
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department from the same supplier from which B receives its raw materials at a reduced
price of Rs.20 per unit. The regular market price of the raw materials required for
Department C is Rs.40. The supplier will also cease to supply the raw material needed for
Department C, if Department B receives transfer from Department A.
Required:
a. Transfer price under the condition of access capacity
b. Transfer price under capacity constraint

P – 22. Kasthamandap Window Manufacturing Company manufactures windows for

home-building industry. The window frames are produced in the Frame Division. The
frames are then transferred to the Glass Division, where the glass and hardware are
installed. The company's best-selling product is a three-by-four-foot, double-paned
operable window.

The frame Division can also sell frames directly to custom home builders who install the
glass and hardware. The selling price for a frame is Rs.125. The Glass Division sells its
finished windows for Rs.280. The markets for both the frames and finished windows
exhibit perfect competition.

The standard cost of the window is detailed as follows:

Frame Division Glass Division
Direct material Rs.30 Rs.50*
Direct labor 30 30
Variable overhead 40 40
Total Rs.100 Rs.120
* Excluding the transfer price for the frame.
Required
a. Assuming that there is no excess capacity in the Frame Division, compute the
transfer price for the window frames using the general rule.
b. Assuming that there is enough excess capacity in the Frame Division; compute the
transfer price for the window frames using the general rule.
c. Suppose the predetermined fixed-overhead rate in the Frame Division is 40 percent
of the direct-labor cost. Calculate the transfer price if it is based on standard full
cost plus a 10 percent markup.
d. Assume that the transfer price established in requirement (c) is used. The Glass
Division has been approached by the Nepal Army with a special order for 1,000
windows at Rs.235. From the perspective of the Window Company as a whole,
should the special order be accepted or rejected? Why?
e. Assume the same facts as in requirement (d). Will an autonomous Glass Division
manager accept or reject the special order? Why?

P – 23. Kathmandu Television Ltd. has two independent divisions: Tube and television
divisions. Television division produces and sales television in the market and tube division
manufactures LDC tubes which could be used in production of television. The variable
manufacturing cost of would be Rs.250 and they could be sold in the market at a price of
Rs.300. The television division either could receive LDC tubes from the tubes division or
purchase it from a supplier at a price of Rs.300. The supplier would also life the scraps of
tube division at a price of Rs.25 per unit and it would stop buying scraps if, television
would receive LDC tubes from tube division.
Required:
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 Pricing Decision

a. Transfer price of LDC tubes to television divisions where no capacity constraint

exists.
b. Transfer price where capacity constraint exists. (TU 2060)

P – 24 The electronics Ltd. has three autonomous units viz. Circuit designing, television manufacturing and
refrigerator manufacturing, enjoying full autonomy. The television manufacturing unit either could buy the circuit it
would need to produce television, from the circuit designing unit or from a whole seller. The whole seller also supplies
'Thermostat' needed for the manufacturing of refrigerator. If the television manufacturing unit would purchase required
circuits from circuit designing unit the wholesaler would also stop the supply of 'thermostat'. The further details other
than mentioned above have been summarized below:
Circuit Television Refrigerator
designing unit manufacturing unit manufacturing unit
(a) Transfer pricing (a) Buying cost from whole (a) Buying cost of
(SP) cost plus 25% seller Rs. 300 per unit Thermostat from whole
seller Rs. 50
(b) Cost of production (b) Buying cost from open
Rs. 240 per unit market Rs. 80
Required:
a. Transfer pricing with no capacity constraints.
b. Transfer pricing with capacity constraints. (TU 2057)
P–25 Easy Living Industries manufactures carpets, furniture and cushions in three separate
divisions. The company's operating statement for 2004 is as follows
Easy Living Industries, Operating Statement
For the Year Ended December 31, 2004
Particulars Carpet Furniture Cushion Total
Division Division Division
Sales revenue Rs3,000,000 Rs.3,000,000 Rs.3,800,000 9,800,000
Variable Cost of goods sold 2,000,000 1,300,000 3,000,000 6,300,000
Gross Profit Rs.1,000,000 Rs1,700,000 Rs.800,000 3,500,000
Operating expenses:
Administration (all fixed) Rs.300,000 Rs.500,000 Rs.400,000 1,200,000
Selling (50% variable) 600,000 600,000 500,000 1,700,000
Total operating expenses Rs.900,000 Rs.1,100,000 Rs.900,000 2,900,000
Income (loss) from operation Rs100,000 Rs.600,000 (Rs.100,000) Rs.600,000
Required
a. One of the Furniture Division's inputs is the output of Carpet Division. What price
should the Carpet Division charge for its product to the Furniture Division if (i) the
Carpet Division has excess capacity (ii) it has no excess capacity?
b. The CEO of Easy Living Industries believes that the total income could be increased
dropping the Cushion Division, as it is giving negative income. Is CEO correct? Show
the differential cost-benefit analysis to justify your opinions.

P–26 Global Board Marker Company manufactures board markes. The ink used to
produce board marker is produced in Alpha Division. The ink is then transferred to the
Beta Division where the finished marker is produced. The Alpha division can also sell ink
refill directly to other producers and reusers of board markers. The sales price for refill ink
is Rs.8. The Beta division sells its finished marker for Rs.30. The market for both ink and
board markers exhibit perfect competition. The standard cost of the4 ink and marker is
detailed as follows:
Alpha Division Beta Division
Direct material Rs.2 Rs.6*

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Direct labor 2 5
Variable overheads 1 6
Total Rs.5 Rs.17
*Not included the transfer price for the ink.
Required:
a. Use the general rule to compute the transfer price for Alpha’s ink, assuming there
is no excess capacity in Alpha Division.
b. Calculate the transfer price if it is based on standard variable costs with a 10% of
mark up.
c. Use the general rule to compute the transfer price for Alpha’ ink, assuming there is
excess capacity in Alpha Division.
d. Suppose predetermined fixed overhead rate in Alpha division is 50% of direct
labor. Calculate the transfer price if it is based on standard full cost plus a 10%
mark up.
e. Assume the transfer price established in requirement (d) is used. Mahendra
Mutliple campus has approached the Beta division with a special order for 2000
board markers at Rs 25. From the prospective of Global Company as a whole,
should the special order be accepted or rejected? Why? Assume Alpha and Beta
both have excess capacity
P – 27. Electronic Co. Ltd manufactures Tube, Television and Refrigerator in three
different autonomous departments. The income statement regarding such products is
given below.
Electronic Co. Ltd
Income Statement
For the year ending 2005
Particulars Tube Television Refrigerator Total
Sales units 10,000 1,500 2,000 13,500
Sales Revenue 200,000 450,000 800,000 1450,00
Less: Variable Cost 100,000 200,000 500,000 800,000
Gross Profit 100,000 250,000 300,000 650,000
Less: Departmental fixed cost 20,000 100,000 200,000 320,000
Joint fixed cost 30,000 50,000 120,000 200,000
Net Income 50,000 100,000 (20,000) 130,000
The refrigerator division bas suffered losses for years. The management is considering to
drop out Refrigerator from its production schedule. If it is dropped, the capacity of the
company cannot be changed.
Required
a. Should the refrigerator division be dropped? Give you decision with necessary
calculations.
b. The output of the tube division is the input of the television division. What price
should the tube division charge for its product to the television division if (i) the tube
division has excess capacity (ii) It has no excess capacity.

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 Pricing Decision

10-44 Transfer Pricing

The Pump Division of Global Motors Company produces water pumps for automobiles. It has been the sole supplier of
water pumps to the Automotive Division and charges $30 per unit, the current market price for very large wholesale lots.
The Pump Division also sells to outside retail outlets, at $38 per unit. Normally, outside sales amount to 25% of a total
sales volume of 1 million water pumps per year. Typical combined annual data for the division follow:
Sales $32,000,000
Variable costs @ $25 per water pump $25,000,000
Fixed costs $ 3,000,000
Total costs $28,000,000
Gross margin $4,000,000
Dearborn Pump Company, an entirely separate entity, has offered the Automotive Division comparable water pumps at a
firm price of $28 per unit. The Pump Division of Global Motors claims that it cannot possibly match this price because it
could not earn any margin at $28.
1. Assume that you are the manager of the Automotive Division of Global Motors. Comment on the Pump Division's
claim. Assume that normal outside volume cannot be increased.
2. The Pump Division believes that it can increase outside sales by 75,000 water pumps per year by increasing fixed
costs by $2 million and variable costs by $3 per unit while reducing the selling price to $36. Assume that maximum
capacity is 1 million pumps per year. Should the division reject intra-company business and concentrate on outside
sales?

10.48 Negotiated Transfer Prices

The Assembly Division of Nathan Allen Office Furniture, Inc., needs 1,200 units of a subassembly from the Fabricating
Division. The company has a policy of negotiated transfer prices. The Fabricating Division has enough excess capacity to
produce 2,000 units of the subassembly. Its variable cost of production is $22. The market price of the subassembly i$38.
What is the natural bargaining range for a transfer price between the two divisions? Explain why no price below your
range would be acceptable. Also explain why no price above your range would be acceptable.

10-46 Transfer Prices and Idle Capacity

The Ashville Division of National Woodcraft purchases lumber, which it uses to fabricate tables, chairs, and other wood
furniture. It purchases most of the lumber from Georgolina Mill, also a division of National Woodcraft. Both the Ashville
Division and Georgolina Mill are profit centers.
The Ashville Division proposes to produce a new Shaker-style chair that will sell for $94. The manager is exploring the
possibility of purchasing the required lumber from Georgolina Mill. Production of 800 chairs is planned, using capacity
in the Ashville Division that is currently idle.
The Ashville Division can purchase the lumber from an outside supplier for $72. National woodcraft has a policy that
internal transfers are priced at fully allocated cost.
Assume the following costs for the production of one chair and the lumber required for the chair:
Georgolina Mill Ashville Division
Variable cost $48 Variable cost
Allocated fixed cost 22 Lumber from Georgolina Mill $70
Fully allocated cost $70 Ashville Division variable costs
Manufacturing $23
Selling 6 29
Total variable cost $99
1. Assume that the Georgolina Mill has idle capacity and therefore would incur no additional fixed costs to produce
the required lumber. Would the Ashville Division manager buy the lumber for the chair from the Georgolina Mill,
given the existing transfer-pricing policy? Why or why not? Would the company as a whole benefit if the manager
decides to buy from the Georgolina Mill? Explain.
2. Assume that there is no idle capacity at the Georgolina Mill and the lumber required for one chair can be sold to
outside customer for $72. Would the company as a whole benefit if the Ashville manager buys from Georgolina?
Explain.

c.

ASSIGNMENT QUESTIONS

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 Pricing Decision

 All EVEN NUMBERS PROBLEMS for even ROLL NUMBER

STUDENTS and uneven questions for UNEVEN ROLL
NUMBER STUDENTS
 To be submitted within One week from the date of
completion of the chapter.

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