ch08 Cost Control

CHAPTER 8
Pricing
ASSIGNMENT CLASSIFICATION TABLE
Brief A
Learning Objectives Questions Exercises Do It! Exercises Problems
1. Compute a target cost when 1, 2 1 1 1, 2, 3

the market determines a
product price.
2. Compute a target selling price 3, 4, 5, 2, 3, 2 3, 4, 5, 1A, 2A

using cost-plus pricing. 6, 7 4, 5 6, 7
3. Use time-and-material pricing 8, 9 6 3 8, 9, 10 3A

to determine the cost of
services provided.
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.
*5. Determine prices using 17, 18 10, 11 18, 19, 20 7A, 8A

absorption-cost pricing
and variable-cost pricing.
*6. Explain issues involved in 19

transferring goods between
divisions in different countries.
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the
chapter.
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 8-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time

Number Description Level Allotted (min.)
1A Use cost-plus pricing to determine various amounts. Simple 20–30
2A Use cost-plus pricing to determine various amounts. Simple 20–30
3A Use time-and-material pricing to determine bill. Simple 20–30
4A Determine minimum transfer price with no excess capacity Moderate 20–30

and with excess capacity.
5A Determine minimum transfer price with no excess capacity. Moderate 20–30
6A Determine minimum transfer price under different situations. Moderate 20–30
*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.
8-2 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
BLOOM’S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems
Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

*1. Compute a target cost when the Q8-1 Q8-2 DI8-1 E8-3
market determines a product BE8-1 E8-1
price. E8-2
*2. Compute a target selling price Q8-3 Q8-4 E8-4
using cost-plus pricing. Q8-5 Q8-6 E8-5
Q8-7 E8-6
BE8-2 E8-7
BE8-3 P8-1A
BE8-4 P8-2A
BE8-5
DI8-2
E8-3
*3. Use time-and-material pricing Q8-9 Q8-8 BE8-6 E8-10
to determine the cost of DI8-3 P8-3A
services provided. E8-8
E8-9
*4. Determine a transfer price using Q8-12 Q8-10 BE8-7 E8-12
the negotiated, cost-based, and Q8-14 Q8-11 E8-16
market-based approaches. Q8-15 Q8-13 BE8-8 E8-17
Q8-16 BE8-9 P8-4A
DI8-4 P8-5A
E8-11 P8-6A
E8-13
E8-14
E8-15
*5. Determine prices using Q8-17 Q8-18 E8-20
absorption-cost pricing BE8-10 P8-7A
and variable-cost pricing. BE8-11 P8-8A
E8-18
E8-19
*6. Explain issues involved in Q8-19
transferring goods between
divisions in different countries.
Expand Your Critical Thinking CT8-4 CT8-2 CT8-1
CT8-3 CT8-6
CT8-5
CT8-7
8-3
ANSWERS TO QUESTIONS
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:
Target selling price = Cost + Markup

4. The basic formula to determine the target selling price in cost-plus pricing is:
Target selling price = Cost + (Markup percentage X Cost)

$23.40 = $18 + (30% X $18)
LO2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision Analysis
[$18 + (30% x $18) = $23.40]
[Cost + (Markup % x Cost) = Target sell. price]
5. The basic formula to compute the markup percentage is:

Desired ROI per unit
Markup percentage =
Total unit cost
6. Total cost base per unit, excluding selling and administrative expenses.......................... $60
Selling and administrative expenses per unit................................................................... 15
Total unit cost................................................................................................................... $75
The markup percentage is computed as follows:

$6
= 8%
$75
[($60 + $15 = $75); ($6 ÷ $75 = 8%)]
[Unit cost excluding S&A + S&A/unit = Tot. unit cost); (ROI/unit ÷ Tot. unit cost = Markup %)]

7. The markup percentage is:
$6
= 24%
$25
Variable cost per unit........................................................................................................ $16

Fixed cost per unit............................................................................................................ 9
Desired ROI per unit......................................................................................................... 6
Target selling price........................................................................................................... $31
[($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.
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.
*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.
*11. The objective of an appropriate transfer price is to maximize the return to the whole company
and not cause divisional performance to decline.
*12. The three approaches for determining transfer prices are:

(1) Negotiated transfer prices
(2) Cost-based transfer prices
(3) Market-based transfer prices
*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.
*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
*15. When determining the minimum transfer price, the opportunity cost is the contribution margin
that would be received if the goods were sold externally.
*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).
*17. The absorption-cost approach defines the cost base as manufacturing cost. Therefore, it excludes
variable and fixed selling and administrative costs.
Chapter 8 Questions (Continued)
*18. The markup percentage using variable-cost pricing would be:

$3 + $9
= 75%
$16
[($3 + $9) ÷ $16 = 75%]
[(Desired ROI/unit + FC/unit) ÷ VC/unit = Markup %]
*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.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8-1
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.
BRIEF EXERCISE 8-2
Direct materials......................................................................................... $12

Direct labor................................................................................................ 8
Variable manufacturing overhead............................................................ 6
Fixed manufacturing overhead................................................................ 14
Variable selling and administrative expenses........................................ 4
Fixed selling and administrative expenses............................................. 12
Total unit cost.................................................................................... $56
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)]
BRIEF EXERCISE 8-3
(Total investment X Desired ROI percentage)

ROI per unit =
Number of units
($10,000,000 X 12%)
= = $24
50,000
Analysis
[($10,000,000 x 12%) ÷ 50,000 = $24]
[(Tot. invest. x Desired ROI %) ÷ No. of units = ROI/unit]
BRIEF EXERCISE 8-4
The markup percentage would be:
$30 18.75%
=
$36 + $24 + $18 + $40 + $14 + $28
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 %]
BRIEF EXERCISE 8-5
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:
Desired ROI per unit $30

= = 25%
Total unit cost $120
Analysis
BRIEF EXERCISE 8-6
Rooney’s total bill would equal:
(10.5 hours X $42) + $700 + ($700 X 40%) = $1,421

Analysis
[(10.5 x $42) + $700 + ($700 x 40%) = $1,421]
[(No. hrs. worked x Hrly. rate) + Mat. used + (Mat. used x Mat. loading %) = Tot bill]
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:
Minimum transfer price = $25 + ($45 – $25) = $45.

Analysis
[$25 + ($45 - $25) = $45]
[VC/unit + (Lost USP – VC/unit) = Min. transfer price]
BRIEF EXERCISE 8-8
If the division has excess capacity, then its opportunity cost is zero. In this
case, the minimum transfer price is:
Minimum transfer price = $25 + $0 = $25.

Analysis
($25 + $0 = $25)
(UVC + Opp. Cost = Min. transfer price)
BRIEF EXERCISE 8-9
The minimum transfer price is equal to the division’s variable cost plus its
opportunity cost. In this case the minimum transfer price is:
Minimum transfer price = $27 + ($45 – $25) = $47.

Analysis
[$27 + ($45 - $25) = $47]
[New UVC + (Lost USP – Regular UVC) = Min. transfer price]
*BRIEF EXERCISE 8-10
The markup percentage using the absorption-cost approach is calculated

by including only manufacturing costs in the cost base. Therefore, all costs
related to selling and administration are excluded from the cost base and
added back in the numerator.
$30 + ($14 + $28)
Markup percentage = = 61.02%
$36 + $24 + $18 + $40
Analysis
[($30 + ($14 + $28)) ÷ ($36 + $24 + $18 + $40) = 61.02%]
*BRIEF EXERCISE 8-10 (Continued)

[(Desired ROI/unit + (Var. S&A/unit + Fix. S&A/unit)) ÷ (DM/unit + DL/unit + Var. OH/unit + Fix. OH/unit) = Absorp.
markup %]
*BRIEF EXERCISE 8-11
The markup percentage using variable-cost pricing is calculated by including

only variable costs in the cost base. Therefore, all fixed costs are excluded
from the cost base and added back in the numerator.
$30 + ($40 + $28)
$36 + $24 + $18 + $14
Analysis
[($30 + ($40 + $28)) ÷ ($36 + $24 + $18 + $14) = 106.52%]
[(Desired ROI/unit + (Fix. OH/unit + Fix. S&A/unit)) ÷ (DM/unit + DL/unit + VOH/unit + Var. S&A/unit) = Var.cost
markup %]
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%)
Each filter must result in $.32 of profit ($320,000/1,000,000 units)

[($2,000,000 x 16%) ÷ 1,000,000 = $0.32]
[(Invest. x Min. ROR) ÷ Est. no. of units to be sold = Profit/filter]
Market price – Desired profit = Target cost per unit

$3 – $.32 = $2.68 per unit
Analysis
DO IT! 8-2
Direct materials................................................................ $18

Direct labor....................................................................... 9
Variable manufacturing overhead.................................. 5
Fixed manufacturing overhead....................................... 6
Variable selling and administrative expenses............... 3
Fixed selling and administrative expenses................... 7
Total unit costs........................................................... $48
Total unit cost + (Total unit cost X Markup percentage) = Target selling price
$48 + ($48 X 30%) = $62.40
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
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
DO IT! 8-3 (Continued)
Materials cost................................................ $ 70
Materials loading charge ($70 X 60%)......... 42
Total materials cost...................................... $112
Cost of dishwasher repair

Labor costs ($60 X 1.5)........................ $ 90
Materials cost........................................ 112
Total repair cost............................................ $202
Analysis
[(($110,000 ÷ 5,000) + ($40,000 ÷ 5,000) + ($50,000 ÷ 5,000) + $20 = $60); (($60 x 1.5) + $70 + ($70 x 60%) =
$202)]
[((Repair-tech. wages ÷ Tot. Hrs.) + (Fringe bene. ÷ Tot. hrs.) + (OH ÷ Tot. hrs.) + Profit margin = Hrly. labor rate);
((Hrly. labor rate x No. hrs. worked) + Mat. cost + (Mat. cost x Mat. loading charge) = Tot. repair bill)]
DO IT! 8-4
(a) Minimum transfer price = Variable cost + Opportunity cost

$2.80 = $2.80 ($3 – $.20) + $0
[($3.00 - $0.20) + $0 = $2.80]
[(UVC – Reduction in zipper cost/unit) + Opp. cost = Min. transfer price]
(b) Minimum transfer price = Variable cost + Opportunity cost

$7.80 = $2.80 ($3 – $.20) + $5 ($8 – $3)
[($3.00 - $0.20) + ($8.00 - $3.00) = $7.80]
[(UVC – Reduction in zipper cost/unit) + (Lost USP – UVC) = Min. transfer price]
Analysis
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]
(b) Target costing is particularly helpful when a company faces a competi-

tive market. In this case, the price is affected by supply and demand,
so no company in the industry can affect price. Therefore to earn a
profit, companies must focus on controlling costs.
Analysis
EXERCISE 8-2
The following formula may be used to determine return on investment
Investment X ROI percentage = Return on investment

$8,000,000 X 20% = $1,600,000
Return on investment per unit is then $16 ($1,600,000 ÷ 100,000)
The target cost is therefore $74 computed as follows:
Target cost = Market price – Desired profit

$74 = $90 – $16
Analysis
[$90 – (($8,000,000 x 20%) ÷ 100,000) = $74]
[Mkt. price – ((Invest. x ROI %) ÷ Units sold) = Target cost]
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:
Target cost = Market price – Desired profit

$75 = $100 – $25
[$100 – $25 = $75]
[Mkt. price – Desired profit = Target cost]
Analysis
EXERCISE 8-4
(a) Total cost per unit:

Per Unit
Direct materials........................................................................... $17
Direct labor.................................................................................. 8
Variable manufacturing overhead............................................. 11
Fixed manufacturing overhead
($300,000/30,000)..................................................................... 10
Variable selling and administrative expenses.......................... 4
Fixed selling and administrative expenses
($150,000/30,000)..................................................................... 5
$55
(b) Target selling price = $55 + (40% X $55) = $77

[($17 + $8 + $11 + $10 + $4 + $5) + ($55 x 40%) = $77]
[(DM/unit + DL/unit + VOH/unit + FOH/unit + Var. S&A/unit + Fix. S&A/unit) + (Tot. cost/unit x Markup %) = Target
sell. price]
Analysis
EXERCISE 8-5
(a) Total cost per unit:

Per Unit
Direct materials........................................................................... $ 7
Direct labor.................................................................................. 11
Fixed manufacturing overhead
($3,000,000/500,000)................................................................ 6
($1,500,000/500,000)................................................................ 3
$56
($7 + $11 +$15 + $6 + $14 + $3 = $56)
(DM/unit + DL/unit + VOH/unit + FOH/unit + Var. S&A/unit + Fix. S&A/unit = Tot. cost/unit)
(b) Desired ROI per unit = (25% X $28,000,000)/500,000 = $14

[($28,000,000 x 25%) ÷ 500,000 = $14]
[(Investment x Desired ROI %) ÷ Ann. no. of units = Desired ROI/unit]
(c) Markup percentage using total cost per unit:

$14
= 25%
$56
($14 ÷ $56 = 25%)
(Desired ROI/unit ÷ Tot. cost/unit = Markup %)
(d) Target selling price = $56 + ($56 X 25%) = $70

Analysis
EXERCISE 8-6
(a) Total cost per session:
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
($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)
(b) Desired ROI per session = (20% X $2,352,000) ÷ 1,000 = $470.40
(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]
(d) Target price per session = $1,960 + ($1,960 X 24%) = $2,430.40

Analysis
EXERCISE 8-7
$1,500,000
(a) Fixed manufacturing overhead per unit = = $500 per unit
3,000
Fixed selling and administrative = $324,000 = $108 per unit

expenses per unit 3,000
20% X $54,000,000
(b) Desired ROI per unit = = $3,600 per unit
3,000
(c) Per Unit

Direct labor.................................................................................. 290
Fixed manufacturing overhead.................................................. 500
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]
Analysis
EXERCISE 8-8
(a) Total Total Per Hour

Cost ÷ Hours = Charge
Hourly labor rate for repairs
Technician’s wages and benefits $228,000 ÷ 7,600 = $30
Overhead costs
Office employee’s salary and
benefits 38,000 ÷ 7,600 = 5
Other overhead 15,200 ÷ 7,600 = 2
$281,200 ÷ 7,600 = 37
Profit margin 30
[($228,000 ÷ 7,600) + ($38,000 ÷ 7,600) + ($15,200 ÷ 7,600) + $30 = $67]
[(Tech. wages & bene. ÷ Tot. hrs.) + (Off. emp. sal. & bene. ÷ Tot. hrs.) + (Other OH ÷ Tot. hrs.) + Profit margin =
Labor rate/hr.]
(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%]
[((Parts mgr. sal. & bene. + Off. emp. sal. & bene.) ÷ Tot. cost mat. & parts) + (Other OH ÷ Tot. cost mat. & parts) +
Profit margin = Mat. loading %]
(c) Job: Pace Corporation—Rebuild spot welder
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
Analysis
EXERCISE 8-9
(a) Total Total Per Hour

Technician’s wages and benefits $150,000 ÷ 6,250 = $24.00
Overhead costs
Office employee’s salary and
benefits 30,000 ÷ 6,250 = 4.80
Other overhead 15,000 ÷ 6,250 = 2.40
$195,000 ÷ 6,250 = 31.20
Profit margin 38.00
Rate charged per hour of labor $69.20
[($150,000 ÷ 6,250) + ($30,000 ÷ 6,250) + ($15,000 ÷ 6,250) + $38.00 = $69.20]
[(Tech. wages & bene. ÷ Tot. hrs.) + (Off. emp. sal. & bene. ÷ Tot. hrs.) + (Other OH ÷ Tot. hrs.) + Profit margin =
Labor rate/hr.]
(b) Total
Material Invoice Cost, Material
Loading Parts and Loading
Overhead costs
Parts manager’s salary and
benefits $34,000
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
Material loading percentage 80.00%
93.00%
[(($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 %]
(c) Job: Buil Builders
Labor charges
80 hours @ $69.20................................. $ 5,536
Material charges
Cost of parts and materials.................. $40,000
(93% X $40,000).................................. 37,200 77,200
Total price of labor and material.... $82,736
Analysis
EXERCISE 8-10
(a) Total Total Hourly

Hourly labor rate:
Restorers’ wages and fringes $270,000 ÷ 12,000 = $22.50
Overhead costs:
Administrative salaries & 54,000 ÷ 12,000 = 4.50
fringes
Other overhead costs 24,000 ÷ 12,000 = 2.00
Total hourly cost $348,000 ÷ 12,000 = $29.00
Profit margin = Hourly rate – total hourly cost

= $70.00 – $29.00
= $41.00
[(($270,000 ÷ 12,000) + ($54,000 ÷ 12,000) + ($24,000 ÷ 12,000) = $29.00); ($70 – 29 = $41)]
[((Restorer’s wages & fringes ÷ Tot. hrs.) + (Admin. sal. & fringes ÷ Tot. hrs.) + (Other OH costs ÷ Tot. hrs.) = Tot.
hrly. cost); (Hrly. labor rate – Tot. hrly. cost = Profit margin)]
(b)
Material Total Invoice Material

Loading Cost, Parts & Loading
Overhead costs:
Purchasing agent’s
salary and $ 67,500
fringes
Administrative
salaries and
fringes 21,960
89,460 ÷ $1,260,000 = 7.10%
Other overhead costs 77,490 ÷ $1,260,000 = 6.15%

Total $166,950 ÷ $1,260,000 = 13.25%
Material loading charge (with profit) 83.25%

Material loading charge (without profit) 13.25%
Profit margin on materials 70.00%
[((($67,500 + $21,960) ÷ $1,260,000) + ($77,490 ÷ $1,260,000) = 13.25%); (83.25% - 13.25% = 70.00%)]
[((Purch. agent’s sal. & fringes + Admin. sal. & fringes) ÷ Tot. cost parts & mat.) + (Other OH costs ÷ Tot. cost
parts & mat.) = Mat. loading chrg. without profit margin); (Mat. loading chrg. with profit margin – Mat. loading chrg.
without profit margin = Profit margin on mat.)]
(c) Labor charges:

150 hours @ $70 $ 10,500
Material charges:
Cost of parts & materials $60,000
($60,000 X 83.25%) 49,950 109,950
Total price of labor and materials $120,450
Analysis
EXERCISE 8-11
(a) The minimum transfer price is:
Minimum transfer price = Variable cost + opportunity cost
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.
Analysis
EXERCISE 8-12
(a) As indicated, FrameBody has excess capacity and therefore should be

willing to accept any price that equals or exceeds its variable cost.
1. The effect on Cycle Division is as follows:
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
In this case, Cycle Division makes $20 ($1,020 – $1,000) more

per cycle sold and therefore if it sells 1,000 cycles, it makes an
additional $20,000.
[(Present: $2,200 – ($300 + $900) = $1,000); (Purchase: $2,200 – ($280 + $900) = $1,020); (Change in CM:
($1,020 - $1,000) x 1,000 = $20,000)]
[(Present: USP – Body frame cost/unit + Other VC/unit) = UCM); (Purchase: USP – (Body frame cost/unit + Other
VC/unit) = UCM); (Change in CM: (Purch. UCM – Presnt UCM) x No. of cycles sold = Incr. in CM)]
2. The effect on FrameBody is that it makes $10 on each frame sold

as shown below:
Selling price to Cycle Division $280
Variable cost 270
$ 10
Thus the FrameBody Division gains $10,000 ($10 X 1,000).

[($280 - $270) x 1,000 = $10,000]
[(USP to Cycle Div. – UVC) x No. of cycles sold = Incr. in CM]
3. As a result, the overall income for Ayala increases $30,000 ($20,000

from Cycle Division and $10,000 from FrameBody).
(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:
Selling price to outside buyer $ 350

Selling price to Cycle Division 280
Lost contribution margin per cycle $ 70
Number of cycles X 1,000
Lost contribution margin $70,000
[($350 - $280) x 1,000 = $70,000]
[(USP to outside buyer – USP to cycle div.) x No. of cycles sold = Lost CM]
3. The effect on the overall income to Ayala is a net loss of

$50,000 as shown below:
Cycle Division gain $20,000

Frame Body loss (70,000)
Overall loss ($50,000)
[$20,000 - $70,000 = ($50,000)]
[Cycle div. incr. CM – Frame body div. lost CM = Overall company loss]
LO4 BT: AN Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
EXERCISE 8-13
(a) The minimum transfer price that Benson should accept is:
Minimum transfer price = ($37 – $3) + ($86 – $37) = $83

[($37 - $3) + ($86 - $37) = $83]
[(Tot. UVC – Var. ship. cost saved) + (Outside USP – Outside UVC) = Min. transfer price]
(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
Total lost contribution margin is $3 X 200,000 units = $600,000

[((($86 - $37) – ($35 - $34)) – ($80 - $35) = $3); ($3 x 200,000 = $600,000)]
[(((USP to outside cust. – UVC) – (Transfer price to vehicle div. – UVC for sales to vehicle div)) – (USP to outside
cust. – UVC for outside sales) = Lost UCM); (Lost UCM x No. units sold = Tot. lost CM)]]
(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.
Analysis
EXERCISE 8-14
The minimum transfer price on this special order would be:
Minimum transfer price = ($140 – $6) + ($50 – $29) = $155.
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.
Analysis
[($140 - $6) + ($50 - $29) = $155]
[(External UVC – Var. sell. exp/unit saved) + (Outside USP – Outside UVC) = Min. transfer price/unit]
EXERCISE 8-15
(a) Minimum transfer price = ($130 – $8) + $0 = $122

[($130 - $8) + $0 = $122]
[(Outside UVC – Admin. exp./unit saved) + Opp. cost = Min. transfer price/unit]
(b) Minimum transfer price = ($130 – $8) + ($160 – $130) = $152

[($130 - $8) + ($160 - $130) = $152]
[(Outside UVC – Admin. exp./unit saved) + (Outside USP – Outside UVC) = 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.
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 be the external price paid by Division A,

which is $10 per unit.
[(($7 - $1) + $0 = $6); (Max. = $10)]
[((Outside UVC – Var. sell. exp./unit saved) + Opp. cost = Min. transfer price); (Max. unit transfer price = Current
USP)]]
(b) Minimum transfer price = variable costs + opportunity cost

Variable costs = $6 (as in (a))
Opportunity cost = (($7 – $5) X 15,000) ÷ 10,000 = $3
Therefore the minimum transfer price should be $9 ($6 + $3)
The maximum price would still be the external price paid by Division A,
[((($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)]
(c) Minimum transfer price = variable costs + opportunity cost

Variable costs = $6.00 (as in (a))
Opportunity cost = (($12 – $7) X 5,000) ÷ 15,000 = $1.67
Therefore the minimum transfer price should be $7.67 ($6 + $1.67)
The maximum price would still be the external price paid by Division A,
Analysis
EXERCISE 8-17
(a) Division Division Total

A B Company
Sales $1,500 $2,400 $3,900
Less: Costs
Variable costs $1,100 $1,200 $2,300
Transfer costs 0 1,500 1,500
Total costs $1,100 $2,700 $3,800
Contribution to income $ 400 $ (300) $ 100
[(Div. A: $1,500 – $1,100 = $400); (Div. B: $2,400 – ($1,200 + $1,500) = ($300)); (Tot. co.: $3,900 – ($2,300 +
$1,500) = $100)]
[(Div. A: Sales – VC = Contrib. to inc.); (Div. B: Sales – (VC + Transfer costs) = Neg. contrib. to inc.); (Tot. co.:
Sales – (VC + Transfer costs) = Contrib. to inc.)]
(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.
(c) (i) Maintain price, no transfers

(500 X $1,500) – (500 X $1,100) = $200,000
[(500 x $1,500) – (500 x $1,100) = $200,000]
[(No. units sold x USP) – (No. units sold x UVC) = Tot. CM]
(ii) Cut price, no transfers

(1,000 X $1,200) – (1,000 X $1,100) = $100,000
[(1,000 x $1,200) – (1,000 x $1,100) = $100,000]
[(No. units sold x Reduced USP) – (No. units sold x UVC) = Tot. CM]
(iii) Maintain price and transfers

(500 X $2,400) + (500 X $1,500) – $1,700,000* = $250,000
*(500 X $2,300) + (500 X $1,100)
[((500 x $2,400) + (500 x $1,500)) – ((500 x $2,300) + (500 x $1,100)) = $250,000]
[((No. units sold by Div. B x USP) + (No. units sold by Div. A x USP)) – ((No. units sold x Sum of Div. A & Div. B
UVC) + (No. units sold x Div. A UVC)) = Tot. CM]
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
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).
Analysis
*EXERCISE 8-18
(a) Cost per unit:

Per Unit
Direct labor.................................................................................. 11
Fixed manufacturing overhead ($3,000,000/500,000).............. 6
($1,500,000/500,000)................................................................ 3
$56
(b) Desired ROI per unit = (25% X $28,000,000)/500,000 = $14

[(25% x $28,000,000) ÷ 500,000 = $14]
[(Desired ROI % x Investment) ÷ Ann. vol. in units = Desired ROI/unit]
(c) Absorption-cost pricing $14 + ($14 + $3)

= = 79.49%
markup percentage ($7 + $11 + $15 + $6)
[($14 + $14 + $3) ÷ ($7 + $11 + $15 + $6) = 79.49%]
[(Desired ROI/unit + Var. S&A exp./unit + Fix. S&A exp./unit) ÷ (DM/unit + DL/unit + Var. OH/unit + Fix. OH/unit) =
Absorp. Markup %]
(d) Variable-cost pricing $14 + ($6 + $3)

= = 48.94%
[($14 + $6 + $3) ÷ ($7 + $11 + $15 + $14) = 48.94%]
[(Desired ROI/unit + Fix. OH/unit + Fix. S&A/unit) ÷ (DM/unit + DL/unit + Var. OH/unit + Var. S&A/unit) = VC
markup %]
Analysis
*EXERCISE 8-19
(a) The cost base of absorption-cost pricing includes only manufacturing

costs. All selling and administrative costs are excluded from the cost
base and are added back in the numerator of the markup percentage.
Absorption-cost pricing $24 + ($9 + $11)

= = 55%
[($24 + $9 + $11) ÷ ($20 + $25 + $14 + $21) = 55%]
[(Desired ROI/unit + Var. S&A/unit + Fix. S&A/unit) ÷ (DM/unit + DL/unit + Var. OH/unit + Fix. OH/unit) = Absorp.
Markup %]
(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.
*EXERCISE 8-19 (Continued)
Variable-cost pricing $24 + ($21 + $11)

= = 82.35%
[($24 + $21 + $11) ÷ ($20 + $25 + $14 + $9) = 82.35%]
[(Desired ROI/unit + Fix. OH/unit + Fix. S&A/unit) ÷ (DM/unit + DL/unit + Var. OH/unit + Var. S&A/unit) = VC
markup %]
Analysis
*EXERCISE 8-20
(a) Fixed manufacturing $1,500,000

= = $500 per unit
overhead per unit 3,000
Fixed selling and administrative $324,000

= = $108 per unit
expenses per unit 3,000
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]
(c) Absorption-cost pricing $3,600 + ($55 + $108)

= = 302.979%
markup percentage $380 + $290 + $72 + $500
Target selling price = $1,242 + ($1,242 X 302.979%) = $5,005

[(($3,600 + $55 + $108) ÷ ($380 + $290 + $72 + $500) = 302.979%); ($1,242 + ($1,242 x 302.979%) = $5,005)]
[((Desired ROI/unit + Var. S&A/unit + Fix. S&A/unit) ÷ (DM/unit + DL/unit + Var. OH/unit + Fix. OH/unit) = Absorp.
markup %); (Tot. cost/unit + (Tot. cost/unit x Absorp. markup %) = Target sell. price)]
(d) Variable-cost pricing $3,600 + ($500 + $108)

= = 527.980%
markup percentage $380 + $290 + $72 + $55
Target selling price = $797 + ($797 X 527.980%) = $5,005

[(($3,600 + $500 + $108) ÷ ($380 + $290 + $72 + $55) = 527.980%); ($797 + ($797 x 527.980%) = $5,005)]
[((Desired ROI/unit + Fix. OH/unit + Fix. S&A/unit) ÷ (DM/unit + DL/unit + Var. OH/unit + Var. S&A/unit) = VC
markup %); (Tot. VC/unit + (Tot. VC/unit x VC markup % = Target sell. price)]
Analysis
SOLUTIONS TO PROBLEMS
PROBLEM 8-1A
(a) Direct materials........................................................................... $25

Direct labor.................................................................................. 40
Variable selling and administrative expenses......................... 5
Variable cost per unit................................................................. $80
Total Budgeted Cost

Costs ÷ Volume = Per Unit
Fixed manufacturing overhead $1,440,000 ÷ 80,000 = $18
Fixed selling and administrative
expenses 960,000 ÷ 80,000 = 12
Fixed cost per unit $2,400,000 ÷ 80,000 = $30
Variable cost per unit................................................................. $ 80

Fixed cost per unit...................................................................... 30
Total cost per unit....................................................................... $ 110
[($25 + $40 + $10 + $5 = $80); (($1,440,000 ÷ 80,000) + ($960,000 ÷ 80,000) = $30); ($80 + $30 = $110)]
[(DM + DL + VOH + Var. S&A = VC/unit); ((Fix. OH ÷ Bud. vol.) + (Fix. S&A ÷ Bud. vol.) = FC/unit); (VC/unit +
FC/unit = Tot. cost/unit)]
(b) Total cost per unit....................................................................... $ 110

Markup......................................................................................... X 40%
Desired ROI per unit................................................................... $ 44
($110 x 40% = $44)
(Tot. cost/unit x Markup = Desired ROI/unit)
(c) Total cost per unit....................................................................... $110

Desired ROI per unit................................................................... 44
Target selling price..................................................................... $154
($110 + $44 = $154)
(Tot. cost/unit + Desired ROI/unit = Target sell. price)
(d) Variable cost per unit.......... $ 80 (same as above)

Fixed cost per unit............... 40 ($1,440,000 + $960,000) ÷ 60,000
Total cost per unit................ $120
Analysis
PROBLEM 8-2A
(a) Direct materials........................................................................... $ 50

Direct labor.................................................................................. 26
Total Budgeted Cost

Fixed manufacturing overhead $ 600,000 ÷ 50,000 = $12
expenses 400,000 ÷ 50,000 = 8
Fixed cost per unit $1,000,000 ÷ 50,000 = $20

Total cost per unit....................................................................... $135
[($50 + $26 + $20 + $19 = $115); (($600,000 ÷ 50,000) + ($400,000 ÷ 50,000) = $20); ($115 + $20 = $135)]
[(DM + DL + VOH + Var. S&A = VC/unit); ((Fix. OH ÷ Bud. vol.) + (Fix. S&A ÷ Bud. vol.) = FC/unit); (VC/unit +
FC/unit = Tot. cost/unit)]
25% X $1,000,000
Desired ROI per unit = = $5
50,000
$5
$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)]
(b) Variable cost per unit............................................... $115 (same as (a))
Total Budgeted Cost

Fixed manufacturing overhead $ 600,000 ÷ 40,000 = $15
expenses 400,000 ÷ 40,000 = 10
Fixed cost per unit $1,000,000 ÷ 40,000 $25
PROBLEM 8-2A (Continued)

[(($600,000 ÷ 40,000) + ($400,000 ÷ 40,000) = $25); ($115 + $25 = $140)]
[((Fix. OH ÷ Bud. vol.) + (Fix. S&A ÷ Bud. vol.) = FC/unit); (VC/unit + FC/unit = Tot. cost/unit)]
25% X $1,000,000
Desired ROI per unit = = $6.25
40,000
$6.25
$140
Total cost per unit....................................................................... $140.00

Desired ROI per unit................................................................... 6.25
Target selling price..................................................................... $146.25
[((25% x $1,000,000) ÷ 40,000 = $6.25); ($6.25 ÷ $140 = 4.46%); ($140.00 + $6.25 = $146.25)]
[((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)]
Analysis
PROBLEM 8-3A
(a) Computation of time charge rate

Total Total Per Hour
Shop employees’ wages and benefits $108,000 ÷ 5,000 = $21.60
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.]
(b) Computation of material loading charge

Material Material
Loading Total Invoice Cost, Loading
Charges ÷ Parts and Materials = Percentage
Overhead costs
Parts manager’s salary
and benefits $25,400
and benefits 13,600
39,000 ÷ $100,000 = 39%
Other overhead 16,000 ÷ 100,000 = 16%
Total $55,000 ÷ 100,000 = 55%
Profit margin 25%
Material loading percentage 80%
[(($25,400 + $13,600) ÷ $100,000) + ($16,000 ÷ $100,000) + 25% = 80%]
[((Parts mgr.’s sal. & bene. + Off. emp. sal. & bene.) ÷ Tot. cost parts & mat.) + (Other OH ÷ Tot. cost parts &
mat.) + Profit margin = Mat. loading %]
PROBLEM 8-3A (Continued)
(c) Price quotation for time and material
SUTTON’S ELECTRONIC REPAIR SHOP

Time and Material Price Quotation
January 5, 2020
Job: Fix big screen TV set
Labor charges: 4 hours @ $41.50.................... $166
Material charges
Cost of parts and materials......................... $200
Material loading charge (80% X $200)........ 160 360
Total price of labor and material....................... $526

Analysis
PROBLEM 8-4A
(a) Assuming no available capacity, the printing operation’s variable cost

is $0.004 per page and its opportunity cost is $0.006 ($0.01 – $0.004)
per page. The minimum transfer price would be $0.01 ($0.004 + $0.006).
Therefore, the printing operation would not accept the internal transfer
price of $0.007.
[$0.004 + ($0.01 - $0.004) = $0.01]
[VC/page + (Price/page – VC/page) = Min. transfer price]
(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)
Business Books would save:

($0.009 – $0.007) X 500 pages X 1,500 copies = 1,500
Overall loss to the company as a whole = ($ 750)
[(Printing oper.: ($0.01 - $0.007) x 500 x 1,500 = ($2,250)) + (Bus. Books: ($0.009 - $0.007) x 500 x 1,500 =
$1,500); (($2,250 + $1,500 = ($750))]
[(Printing oper.: (Outside price/page – Transfer price/page) x No. of pages x No. of copies = Decr. in CM) + (Bus.
Books: (Outside cost/page – Transfer price/page) x No. of pages x No. of copies = Incr. in CM); (Decr. in print.
oper. CM + Incr. in bus. books CM = Overall decr. in CM to company)]
LO4 BT: AP Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
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:
Lost contribution margin by Board Division:

Cost of buying externally, per chip $22
Less: Cost of buying internally, per chip 21
Increased cost, resulting in lower
unit contribution margin 1
Number of units purchased X 40,000
Total lost contribution margin $ 40,000
Lost contribution margin by Chip Division:

Unit contribution margin on internal sales
($21 – $10) $11
Less: Unit contribution margin on external sales
($22.50 – $14.50) 8
Lost unit contribution margin 3
Number of units sold X 40,000
Total lost contribution margin 120,000
Overall lost contribution margin for the company $160,000

[(Board div.: ($22 - $21) x 40,000 = $40,000); (Chip div.: ($11 - $8) x 40,000 = $120,000); ($40,000 + $120,000 =
$160,000)]
[(Board div.: External cost/chip – Internal cost/chip) x No. of chips = Lost CM); (Chip div.: (UCM on internal sales
– UCM on external sales) x No. of units sold = Lost CM); (Lost CM board div. + Lost CM chip div. = Overall lost
CM for company)]
Analysis
PROBLEM 8-6A
(a) Assuming no available capacity, and that in order to produce the

12,000 special pagers, 10,000 standard pagers would be foregone, the
minimum variable cost would be ($50 + $30) or $80 and the opportunity
cost would be:
Total contribution margin on standard pagers ($95 – $50) X 10,000

= = $37.50
Number of special pagers 12,000
Therefore, the minimum transfer price would be $117.50 [($50 + $30) +

$37.50). Since this is higher than the $105 transfer price being offered,
the CD Division should reject the offer.
(b) Assuming no available capacity, and that in order to produce the

12,000 special pagers, 16,000 standard pagers would be forgone, the
minimum variable cost would be ($50 + $30) or $80 and the opportunity
cost would be:
Total contribution margin on standard pagers ($95 – $50) X 16,000

= = $60
Number of special pagers 12,000
Therefore, the minimum transfer price would be $140 [($50 + $30) +

$60]. Since the $150 transfer price being offered exceeds the minimum
transfer price of $140, the CD Division should accept the offer.
[($50 + $30) + ((($95 - $50) x 16,000) ÷ 12,000) = $140]
[(Std. pager VC/unit + Spec. pager VC/unit) + (((Std. pager USP – Std. pager VC/unit) x No. of std. pagers
foregone) ÷ No. of spec. pagers) = Min. transfer price]
(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.
Analysis
*PROBLEM 8-7A
(a) Absorption-cost pricing:
Computation of unit manufacturing cost and target selling price
Direct materials.......................................................................... $ 20

Direct labor................................................................................. 40
Variable manufacturing overhead............................................ 10
Fixed manufacturing overhead ($1,600,000 ÷ 80,000)............. 20
Unit manufacturing cost.................................................... 90
Markup: 50% X $90.................................................................... 45
Target selling price.................................................................... $135
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]
(b) Variable-cost pricing:
Computation of total variable cost and target selling price
Direct materials.......................................................................... $ 20

Direct labor................................................................................. 40
Unit total variable cost....................................................... 75
Markup: 80% X $75.................................................................... 60
Target selling price.................................................................... $135
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]
Analysis
*PROBLEM 8-8A
Absorption-cost pricing
(a) Step one—Computation of unit manufacturing cost:

Per Unit
Direct materials.......................................................................... $100
Direct labor................................................................................. 70
Fixed manufacturing overhead ($120,000 ÷ 4,000)................. 30
Total manufacturing cost.................................................. $220
[$100 + $70 + $20 + ($120,000 ÷ 4,000) = $220]
[DM/unit + DL/unit + VOH/unit + (Fix. OH ÷ Bud. vol.) = Tot. mfg. cost/unit]
Step two—Computation of markup percentage to provide a 25% ROI:
Markup [(25% X $1,016,000) ÷ 4,000] + [$10 + ($102,000 ÷ 4,000)] $99
= = = 45%
Percentage $220 $220
[(((25% x $1,016,000) ÷ 4,000) + (($10 + ($102,000 ÷ 4,000))) ÷ $220 = 45%]
[(((Desired ROI % x Investment) ÷ Bud. vol.) + ((Var. S&A/unit + (Fix. S&A ÷ Bud. vol.))) ÷ Tot. mfg. cost/unit =
Markup %]
(b) Step three—Computation of target price:
Target price: $220 + [45% X $220) = $319

Proof of 25% ROI under absorption-cost pricing:
ANDERSON WINDOWS INC.

Budgeted Absorption-Cost Income Statement
(Tinted Window)
Revenues (4,000 units X $319)......................................... $1,276,000

Cost of goods sold (4,000 units X $220)......................... 880,000
Gross profit........................................................................ 396,000
Selling and administrative expenses
[(4,000 units X $10) + $102,000].................................... 142,000
Net income......................................................................... $ 254,000
$254,000
Desired ROI = = 25%
$1,016,000
$254,000 + $142,000
Markup percentage = = 45%
*$880,000*
*$220 X 4,000
*PROBLEM 8-8A (Continued)
[$220 + (45% x $220) = $319]

[Tot. mfg. cost/unit + (Tot. mfg. cost/unit x Markup %) = Target sell. price]
Variable-cost pricing
(c) Step one—Computation of unit variable cost:

Per Unit
Direct materials....................................................................... $100
Direct labor.............................................................................. 70
Variable manufacturing overhead.......................................... 20
Variable selling and administrative
expenses.............................................................................. 10
Total variable cost........................................................... $200
($100 + $70 + $20 + $10 = $200)
DM/unit + DL/unit + VOH/unit + Var. S&A/unit = Tot. VC/unit)
Step two—Computation of markup percentage to provide a 25% ROI:
Markup [(25% X $1,016,000) ÷ 4,000] + [($120,000 + $102,000) ÷ 4,000] $119
= = = 59.50%
Percentage $200 $200
[(((25% x $1,016,000) ÷ 4,000) + (($120,000 + $102,000) ÷ 4,000))) ÷ $200 = 59.50%]
[(((Desired ROI % x Investment) ÷ Bud. vol.) + ((Fix. OH + Fix. S&A) ÷ Bud. vol.))) ÷ Tot. VC/unit = Markup %]
(d) Step three—Computation of target price:
Target price: $200 + (59.5% X $200) = $319
Proof of 25% ROI under variable-cost pricing:
ANDERSON WINDOWS INC.

Budgeted Variable-Cost Income Statement
(Tinted Window)
Revenue (4,000 units X $319)............................. $1,276,000

Variable costs (4,000 units X $200).................... 800,000
Contribution margin............................................ 476,000
Fixed costs
Fixed manufacturing overhead costs............ $120,000
Fixed selling and administrative expenses..... 102,000 222,000
Net income........................................................... $ 254,000
Desired ROI = $254,000 = 25%
$1,016,000
*PROBLEM 8-8A (Continued)

$222,000 + $254,000
$800,000
[$200 + (59.5% x $200) = $319]
[Tot. VC/unit + (Markup % x Tot. VC/unit) = Target sell. price]
(e) Both absorption-cost pricing and variable-cost pricing are used because
they have differing merits.
Absorption-cost pricing, especially when it includes full or all costs, is

preferred by some because in the long-run all costs plus a normal profit
margin must be covered. Using only variable costs, as the variable-cost
pricing does, is thought to encourage decision makers to set too low a
price in order to boost sales. Also, absorption-cost pricing is preferred
because of its convenience. Absorption-cost data is more readily pro-
vided by most companies’ financial and cost accounting systems. The
accounts and numbers used to prepare financial reports can be used
for absorption-cost pricing.
Variable-cost pricing is preferred by some, even though the basic

accounting data is less accessible, because it is more consistent with
cost-volume-profit analysis. In addition, it can be used in pricing special
orders since it shows the incremental cost of one more unit or one
more order. Variable-cost pricing also avoids arbitrary allocation of
common fixed costs to individual product lines.
LO5 BT: AP Difficulty: Complex TOT: 50 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Decision
Analysis
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
Job: Composite kayak repair

Labor charges: 3 hours @ $45 $135
Materials charges
Cost of parts and materials $100
Materials loading charge (50% X $100) 50 150
Total price of labor and material $285
Analysis
[(($30,000 ÷ 2,000) + ($10,000 ÷ 2,000) + ($10,000 ÷ 2,000) + $20 = $45); ((3 x $45) + $100 + (50% x $100) =
$285)]
[((Repair-tech. wages ÷ Tot. hrs.) + (Fringe bene. ÷ Tot. hrs.) + (OH ÷ Tot. hrs.) + Profit margin = Labor rate/hr.);
((Hrs. worked x Labor rate/hr.) + Cost of parts & mat. + (Mat. load. Chrg. % x Cost of parts & mat.) = Tot. price to
cust.]
CT 8-1 DECISION-MAKING ACROSS THE ORGANIZATION
(a) Purchasing goods from within the company offers a number of

advantages. (1) It cuts out the “middle man,” thus keeping all profits in
the company. (2) It allows the company to have more control over the
quality of its products. (3) It allows the company to have more control
over the timing of production and shipments. (4) It keeps the company
running closer to full capacity.
(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:
Lost contribution margin by Bearing Division:

Lost contribution margin on external sales
($36 - $22) $14
Less: Contribution margin on internal sales
($22 - $22) 0
Total lost contribution margin $14
Increased contribution margin by Wheel Division:

Cost of buying externally $25
Less: Cost of buying internally 22
Total increase in contribution margin
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
CT 8-2 MANAGERIAL ANALYSIS
(a) Dave must consider a number of issues in arriving at a price. First, he

should gather information regarding what price people would be willing
to pay for his type of service. This information could be gathered by a
marketing agency. He must consider the strengths and weaknesses of
his product. First, he is close to housing developments, thus more
convenient for his potential customers. Two, his service is easier,
especially when compared to the “self-spray” service. Also, his service
is safer for the car than the “brush” type service offered at the gas
station. Furthermore, he offers a higher level of service for those
interested in really taking care of their cars. He has initially decided to
offer only three levels of service. He may ultimately decide to offer
additional different levels of service. Often businesses will promote
their least expensive service and then try to “sell the customer up” to a
higher level of service when they drive in. Also, humans are creatures
of habit. It would probably be wise for Dave to offer an introductory-
type price in the early months in order to get people used to coming to
his car wash. He may also want to offer promotions, such as coupon
books, and the option of purchasing multiple washes in advance.
(b) Variable cost per unit

Basic Deluxe Premium
Wash Wash Wash
Direct materials $0.30 $0.80 $1.10
Direct labor 0.00 0.40 2.40
Variable overhead 0.10 0.20 0.20
Variable selling and administrative
expenses 0.10 0.10 0.10
$0.50 $1.50 $3.80
[(Basic: $0.30 + $0.00 + $0.10 + $0.10 = $0.50); (Deluxe: $0.80 + $0.40 + $0.20 + $0.10 = $1.50); (Prem.: $1.10
+ $2.40 + $0.20 + $0.10 = $3.80)]
[Basic, Deluxe & Prem.: DM + DL + VOH + Var. S&A = Tot. VC/unit]
Fixed cost per unit

Total Budgeted Cost
Fixed overhead $117,000 45,000 $2.60
expenses 130,500 45,000 2.90
Fixed cost per unit $5.50
[($117,000 ÷ 45,000) + ($130,500 ÷ 45,000) = $5.50]
[(Fix. OH ÷ Bud. vol.) + (Fix. S&A ÷ Bud. vol.) = FC/unit]
CT 8-2 (Continued)
Computation of selling price (45,000 units)
Basic Deluxe Premium

Variable cost per unit $0.50 $1.50 $ 3.80
Fixed cost per unit 5.50 5.50 5.50
Total unit cost 6.00 7.00 9.30
Desired ROI per unit* 1.75 1.75 1.75
Selling price $7.75 $8.75 $11.05
*($393,750 X .20) ÷ 45,000

[(Basic: $0.50 + $5.50 + (($393,750 x 20%) ÷ 45,000) = $7.75); (Deluxe: $1.50 + $5.50 + $1.75 = $8.75); (Prem.:
$3.80 + $5.50 + $1.75 = $11.05)]
[(Basic, Deluxe & Prem.: VC/unit + FC/unit + Desired ROI/unit = Sell. price/unit)]
(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
ROI = $64,250 ÷ $393,750 = 16.32%

[((3,000 x $7.75) + (31,000 x $8.75) + (9,000 x $11.05)) – ((3,000 x $0.50) + (31,000 x $1.50) + (9,000 x $3.80)) –
($117,000 + $130,500) = $64,250); ($64,250 ÷ $393,750 = 16.32%)]
[((Basic: Units sold x USP) + (Deluxe: Units sold x USP) + (Prem.: Units sold x USP)) – ((Basic: Units sold x UVC)
+ (Deluxe: Units sold x UVC) + (Prem.: Units sold x UVC)) – (Fix. OH + Fix. S&A) = Net inc.); (Net inc. ÷
Investment = Act. ROI)]
(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
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
CT 8-3 REAL-WORLD FOCUS
(a) Pricing in the pharmaceutical industry is complicated by a number of

factors:
1. When a new drug is developed, it is patented. This protects the

company from competition for a period of time and allows the
company to charge a higher price.
2. The nature of the product is such that demand is relatively inelastic.

If a person needs a drug that will dramatically improve his health,
he will pay as much as he can afford to acquire it.
3. In light of 2., pharmaceutical companies must be careful not to
charge so much that they are perceived as gouging their customers.
If they do, the public will call for regulation and oversight of the
industry by the government.
4. Many prescription drugs are paid for by health insurance policies.
This complicates matters since it makes the user of the drug
insensitive to price, but makes the ultimate payer (the insurance
company) very sensitive to price. That is why insurance companies
and health maintenance organizations are constantly questioning
whether certain treatments and prescriptions are medically necessary.
5. The pharmaceutical industry is heavily regulated worldwide. However,

the regulations differ significantly from country to country.
(b) Normally, if a difference exists in the price of a product across markets,

that difference will be eliminated as people take advantage of the
difference by shipping the goods. Eventually, the difference should be
equal to the cost of transporting and selling from one market to
another. However, in the pharmaceutical industry, barriers exist which
allow significant differences in price to persist. For example, it is often
illegal to transport prescription drugs from one country to another.
Some drugs are illegal in one country and not another. Prices may also
differ due to relaxed oversight in one country versus another that
reduces the production costs. The extreme case of price differentiation
exists when the same drug is used for humans and pets. Customers
might be willing to pay $500 per dose for a critical drug for themselves,
but only $50 for a pet.
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
CT 8-4 REAL-WORLD FOCUS
(a) Answers will vary.
(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
CT 8-5 COMMUNICATION ACTIVITY
To: Jane Fleming
From: Student
Re: Proposal to start business with links to businesses of relatives
The student’s memo should address the following points:
1. In a traditional transfer pricing problem, the transactions are between

divisions within the same company. In the case of related divisions, the
challenge is to find a transfer price that is fair to all parties and results
in equitable evaluation of division performance. In this situation,
evaluation of each party’s performance isn’t a concern, but arriving at a
price that is fair to all parties is.
2. It is similar to a transfer pricing case in that, for a variety of reasons, it

would be desirable to deal with the related (in this case literally)
parties. For example, quality is more assured. Some costs, such as
variable marketing expenditures, are eliminated. It also avoids the
awkward question, that may arise from customers, of why you chose to
buy from a supplier other than your related division.
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
CT 8-6 ETHICS CASE
(a) The stakeholders in this case are:
 The two airlines

 The flying public in the affected cities
 Federal transportation regulators
(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
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:
a. Usual costs: Personnel and fuel savings.
b. Hidden costs: Insurance rates, regulatory costs, hazardous waste

disposal fees.
c. Liability costs: Reduction of potential contingencies, fines and

penalties.
d. Less tangible costs: Value of improved image.
e. Environmental focused costs: Reduced soil contamination and

reduced air pollution.
(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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CHAPTER 8

ASSIGNMENT CLASSIFICATION TABLE

1. Compute a target cost when 1, 2 1 1 1, 2, 3

2. Compute a target selling price 3, 4, 5, 2, 3, 2 3, 4, 5, 1A, 2A

3. Use time-and-material pricing 8, 9 6 3 8, 9, 10 3A

*5. Determine prices using 17, 18 10, 11 18, 19, 20 7A, 8A

*6. Explain issues involved in 19

Problem Difficulty Time

1A Use cost-plus pricing to determine various amounts. Simple 20–30

2A Use cost-plus pricing to determine various amounts. Simple 20–30

3A Use time-and-material pricing to determine bill. Simple 20–30

4A Determine minimum transfer price with no excess capacity Moderate 20–30

5A Determine minimum transfer price with no excess capacity. Moderate 20–30

6A Determine minimum transfer price under different situations. Moderate 20–30

BLOOM’S TAXONOMY TABLE

Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

Target selling price = Cost + Markup

Target selling price = Cost + (Markup percentage X Cost)

5. The basic formula to compute the markup percentage is:

The markup percentage is computed as follows:

Variable cost per unit........................................................................................................ $16

*12. The three approaches for determining transfer prices are:

Chapter 8 Questions (Continued)

*18. The markup percentage using variable-cost pricing would be:

BRIEF EXERCISE 8-1

BRIEF EXERCISE 8-2

Direct materials......................................................................................... $12

BRIEF EXERCISE 8-3

(Total investment X Desired ROI percentage)

The markup percentage would be:

BRIEF EXERCISE 8-5

Desired ROI per unit $30

BRIEF EXERCISE 8-6

Rooney’s total bill would equal:

(10.5 hours X $42) + $700 + ($700 X 40%) = $1,421

Minimum transfer price = $25 + ($45 – $25) = $45.

BRIEF EXERCISE 8-8

Minimum transfer price = $25 + $0 = $25.

BRIEF EXERCISE 8-9

Minimum transfer price = $27 + ($45 – $25) = $47.

*BRIEF EXERCISE 8-10

The markup percentage using the absorption-cost approach is calculated

*BRIEF EXERCISE 8-10 (Continued)

*BRIEF EXERCISE 8-11

The markup percentage using variable-cost pricing is calculated by including

Each filter must result in $.32 of profit ($320,000/1,000,000 units)

Market price – Desired profit = Target cost per unit

Direct materials................................................................ $18

DO IT! 8-3 (Continued)

Cost of dishwasher repair

(a) Minimum transfer price = Variable cost + Opportunity cost

(b) Minimum transfer price = Variable cost + Opportunity cost

(b) Target costing is particularly helpful when a company faces a competi-

The following formula may be used to determine return on investment

Investment X ROI percentage = Return on investment

Return on investment per unit is then $16 ($1,600,000 ÷ 100,000)

The target cost is therefore $74 computed as follows:

Target cost = Market price – Desired profit