Chapter 8 & 9

TUTORIAL QUESTIONS: CHAPTER 8

QUESTION 1: ALL INCOME STATEMENTS & RECONCILIATION FOR YEAR 1

QUESTION 2: ALL INCOME STATEMENTS & RECONCILIATION FOR YEAR 2
 TUTORIAL QUESTIONS: CHAPTER 9

QUESTION 1: EXTERNAL PRICING – COST PLUS PRICING

Laventure Products Inc. is in the process of determining a selling price for their new
product. Data shows that direct material, direct labour, variable overhead, and variable
selling and admin expenses are $23, $17, $12, and $8 respectively. Fixed overhead and
fixed selling and admin expenses are $280,000 and $240,000 respectively. This data was
based on 10,000 units.

The company desires a 20% ROI on all investments and has invested $1,000,000.

Required
1. Calculate the markup percentage under the total-cost plus pricing method and
find the selling price.
2. Calculate the markup percentage under the absorption-cost pricing method
and find the selling price.
3. Calculate the markup percentage under the variable-cost pricing method and
find the selling price.

Solution
Desired ROI/unit = (desired ROI % * investment) / units produced
= 0.2 * 1,000,000 / 10,000
= 20$

Total = ROI / total unit cost = 20/112 = 0.17857

Target price = 112 * 1.17857 = $132

Absorption = (ROI + SnA) / product cost = ( 20 + 32 ) / 80 = 0.65

Target price = 80 * 1.65 = $132

Variable = (ROI + FC) / VC = (20 + 28 + 24) / 60 = 1.2

Target price = 60 * 2.2 = $132
QUESTION 2: EXTERNAL PRICING – TIME AND MATERIAL PRICING

Messina Manufacturing (MnM) Inc. rebuilds spot welders for manufacturers. The following
budgeted cost data for 2016 are available for MnM Inc.:

Time Charges Material Loading Charges

Technicians’ wages and benefits $228,000
Parts manager’s salary and benefits $42,500
Office employee’s salary and benefits 38,000 9,000
Other overhead 15,200 24,000
Total budgeted costs $281,200 $75,500

The company wants a $30 profit margin per hour of labour and a 20% profit margin on
parts. It has budgeted for 7,600 hours of repair time in the coming year, and estimates that
the total invoice cost of parts and materials in 2016 will be $400,000.

Required
1. Calculate the rate charged per hour of labour.
2. Calculate the material loading percentage. (Round to three decimal places.)
3. Lindy Corporation has asked for an estimate on rebuilding its spot welder.
MnM estimates that it would require 40 hours of labour and $2,000 in parts.
Calculate the total estimated bill.

Solution
(a) Total budgeted time costs $281,200
Budgeted hours of repair time 7,600
Per hour cost $37.00
Plus: profit margin 30.00
Rate to be charged per hour of labour $67.00

(b) Material loading percentage:

$75,500 ÷ $400,000 = 18.875% + 20% = 38.875%

(c) Job: Lindy Corporation—Rebuild spot welder

Labour: 40 hours × $67 per hour $2,680.00

Material charges:
Invoice cost $2,000.00
Material loading charge at 38.875% 777.50 2,777.50
Total for labour and material $5,457.50
QUESTION 3: INTERNAL TRANSFER PRICING

Rossi Inc. has two divisions. Division A makes and sells student desks. Division B
manufactures and sells reading lamps. Each desk has a reading lamp as one of its
components. Division A needs 10,000 lamps for the coming year and can purchase reading
lamps at a cost of $10 from an outside vendor.

Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside
customers are estimated at 40,000 lamps for the next year. It sells reading lamps for $12
each. Variable costs are $8 per lamp and include $1 of variable sales costs that are not
incurred if division B sells lamps internally to division A. The total amount of fixed costs for
division B is $80,000.

Required
***Consider the following independent situations:***

1. What should be the minimum transfer price division B accepts for the 10,000
lamps and the maximum transfer price division A pays? Justify your answer.

2. If division A needs 15,000 lamps instead of 10,000 during the next year, what
should be the minimum transfer price division B accepts and the maximum
transfer price division A pays? Justify your answer.

3. Suppose division B could use the excess capacity to produce and sell
externally 20,000 units of a new product at a price of $8 per unit. The variable
cost for this new product is $6 per unit. What should be the minimum transfer
price division B accepts for the 10,000 lamps and the maximum transfer price
division A pays? Justify your answer.

Solution

a. Buyer: Division A à max TP = $10

Seller: Division B à min TP = SVC + OC
=7+0
= $7

b. Buyer: Division A à max TP = $10

Seller: Division B à min TP = SVC + OC
= 7 + [(4 * 5000)/15,000]
= 7 + 1.33
= $8.33
 c. Buyer: Division A à max TP = $10
Seller: Division B à min TP = SVC + OC
= 7 + [(2 * 20,000)/10,000]
=7+4
= $11

QUESTION 4: INTERNAL TRANSFER PRICING

Family Inc. has two divisions. Division A makes and sells T-shirts. Division B manufactures
and sells ties. Each T-shirt has a tie as one of its components. Division A needs 10,000 ties
for the coming year and can purchase ties at a cost of $30 from an outside vendor.

Division B has the capacity to manufacture 50,000 ties annually. Sales to outside customers
are estimated at 40,000 ties for the next year. It sells ties for $35 each. Variable costs are
$29 per tie and include $2 of variable sales costs that are not incurred if division B sells ties
internally to division A. The total amount of fixed costs for division B is $80,000.

Required
***Consider the following independent situations: ***
1. What should be the minimum transfer price division B accepts for the 10,000
ties and the maximum transfer price division A pays? Justify your answer.

2. Suppose division B could use the excess capacity to produce and sell
externally 20,000 units of a new product at a price of $18 per unit. The
variable cost for this new product is $15 per unit. What should be the
minimum transfer price division B accepts for the 10,000 ties and the
maximum transfer price division A pays? Justify your answer.

3. If division A needs 15,000 ties instead of 10,000 during the next year, what
should be the minimum transfer price division B accepts and the maximum
transfer price division A pays? Justify your answer
Solution

a. Buyer: Division A à max TP = $30

Seller: Division B à min TP = SVC + OC
= 27 + 0
= $27

b. Buyer: Division A à max TP = $30

Seller: Division B à min TP = SVC + OC
= 27 + [(3 * 20,000)/10,000]
= 27 + 6
= $33

c. Buyer: Division A à max TP = $30

Seller: Division B à min TP = SVC + OC
= 27 + [(6 * 5000)/15,000]
= 27 + 2
= $29