Managerial Accounting

Solutions to Chapter 8: Pricing

E8-1, p.364:
a) Market price = $20
Desired profit = $20 x 30% = $6
Target cost = Market price – Desired profit = 20 – 6 =$14

b) When the products are not easily differentiated, and the company is price taker

E8-3, p.364:
a) 1. Target selling price = Cost + Markup = $100 + (100 x 20%) = $120
2. In case of no competition

b) Target price = Market selling price = $100

c) Target cost = Market price – Desired profit = 100 – 20 = $80

E8-4, p.365:
a) Total cost per unit:
Total variable cost per unit = 17 + 8 + 11 + 4 = $40
Total fixed cost = 300,000 + 150,000 = $450,000
Fixed cost per unit = $450,000 ÷ 30,000 unit = $15
Total cost per unit = 40 + 15 = $55

b) Target selling price = Cost + Markup = $55 + (55 x 40%) = $77

E8-5, p.365:
a) Total cost per unit:
Total variable cost per unit = 7 + 9 + 15 + 14 = $45
Total fixed cost = 3,000,000 + 1,500,000 = $4,500,000
Fixed cost per unit = $4,500,000 ÷ 500,000 unit = $9
Total cost per unit = 45 + 9 = $54

b) ROI = $26,000,000 x 25% = $6,500,000

ROI per unit = 6,500,000 ÷ 500,000 unit = $13

c) Markup percentage = ROI per unit ÷ total unit cost = 13 ÷ 54 = 24%

d) Target selling price = 54 + 13 = $67

E8-6, p.365:
a) Total cost per session:
Total variable cost per session = 20 + 400 + 50 + 40 = $510
Total fixed cost = 950,000 + 500,000 = $1,450,000
Fixed cost per session = $1,450,000 ÷ 1,000 session = $1,450
Total cost per unit = 510 + 1,450 = $1,960

b) ROI = $2,352,000 x 20% = $470,400

ROI per session = $470,400÷ 1,000 session = $470.40

c) Markup percentage = ROI per session ÷ total session cost = 470.40÷ 1,960= 24%

d) Target price per session = 1960 + 470.40 = $2,430.40

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E8-7, p.366:
a) Total fixed cost = 1,800,000 + 324,000 = $2,124,000
Fixed cost per unit = $2,124,000 ÷ 3,000 unit = $708

b) ROI = 51,000,000 x 20% = $10,200,000

ROI per unit = 10,200,000 ÷ 3,000 unit = $3,400

c) Total cost per unit = Variable cost + Fixed cost

= (380 + 290 + 72 + 55) + 708 = $1,505
Target selling price = 1,505 + 3,400 = $4,905

E8-9, p.366:
a) Total cost per hour = Total time charges ÷ Total budgeted hours
= 193,000 ÷ 6,250 = $30.88
Rate charged per hour of labor = Total cost per hour + Profit margin
= 30.88 + 38 = $68.88

Estimated material loading charges

b) Material loading percentage = + Profit margin
Estimated cost of parts and materials

91,000
= + 100% = 13% + 100% = 113%
700,000

c)
Labor charges (80 hr x $68.88) $5,510.40
Material charges:
Cost of parts and materials $40,000
Material loading charge ($40,000 x 113%) 45,200
85,200
Total price of labor & material $90,710.40

E8-10, p.367:
a) Total cost per hour = Total time charges ÷ Total budgeted hours
= 348,000 ÷ 12,000 = $29
Rate charged per hour of labor = Total cost per hour + Profit margin
$70 = 29 + ??
Profit margin per hour on labor = 70 – 29 = $41

Estimated material loading charges

b) Material loading percentage = + Profit margin
Estimated cost of parts and materials

166,950
83.25% = + ??
1,260,000
Profit margin on materials = 83.25% - 13.25% = 70%

c)
Labor charges (150 hr x $70) $10,500
Material charges:
Cost of parts and materials $60,000
Material loading charge ($60,000 x 83.25%) 49,950
109,950
Total price of labor & material $120,450

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E8-12, p.367:
Contribution margin for Body frames = Selling price – Variable cost = 350 – 270 = $80  Opportunity cost
a) Excess capacity:
Minimum acceptable transfer price = Variable cost + Opportunity cost = 270 + 0 = $270
Therefore Frambody can accept the price offer of $280
Outside suppliers for Framebody supplies
Body frame Body frame
Selling price (1,000 unit x $2,200) $2,200,000 $2,200,000
Variable cost:
Body frame $300,000 $280,000
Other variable costs 900,000 900,000
1,200,000 1,180,000
Contribution margin $1,000,000 $1,020,000

1. Cycle division income will increase by $20,000

2. Framebody division income will increase by = 1,000 unit x (280 – 270) = $10,000
3. Income of Ayala will increase by 20,000 + 10,000 = $30,000

b) No Excess capacity:
Cycle division will buy 1,000 frames with $280
1. Income of Cycle division will increase by $20,000
2. Framebody will lose $350 – 280 = $70
Income of framebody will decrease by $70 x 1,000 unit = $70,000
3. Income of Ayola will decrease by 20,000 – 70,000 = $(50,000)

E8-13, p.368:
Venetian operate at full capacity  No excess capacity
Contribution margin = Selling price – Variable cost = $86 – 35 = $51  Opportunity cost

a) Minimum acceptable cost + Opportunity cost = 31 + 51 = $82

b) Potential loss to the corporation as whole = Increase in C.M. for Berna – Decrease in C.M. for Venetian

Berna C.M. will increase because it purchase car stereos for $35 rather than $80
Increase in Berna C.M. = (80 – 35) x 200,000 unit = $9,000,000

Venetian C.M. will decrease because loss in selling price from $86 to $35 = $51  Opportunity cost
Decrease Venetian C.M. = $51 x 200,000 unit = $10,200,000

Potential loss to the Corporation as a whole = 9,000,000 – 10,200,000 = $(1,200,000)

E8-14, p.368:
Fuacet division: (Work at full capacity)
Special ivory tub:
Transfer price = $160
External Variable cost = $140
Internal variable cost = 140 – 6 = $134
Standard unit:
Selling price = $50
Variable cost = $29
Contribution margin = 50 – 29 = $21  Opportunity cost

Minimum acceptable transfer price for Faucet division =

Internal variable cost + opportunity cost = 134 + 21 = $155
Faucet division should accept this offer ($160) because it higher than minimum transfer price ($155)
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E8-15, p.368:
Appraisal department:
Price = $162
Variable cost (external) = $130
Variable cost (internal) = 130 – 6 = $124
Contribution margin = Selling price – Variable cost (external) = 162 – 130 = $32  (Opportunity cost in
case of no excess capacity exist)

Home-Loan Department:
No. of units = 1,200 appraisals
Unit cost = $150 (transfer price)

a. Excess capacity:
Minimum transfer price = Internal variable cost + opportunity cost = 124 + 0 = $124

b. No excess capacity:
Minimum transfer price = Internal variable cost + Opportunity cost = 124 + 32 = $156

c. Management should not force Appraisal department to charge Home-Loan Department $150, because
its income will decrease by (156 – 150) x Quantity = 6 x 1200 = $7,200

E8-16, p.369:
Division A (Desks):
Quantity needed = 10,000 unit
Cost of purchase = $10

Division B (Lamps):
Selling price = $12
External variable cost = $7
Internal variable cost = $6
Contribution margin = Price – Variable cost (External) = 12- 7 = $5  (Opportunity cost in case of no excess
capacity exist)

a. Minimum transfer price for division B = Internal variable cost + Opportunity cost = 6 + 0 = $6
Maximum transfer price for division A = $10

b. Lost total contribution margin = (Selling price – Variable cost) x quantity

= (7-5) x 15,000 = $30,000  Opportunity cost
Opportunity cost per unit of lamp = 30,000 ÷ 10,000 units = $3 per unit
Minimum transfer price for division B = Internal variable cost + Opportunity cost = 6 + 3 = $9
Maximum transfer price for division A = $10

c. Excess capacity 10,000 unit:

Minimum transfer price for division B for the first 10,000 unit = $6 per unit
Total price for the first 10,000 unit = 10,000 unit x $6 = $60,000

The more 5,000 unit:

Minimum transfer price for division B = Internal variable cost + Opportunity cost = 6 + 5 = $11
Total price for the more 5,000 unit = 5,000 unit x $11 = $55,000

Total price for the required 15,000 units = 60,000 + 55,000 = $115,000
Average price = $115,000 ÷ 15,000 unit = $7.67

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