CH 09

CHAPTER 9
Pricing
ASSIGNMENT CLASSIFICATION TABLE
Self-Study Brief Do It! A&B

Study Objectives Questions Exercises Review Exercises Problems
1. Calculate a target cost 2, 3 1 12 16, 17, 18

when the market
determines a product’s
price.
2. Calculate a target selling 1, 4, 5 2, 3, 4, 5 13 18, 19, 20, 34A, 35A, 36A, 37A,
price using total cost-plus 21, 22, 31 51B, 52B, 53B
pricing.
3. Calculate a target selling 9 10 31, 32, 33 46A, 47A, 48A, 63B,

price using absorption 64B
cost-plus pricing.
4. Calculate a target selling 10 11 31, 32, 33 36A, 46A, 47A, 48A,

price using variable cost-plus 63B, 64B
pricing.
5. Use time-and-material 6 6 14 23, 24, 25, 38A, 54B

pricing to determine the 27
cost of services provided.
6. Determine a transfer price 7, 8 7, 8, 9 15 26, 28, 29, 39A, 40A, 41A, 42A,
using the negotiated, cost- 30 43A, 44A, 45A, 48A,
based, and market-based 49A, 50A, 55B, 56B,
approaches. 57B, 58B, 59B, 60B,
61B, 62B, 65B, 66B
Solutions Manual © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Allotted Time
Number Description Level (min.)
34A Use cost-plus pricing to determine various amounts. Moderate 15-25
35A Use cost-plus pricing to determine various amounts. Easy 10-20
36A Use cost-plus pricing to determine various amounts. Moderate 15-25

.
37A Use cost-plus pricing to determine various amounts. Easy 10-20
38A Use time-and-material pricing to determine bill. Easy 10-20
39A Determine the minimum transfer price under different

situations. Moderate 20-30
40A Determine the minimum transfer price with no excess

capacity and with excess capacity. Moderate 30-40

capacity. Moderate 20-30

situations. Challenging 20-30

situations. Easy 15-25

45A Determine the transfer price for goal congruence. Moderate 20-30
46A Calculate the target price using the absorption-cost and

variable-cost approaches. Easy 10-20
47A Calculate various amounts using the absorption-cost and

variable-cost approaches. Easy 30-40


capacity. Easy 10-20
50A Determine the minimum transfer price with excess capacity. Moderate 15-25
9-2
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem Difficulty Allotted Time

Number Description Level (min.)
51B Use cost-plus pricing to determine various amounts. Easy 20-30
52B Use cost-plus pricing to determine various amounts. Challenging 20-30
53B Use cost-plus pricing to determine various amounts. Easy 15-25
54B Use time-and-material pricing to determine bill. Easy 10-20
55B Determine the minimum transfer price with no excess

capacity. Easy 10-20
56B Determine the minimum transfer price with excess capacity. Easy 15-25

capacity and with excess capacity. Moderate 20-30
58B Determine the minimum transfer price under different


capacity. Moderate 15-25

61B Determine the transfer price under different situations. Moderate 15-25
62B Determine the transfer price for goal congruence. Easy 30-40
63B Calculate the target price using absorption-cost pricing and

variable-cost pricing. Easy 10-20
64B Calculate various amounts using absorption-cost pricing

and variable-cost pricing. Easy 20-30


9-3
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

*1. Calculate a target cost when BE1, D12, E16, E17,
© the market determines a E18
2018 product’s price. BLO
For *2. Calculate a target selling price BE2, BE3, BE4, BE5, P34A, P36A, P52B OM’
using total cost-plus pricing. D13, E18, D19, E20,
Instru E21, E22, E31, P35A, S
ctor P37A, P51B, P53B TAX
Use *3. Calculate a target selling price BE10, E31, E32, E33, P46A, P47A, P64B ONO
Only using absorption cost-plus P63B
9-4 pricing. MY
4. Calculate a target selling price BE11, E31, E32, E33, P36A, P46A, P47A, TAB
using variable cost-plus pricing. P63B P64B
LE
5. Use time-and-material pricing BE6, D14, E23, E24,
to determine the cost of E25, E27, P38A, P54B
services provided.
6. Determine a transfer price using BE7, BE8, BE9, D15, P39A, P40A, P41A,
the negotiated, cost-based, and E26, E28, E29, E30, P42A, P43A, P44A,
market-based approaches. P45A, P62B P48A, P49A, P50A
P55B, P56B, P57B,
P58B, P59B, P60B,
P61B, P65B, P66B
A note about the correlation between CPA competencies and the end-of-chapter exercises and problems.
The CPA competencies are divided into enabling competencies and terminal competencies. Unless otherwise specified, the
terminal competency being tested by the end-of-chapter material in this course is cpa-t003 (Management Accounting). The
enabling competency being tested will differ between questions. The following questions test enabling competency cpa-e002
Problem Solving and Decision-Making:
BE9.1, BE9.2, BE9.3, BE9.4, BE9.5, BE9.6, BE9.7, BE9.8, BE9.9, BE9.10, BE9.11, D9.12, D9.13, D9.14, D9.15, E9.16, E9.17, E9.18,
E9.19, E9.20, E9.21, E9.22, E9.23, E9.24, E9.25, E9.26, E9.27, E9.28, E9.29, E9.30, E9.31, E9.32, E9.33, P9.34A, P9.35A, P9.36A,
P9.37A, P9.38A, P9.39A, P9.40A, P9.41A, P9.42A, P9.43A, P9.44A, P9.45A, P9.46A, P9.47A, P9.48A, P9.49A, P9.50A, P9.51B, P9.52B,
P9.53B, P9.54B, P9.55B, P9.56B, P9.57B, P9.58B, P9.59B,P9.60B, P9.61B, P9.62B, P9.63B, P9.64B, P9.65B, P9.66B
_____________________________________________________________________________________________________________
9-4
Managerial Accounting: Tools for Business Decision-Making, Fifth Canadian Edition Weygandt, Kimmel, Kieso, Aly
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9.1
In order to obtain a profit of $15 per drive, Podrive must set its target
cost at $30 per drive ($45 – $15). 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 9.2
Direct material......................................................................................$12
Direct labour......................................................................................... 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
Target selling price: $56 + (0.30 × $56) = $72.80
BRIEF EXERCISE 9.3
ROI per unit = (0.16 × $10,000,000) ÷ 50,000 units = $32
BRIEF EXERCISE 9.4
The markup percentage would be:
$30
= 18.75%
$36 + $24 + $18 + $40 + $14 + $28
_____________________________________________________________________________________________________________

9-5
BRIEF EXERCISE 9.5
The markup percentage is equal to desired ROI per unit divided by

total unit cost.
Desired ROI per unit = ($300,000 ÷ 10,000) = $30

Total unit cost = ($1,100,000 + $100,000) ÷ 10,000 = $120
The markup percentage = $30 ÷ $120 = 25%
BRIEF EXERCISE 9.6
Swayze’s total bill would equal:

(10.5 hours × $42) + $700 + ($700 × 40%) = $1,421
BRIEF EXERCISE 9.7
With a capacity of 2,000 units, the machining division would have to

reduce its external sales by 200 units. The minimum transfer price on
these units is equal to the division’s variable cost plus its opportunity
cost—in this case the contribution margin on the units that could not
be sold externally. The balance of the units could be sold for variable
cost, as there is no opportunity cost. The minimum transfer price for
the 400 units would be a weighted average of both prices, as follows:
Minimum transfer price = [($25 × 400) + (($80 – $30) × 200)] ÷ 400 = $50
OR [($25 x 200) + ($75 x 200)] ÷ 400 = $50
BRIEF EXERCISE 9.8
The company profits would increase by the difference between what

the assembly division pays externally, and what they would pay the
machining division:
(400 units × $75) – (400 units × $50) = $10,000
_____________________________________________________________________________________________________________

9-6
BRIEF EXERCISE 9.9
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 = [($24 × 400) + (($80 – $30) × 200)] ÷ 400 = $49
BRIEF EXERCISE 9.10
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 must be covered by the markup.
Markup $30 + ($14 + $28)
= = 61.02%
percentage $36 + $24 + $18 + $40
BRIEF EXERCISE 9.11
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 must be covered by the
markup.
Markup $30 + ($40 + $28)

= = 106.52%
percentage $36 + $24 + $18 + $14
_____________________________________________________________________________________________________________

9-7
SOLUTIONS TO DO IT! REVIEW
DO IT! REVIEW 9.12
Expected market sales (1,000,000 × $3) $3,000,000

Less: required ROI (0.18 × $2,000,000) 360,000
Target cost for 1,000,000 units 2,640,000
÷ 1,000,000
Target cost per unit $2.64
DO IT! REVIEW 9.13
Total per-unit cost = $18 + $9 + $5 + $6 + $3 + $7 = $48

Target selling price = $48 + ($48 × 0.30) = $62.40
DO IT! REVIEW 9.14
Cost per hour ($210,000 ÷ 5,000 hours) $42

Desired profit margin 18
Labour rate per hour $60
Billing:
Labour (1.5 hrs × $60) $90
Material costs 80
Material handling ($80 × 50%) 40
Total $210
DO IT! REVIEW 9.15
(a) Minimum transfer price = $3.00 – $0.25 = $2.75
(b) Minimum transfer price = $2.75 + ($8.00 – $3.00) = $7.75
_____________________________________________________________________________________________________________

9-8
SOLUTIONS TO EXERCISES
EXERCISE 9.16
(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 $5
(25% × $20). Therefore, the target cost is $15 ($20 – $5).
(b) Target costing is particularly helpful when a company faces a

competitive 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.
EXERCISE 9.17
Return on investment = Investment × ROI percentage

= $8,000,000 × 20%
= $1,600,000
Return on investment per unit is then $16 ($1,600,000 ÷ 100,000)
The target cost = $90 – $16 = $74
EXERCISE 9.18
(a) (1) In this case the selling price would be $125 ($100 + [$100 ×
25%]). The problem with the $125 is that it is unlikely that Mucky
Duck will be able to sell the all-body suits at that price. Market
research seems to indicate that it will sell for only $110.
(2) One way that Mucky Duck might consider manufacturing the all-body
swimsuit is if it has excess capacity and therefore manufacturing the
suit will not affect fixed costs. Thus because the company can
cover its variable costs it might want to sell at the $110 level.
_____________________________________________________________________________________________________________

9-9
EXERCISE 9.18 (Continued)
(3) The highest acceptable cost would be the target cost. The
target cost is $88 as shown below:
Target cost = Market price – Desired profit

Target cost = $110 – (0.25 x target cost)
Target cost = $88
Proof: Desired profit is $22 (25% x target cost)
Market price = $88 + $22 = $110
(b) In this case the amount would be the selling price of $110.
EXERCISE 9.19
(a) Total cost per unit: Per Unit

Direct materials........................................................................... $17
Direct labour................................................................................ 8
Variable manufacturing overhead............................................. 11
Fixed manufacturing overhead
($360,000 ÷ 30,000).................................................................. 12
Variable selling and administrative expenses.......................... 4
Fixed selling and administrative expenses
($150,000 ÷ 30,000).................................................................. 5
$57
(b) Target selling price = $57 + (40% × $57) = $79.80
_____________________________________________________________________________________________________________

9-10
EXERCISE 9.20
(a) Total cost per unit: Per Unit

Direct materials........................................................................... $17.00
Direct labour................................................................................ 8.00
Variable manufacturing overhead............................................. 11.00
Fixed manufacturing overhead
($360,000 ÷ 500,000)................................................................ 0.72
Variable selling and administrative expenses.......................... 4.00
($150,000 ÷ 500,000)................................................................ 0.30
$41.02
(b) Desired ROI per unit = (25% × $24,000,000) ÷ 500,000 = $12
(c) Markup percentage using total cost per unit:

$12 ÷ $41.02 = 29.25%
(d) Target selling price = $41.02 + ($41.02 × 29.25%) = $53.02
EXERCISE 9.21
(a) Total cost per session: Per Session
Direct materials $ 20
Direct labour 400
Variable overhead 50
Fixed overhead ($950,000 ÷ 1,000) 950
Variable selling and administrative expenses 40
($500,000 ÷ 1,000) 500
Total cost per session $1,960
(b) Desired ROI per session = (20% × $2,352,000) ÷ 1,000 = $470.40
(c) Mark-up percentage on total cost per session = $470.40 ÷ $1,960 = 24%
(d) Target price per session = $1,960 + ($1,960 × 24%) = $2,430.40
_____________________________________________________________________________________________________________

9-11
EXERCISE 9.22
(a) Fixed MOH per unit = $1,800,000 ÷ 3,000 = $600 per unit
Fixed S & A expenses per unit = $324,000 ÷ 3,000 = $108 per unit
(b) Desired ROI per unit = (0.20 × $51,000,000) ÷ 3,000 = $3,400 per unit
(c) Per Unit

Direct materials........................................................................... $ 380
Direct labour................................................................................ 290
Variable manufacturing overhead............................................. 72
Fixed manufacturing overhead.................................................. 600
Variable selling and administrative expenses.......................... 55
Fixed selling and administrative expenses.............................. 108
Total cost per unit....................................................................... 1,505
Desired ROI per unit................................................................... 3,400
Target selling price..................................................................... $4,905
EXERCISE 9.23
(a) Total budgeted time costs $281,200

Budgeted hours of repair time 7,600
Per hour cost $37
Plus: profit margin 30
Rate to be charged per hour of labour $67
(b) Material loading percentage:

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

9-12
(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
EXERCISE 9.24
(a) Labour charge: ($193,000 ÷ 6,250) + $38 = $30.88 + $38 = $68.88
(b) Material loading % = ($88,000 ÷ $700,000) + 100% = 112.57%
(c) Job: R. J. Builders—new home
Labour: 80 hours × $68.88 per hour $5,510.40

Material charges:
Invoice cost $40,000.00
Material loading charge at 112.57% 45,028.00 85,028.00
Total for labour and material $90,538.40
EXERCISE 9.25
(a) Labour cost: $348,000 ÷ 12,000 = $29

Profit margin = $70 – $29 = $41
(b) Material loading % = $166,950 ÷ $1,260,000 = 13.25%

Profit margin = 83.25% – 13.25% = 70.00%
_____________________________________________________________________________________________________________

9-13

(c) Labour: 150 hours × $70 per hour $10,500
Material charges:
Invoice cost $60,000
Material loading charge at 83.25% 49,950 109,950
Total for labour and material $120,450
EXERCISE 9.26
(a) Given that the beta division has excess capacity, their only cost
would be the variable cost, which is $45. Therefore, if they sold
the units for $70, the benefit would be ($70 – $45) or $25 per unit.
(b) Given there is excess capacity, the minimum transfer price is

$45, which is its variable cost ($45) plus the lost contribution
margin ($0) on external sales.
(c) When there is no excess capacity, the minimum transfer price is

$75, which is the variable cost ($45) plus the lost contribution
margin $30 ($75 – $45) on external sales.
(d) Given there is excess capacity, the impact on profits of a $75

transfer price would be as follows:
Beta—$30 contribution margin×15,000 units = $450,000 increase
Gama—$5 ($75 – $70) per unit × 15,000 units = $75,000 decrease
Alpha—The total increase in profit will be $375,000, which is the

difference between the cost to gamma to buy ($70) the units, and
the cost to beta to make them (the variable cost of $45).
(e) The level of capacity plays a significant role in determining the

appropriate transfer price. If a division has no excess capacity, it
would not want to sell its product below a selling price that it
could 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.
_____________________________________________________________________________________________________________

9-14
EXERCISE 9.27
(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 cycle division would reduce costs by $25,000

as follows:
Previous cost = $300; new cost = $275
Cost savings = ($300 – $275) = $25 × 1,000 units
(2) The effect on FrameBody is that it makes $25 on each frame

sold as shown below:
Selling price for the body frame = $275
Incremental cost for the body frame = $250 (variable cost)
Thus the FrameBody division also gains $25,000 ($25 × 1,000)
(3) The overall income for TravelFast increases $50,000 (the

difference between purchasing 1,000 frames from an outside
supplier ($300) and making them ($250)).
(b) (1) The answer would not change from (a)(1). The cycle division
would gain $25,000 if it purchased the frames from
FrameBody.
(2) FrameBody would incur a loss of $75,000:
Lost contribution margin per cycle: $350 – $275 = $75
Total for 1,000 units = $75 × 1,000 = $75,000
(3) The effect on the overall income to TravelFast is a net loss of

$50,000 (lost CM of $50 ($350 – $300) per unit for 1,000 units).
_____________________________________________________________________________________________________________

9-15
EXERCISE 9.28
(a) With a capacity of 4,000 units, the machining division would not
have to reduce its external sales. The minimum transfer price on
these units is equal to the division’s variable cost plus its
opportunity cost. The balance of the units could be sold for
variable cost, as there is no opportunity cost. The minimum
transfer price for the 800 units would be:
Minimum transfer price = $50, which does not affect current profit.
(b) The company profits would increase by the difference between
what the assembly division pays externally, and what they would
pay to the machining department.
(800 units × $150) – (800 units × $50) = $80,000
EXERCISE 9.29
(a) The minimum transfer price on this order would be:

$70 + ($90 – $70) = $90
(b) The effect on the overall company would be a decrease to profit of

$75,000 (5,000 x $15). This comes from two factors:
(1) decrease of $20 CM per unit from lost sales by the overseas
division ($90 – $70); and
(2) increase of $5 per unit which is the difference between

purchasing from an outside supplier and making the widgets
internally ($75 – $70)
EXERCISE 9.30
(a) Minimum transfer price = ($35 – $5) + ($86 – $35) = $81
(b) By forcing a transfer price of $35 per unit, Quality Motors would
lose profits totalling $20,000.
_____________________________________________________________________________________________________________

9-16
Lost CM on outside sales ($86 – $35) $51

Savings by making the unit ($80 – $30) 50
Per-unit loss 1
Number of units transferred × 20,000
$20,000
(c) If management insists that it wants High Sound to provide the

stereo units, and they are operating at full capacity, then it must
be willing to pay the minimum transfer price of $81 for those units.
Otherwise it will be penalizing the managers of High Sound by not
giving them adequate credit for their contribution to the
corporation’s contribution margin.
EXERCISE 9.31
Desired ROI per unit = (25% × $24,000,000) ÷ 500,000 = $12

Fixed MOH per unit = $360,000 ÷ 500,000 = $0.72
Fixed selling and admin. per unit = $150,000 ÷ 500,000 = $0.30
(a) Absorption-cost pricing $12 + ($4 + $0.30)

= = 44.39%
markup percentage ($17 + $8 + $11 + $0.72)
(b) Variable-cost pricing $12 + ($0.72 + $0.30)

= = 32.55%
markup percentage ($17 + $8 + $11 + $4)
EXERCISE 9.32
(a) Absorption-cost pricing $20 + ($9 + $15)

= = 51.76%
(b) Variable-cost pricing $20 + ($22 + $15)

= = 79.17%
_____________________________________________________________________________________________________________

9-17
EXERCISE 9.33
Fixed MOH per unit = $1,800,000 ÷ 3,000 = $600

Fixed selling and admin. per unit = $324,000 ÷ 3,000 = $108
Desired ROI per unit = (20% × $51,000,000) ÷ 3,000 = $3,400
(a) Absorption-cost pricing $3,400 + ($55 + $108)

= = 265.499%
markup percentage $380 + $290 + $72 + $600
Target selling price = $1,342 + ($1,342 × 265.499%) = $4,905.00
(b) Variable-cost pricing $3,400 + ($600 + $108)

= = 515.433%
markup percentage $380 + $290 + $72 + $55
Target selling price = $797 + ($797 × 515.433%) = $4,905.00
_____________________________________________________________________________________________________________

9-18
SOLUTIONS TO PROBLEMS—SET A
PROBLEM 9.34A
(a) Total variable costs

Materials $200,000
Labour 320,000
Indirect manufacturing costs 120,000
Variable marketing costs 40,000
$680,000
Total fixed costs

Fixed indirect costs $160,000
Administrative costs 80,000
$240,000
Unit price = ($680,000 + $240,000) ÷ 4,000 = $230

Proof: [$230 + ($230 × 0.20)] × 500 = $138,000
(b) Total variable manufacturing costs

Materials $200,000
Labour 320,000
$640,000
Unit price = $640,000 ÷ 4,000 = $160

Proof: [$160 + ($160 × 0.20)] × 500 = $96,000
(c) With a capacity of 9,000 units, and regular production of only

4,000 units, AGC has plenty of excess capacity to produce the
windshields for the transit authority. Their incremental cost of
production in this case would be equal to the variable cost of
producing the units, which is $160. However, they will want to
earn some profit on the sale, so they would need to charge more
than $160.
On the other hand, the transit authority is not prepared to pay for
costs that have not been incurred, so will reject the $230 amount.
The most appropriate cost should be somewhere in between the
two extremes.
_____________________________________________________________________________________________________________

9-19
PROBLEM 9.35A
(a) Total variable cost per unit

Direct materials $12
Direct labour 18
Variable manufacturing overhead 10
Variable S&A expenses 7
$47
Total fixed costs

Fixed manufacturing overhead $3,000,000
Selling and admin expenses 2,000,000
$5,000,000
Per-unit fixed cost = $5,000,000 ÷ 250,000 = $20

Total cost per unit = $47 + $20 = $67
(b) Markup = $67 × 20% = $13.40
(c) Target selling price = $67.00 + $13.40 = $80.40
(d) Per unit variable cost = $47 (same as above)

Per unit fixed cost = $5,000,000 ÷ 200,000 = $25
_____________________________________________________________________________________________________________

9-20
PROBLEM 9.36A
(a) (1) The minimum selling price that would not affect net income
would be equal to the variable cost per unit.
Direct materials $50,000

Direct labour 80,000
Variable overhead: 40%1 × $20,000 8,000
$138,000
($1.5m – $0.9m) ÷ $1.5m = 40%
(2) Accept the offer—as net income will increase by $12,000.
Selling price $150,000

Less: variable cost 138,000
Net increase in income $12,000
(b) There are several advantages to using the variable-cost

approach to pricing. (1) It provides the type of data that is
consistent with cost-volume-profit analysis used by
management to make decisions about changes in volume and
price. (2) It shows the incremental costs of accepting special
orders. (3) It avoids the allocation of fixed costs to products,
which could be confusing when determining avoidable costs.
A major disadvantage of the variable-cost approach is its short-

run focus. In the long run, a company must sell its products at a
price sufficient to cover its total costs, including fixed costs. If it
cannot obtain a price in excess of its full costs of production,
the company will not remain economically viable.
Another disadvantage is that the basic accounting data that is

required to use this approach is not readily accessible, and
must be determined outside of the normal financial reporting.
_____________________________________________________________________________________________________________

9-21
PROBLEM 9.37A
(a) Total cost per unit

Direct labour 26
Fixed MOH: ($600,000 ÷ 50,000) 12
Fixed S&A: ($400,000 ÷ 50,000) 8
$135
Desired ROI per unit = ($1,000,000 × 25%) ÷ 50,000 = $5
Mark-up percentage = $5 ÷ $135 = 3.70%
Target selling price = $135 + $5 = $140
(b) Total cost per unit

Direct labour 26
Fixed MOH: ($600,000 ÷ 40,000) 15
Fixed S&A: ($400,000 ÷ 40,000) 10
$140
Desired ROI per unit = ($1,000,000 × 25%) ÷ 40,000 = $6.25
Mark-up percentage = $6.25 ÷ $140.00 = 4.46%
Target selling price = $140.00 + $6.25 = $146.25
_____________________________________________________________________________________________________________

9-22
PROBLEM 9.38A
(a) Labour rate:

$154,000 ÷ 5,000 hours $30.80
Required profit per hour 5.00
$35.80
(b) Material loading charge %:

$57,000 ÷ $100,000 = 57%
Required profit 30%
87%
(c) ST-CYR’S ELECTRONIC REPAIR SHOP

Time and Material Price Quotation
January 5, 2020
Labour: 20 hours × $35.80 per hour $ 716

Material charges:
Invoice cost $500
Material loading charge at 87% 435 935
Total for labour and material $1,651
_____________________________________________________________________________________________________________

9-23
PROBLEM 9.39A
(a) The minimum transfer price for Division B would be variable

costs, which are $7 per unit ($8 variable cost – $1.00 variable
selling expense).
The maximum price would be the external price paid by Division

A, which is $10 per unit.
(b) Minimum transfer price = variable costs + opportunity cost
Variable costs = $7 (as in (a))

Opportunity cost = (($8 – $6) × 20,000) ÷ 10,000 = $4
Therefore, the minimum transfer price should be $11 ($7 + $4).
The maximum price would still be the external price paid by

Division A, which is $10 per unit. Since the minimum transfer
price is greater than the maximum price, the internal transfer
should not be completed.
(c) The number of lamps produced above capacity is 5,000;

therefore, the opportunity cost will apply only to these 5,000
units.

Opportunity cost = (($12 – $8) × 5,000) ÷ 15,000 = $1.33
Therefore, the minimum transfer price should be $8.33 ($7 +

$1.33)

Division A, which is $10 per unit.
_____________________________________________________________________________________________________________

9-24
PROBLEM 9.40A
(a) (1) Assuming no available capacity, the printing operation’s

variable cost is $0.006 per page and its opportunity cost is $0.004
($0.010 – $0.006) per page. The minimum transfer price would be
$0.010 ($0.006 + $0.004). Therefore, the printing operation would
not accept the internal transfer price of $0.007.
(2) Assuming that the printing operation has available capacity,

the printing operation’s variable cost is $0.006 and its
opportunity cost is $0. The minimum transfer price would be
$0.006 ($0.006 + $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 $0.001
($0.007 – $0.006) 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.
(b) The advantages of having all of the company’s printing done

internally 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.
(c) The printing operation would lose:

($0.010 – $0.007) × 400 pages × 1,200 copies = $1,440
Business Books would save:
($0.009 – $0.007) × 400 pages × 1,200 copies = $960
Overall loss to the company as a whole: $960 – $1,440 = $(480).
_____________________________________________________________________________________________________________

9-25
PROBLEM 9.41A
(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 $20 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

Cost of buying internally, per chip 20
Decrease in contribution margin, per chip $2
Total lost contribution for 30,000 units $(60,000)
Lost contribution margin by chip division:
Unit contribution margin on internal sales

($20 – $10) $10
Unit contribution margin on external sales
($22.50 – $14.50) 8
Decrease in contribution margin, per chip $2
Total lost contribution for 30,000 units (60,000)
Overall lost contribution margin for company $ (120,000)
_____________________________________________________________________________________________________________

9-26
PROBLEM 9.42A
(a) Contribution margin from selling 10,000 logs:

[$44.50 – ($22.50 + $4.50)] × 10,000 = $175,000
Contribution margin from selling 10,000 poles:

[$90.00 – ($22.50 + $4.50) – ($35.00 + $4.50 + $2.50)] × 10,000
= $210,000
The net increase in contribution margin is $35,000. It would be

beneficial for Wood Inc., as a whole, to transfer the logs at
$29.50.
(b) The transfer of logs at $29.50, instead of selling them externally

at $44.50, will have the effect of transferring profits from the
harvesting division to the sawing division. Since the two
divisions are evaluated as profit centres, based on the
contribution margin, the harvesting division will be penalized to
the benefit of the sawing division.
(c) The minimum transfer price is equal to the variable cost of

$27.00 ($22.50 + $4.50). The maximum transfer price is equal to
the market price of $44.50. The appropriate transfer price is the
market price of $44.50 per log because the harvesting division is
operating at full capacity and is a profit centre.
_____________________________________________________________________________________________________________

9-27
PROBLEM 9.43A
(a) Assuming no available capacity, and that the number of new

units produced would be equal to the number of standard units
forgone, variable cost of the special board would be $50 ($30 +
$20) and the opportunity cost would be $24 ($54 – $30). Therefore,
the minimum transfer price would be $74 ($50 + $24). Since this is
higher than the $62 transfer price, the PC division should reject
the offer.
(b) Assuming no available capacity, and that in order to produce the

200,000 special circuit boards, 250,000 standard boards would be
forgone, the opportunity cost would be: [($54 – $30) × 250,000] ÷
200,000 = $30
Therefore, the minimum transfer price would be $80 [($30 + $20) +

$30]. Since the $90 transfer price being offered exceeds the
minimum transfer price of $80, the PC division should accept the
offer.
(c) Assuming that the PC division has available capacity, variable

cost would be $50 ($30 + $20) and the opportunity cost would be
zero. Therefore, the minimum transfer price would be $50 ($50 +
$0). Since the $62 transfer price being offered exceeds the $50
minimum transfer price, the offer should be accepted.
_____________________________________________________________________________________________________________

9-28
PROBLEM 9.44A
(a) Per unit: Division Division Total

A B Company
Sales $1,400 $ 2,400 $2,400

Less: Costs
Variable costs 1,040 1,200 2,240
Transfer costs 1,400
Total costs 1,040 2,600 2,240
Contribution to income $ 360 $ (200) $ 160
(b) When there is no excess capacity, the opportunity cost is the

contribution margin from the market sales. Transfers should be
made at market prices less any avoidable costs. In the current
situation, it would appear that no transfers would be made, as
division A can earn $360 per unit by selling in the market.
(c) (i) Maintain price, no transfers

[500 × ($1,400 – $1,040)] = $180,000
(ii) Cut price, no transfers

[(1,000 × (80% × $1,400)) – $1,040,000] = $80,000
(iii) Maintain price and transfers

[500 × ($1,400 – $1,040)] + [500 × ($2,400 – $2,240)] = $260,000
The firm is better off by maintaining the current market price for
division A's product and transferring 500 units to division B
(Situation iii). A transfer price within the range of $1,040 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).
_____________________________________________________________________________________________________________

9-29
PROBLEM 9.45A
(a) The glass division will earn the most profit at a level of 13,000 units.
Volume 11,000 12,000 13,000 14,000

Revenue $135,300 $144,000 $152,750 $158,900
Cost (Vol. × cost/case) 117,810 126,240 134,550 142,520
Profit $ 17,490 $ 17,760 $ 18,200 $ 16,380
The filling division will earn the most profit at a level of 14,000
units, if they transfer the bottles internally. They will not be able
to produce more than 14,000 units because they are limited by
the glass division’s capacity.
Volume 11,000 12,000 13,000 14,000

Revenue $418,000 $450,600 $483,600 $515,200
Cost (Vol. × cost/case) 267,520 289,080 310,830 332,640
Transfer cost 135,300 144,000 152,750 158,900
Total cost 402,820 433,080 463,580 491,540
Profit $ 15,180 $ 17,520 $ 20,020 $ 23,660
The profit for the whole company will be optimized at a level of

14,000 units.
Volume 11,000 12,000 13,000 14,000

Revenue $418,000 $450,600 $483,600 $515,200
Less: Costs
Glass division 117,810 126,240 134,550 142,520
Filling division 267,520 289,080 310,830 332,640
Total cost 385,330 415,320 445,380 475,160
Profit $ 32,670 $ 35,280 $ 38,220 $ 40,040
(b) Market price is inappropriate whenever it does not reflect the

firm's opportunity costs. For example, if the supplying division
cannot sell its total capacity on the open market, the market price
will not fit, or if there are cost savings from dealing internally
rather than externally.
_____________________________________________________________________________________________________________

9-30
PROBLEM 9.46A
(a) Absorption-cost pricing:
Computation of unit manufacturing cost and target selling price
Direct materials.............................................................$ 20.00
Direct labour.................................................................. 40.00
Variable manufacturing overhead................................ 10.00
Fixed manufacturing overhead ($1,400,000 ÷ 80,000) 17.50
Unit manufacturing cost....................................... 87.50
Markup: 50% × $87.50.................................................. 43.75
Target selling price.......................................................$131.25
The markup of $43.75 per unit must cover selling and administrative
expenses (variable and fixed) plus provide a desired return on
investment.
(b) Variable-cost pricing:
Computation of total variable cost and target selling price
Direct materials.............................................................$ 20.00
Direct labour......................................................................40.00
Variable manufacturing overhead...................................10.00
Variable selling and administrative expense....................5.00
Unit total variable cost............................................ 75.00
Markup: 75% × $75...........................................................56.25
Target selling price.......................................................$131.25
The markup of $56.25 per unit must cover fixed manufacturing

and fixed selling and administrative costs plus provide a desired
return on investment.
_____________________________________________________________________________________________________________

9-31
PROBLEM 9.47A
Absorption-cost pricing
(a) Computation of unit manufacturing cost:

Per Unit
Direct materials.......................................................................... $100
Direct labour............................................................................... 70
Variable manufacturing overhead............................................ 20
Fixed manufacturing overhead ($120,000 ÷ 4,000)................. 30
Total manufacturing cost.................................................. $220
ROI per unit = (0.25 × $1,016,000) ÷ 4,000 = $63.50

Variable selling and administration per unit = $10
Fixed selling and administration per unit = ($102,000 ÷ 4,000) = $25.50
Markup % = ($63.50 + $10 + $25.50) ÷ $220 = 45%
(b) Target price: $220 + [45% × $220) = $319
Proof of 25% ROI under absorption-cost pricing:
WEATHER GUARD WINDOWS INC.

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

Cost of goods sold (4,000 units × $220) 880,000
Gross profit 396,000
Selling and admin. [(4,000 units × $10) + $102,000] 142,000
Net income $ 254,000
Desired ROI = 25% × $1,016,000 = $254,000
_____________________________________________________________________________________________________________

9-32
PROBLEM 9.47A (Continued)
Variable-cost pricing
(c) Computation of unit variable-cost:

Per Unit
Direct materials....................................................................... $100
Direct labour............................................................................ 70
Variable manufacturing overhead.......................................... 20
Variable selling and administrative expenses...................... 10
Total variable cost........................................................... $200
ROI per unit = (0.25 × $1,016,000) ÷ 4,000 = $63.50

Fixed manufacturing overhead per unit = ($120,000 ÷ 4,000) = $30
Fixed selling and administrative per unit = ($102,000 ÷ 4,000) = $25.50
Markup % = ($63.50 + $30 + $25.50) ÷ $200 = 59.5%
(d) Target price: $200 + [59.5% × $200) = $319
Proof of 25% ROI under variable-cost pricing:
WEATHER GUARD WINDOWS INC.

Budgeted Variable-Cost Income Statement
(Tinted Window)
Revenues (4,000 units × $319) $1,276,000

Variable costs (4,000 units × $200) 800,000
Contribution margin 476,000
Fixed costs ($120,000 + $102,000) 222,000
Net income $254,000
Desired ROI = $254,000 ÷ $1,016,000 = 25%
_____________________________________________________________________________________________________________

9-33
PROBLEM 9.47A (Continued)
(e) Both absorption-cost pricing and variable-cost pricing are used

because they have differing merits.
Absorption-cost pricing, especially when it includes total 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 provided 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.
_____________________________________________________________________________________________________________

9-34
PROBLEM 9.48A
(a) Based on the general approach to transfer pricing, if the screen

division has excess capacity to produce all the monitors required,
the minimum transfer price would be equal to the incremental
variable costs—in this case, $280.
(b) If the screen division is forced to transfer monitors to the laptop

division at incremental cost, all the profit from the “sale” of the
monitors will appear in the laptop division’s results. Several
undesirable actions may be generated by this situation, such as:
(1)The screen division, because they are not allowed to show any
profit on their sales, may not be motivated to produce quality
products, or deliver the products on time, which does not
contribute to successful operations for the whole company.
(2)Because the incremental costs are all being transferred to the

laptop division, the screen division may not be motivated to
work on keeping costs down, which reduces the profit for the
whole company. This is intensified when managers feel they do
not have autonomy to make their own decisions, and therefore,
are not accountable for their actions.
(3) This system of transfer pricing does not allow for the
performance of the managers and divisions to be evaluated
based on profits. If the screen division only sells monitors to the
laptop division, they will only recover variable costs, and they
will always show a loss equal to their fixed costs.
(c) A negotiated transfer price system will split the profits between
divisions, thereby eliminating the problems as described in part (b).
This system provides a sound basis for establishing transfer prices
because both divisions are better off if they both use the proper
decision rules.
_____________________________________________________________________________________________________________

9-35
PROBLEM 9.49A
(a) When there is no excess capacity, the appropriate transfer price

between divisions would be the market price, or $380.
(b) When there is excess capacity, the minimum transfer price would
be any incremental variable costs, less cost savings created by
transferring internally. If the excess capacity is not large enough
to fill the total transfer order, then the minimum transfer price will
be a weighted-average version of the variable cost and the market
price.
_____________________________________________________________________________________________________________

9-36
PROBLEM 9.50A
(a) The assembly division manager would reject the special offer,
because it will show a loss for the division.
Offered price $ 435

Less: variable costs $100
transfer costs 374 474
Loss per unit $ (39)
(b) In the best interests of the company as a whole, the manager

should accept the offer.
Offered price $435

Less
: fabrication costs $300
assembly costs 100 400
Income per unit $ 35
Because both divisions have excess capacity, the only relevant

costs in making the decision would be the incremental variable
costs.
(c) The best way to remedy the situation would be to allow the two
divisions to establish a negotiated transfer price that would divide
the profits equally between the two divisions.
_____________________________________________________________________________________________________________

9-37
SOLUTIONS TO PROBLEMS—SET B
PROBLEM 9.51B
(a) Total variable cost per unit

Direct labour 25
$66
Total fixed costs

Fixed manufacturing overhead $4,000,000
Selling and admin. expenses 2,000,000
$6,000,000
Per unit fixed cost = $6,000,000 ÷ 1,000,000 = $6
(b) Desired markup (i.e., ROI per unit) = $72 × 25% = $18 per unit
(c) Target selling price = $72 + $18 = $90
(d) Per-unit variable cost = $66 (same as above)

Per-unit fixed cost = $6,000,000 ÷ 800,000 = $7.50
Total cost per unit = $66 + $7.50 = $73.50
_____________________________________________________________________________________________________________

9-38
PROBLEM 9.52B
(a) Total variable costs

Materials $192,000
Labour 304,000
Variable marketing costs 32,000
$656,000
Total fixed costs
Fixed indirect costs $176,000
Administrative costs 64,000
$240,000
Unit cost = ($656,000 + $240,000) ÷ 4,000 = $224
Proof: [$224 + ($224 × 0.20)] × 500 = $134,400
(b) Total variable manufacturing costs

Materials $192,000
Labour 304,000
$624,000
Unit cost = $624,000 ÷ 4,000 = $156
Proof: [$156 + ($156 × 0.20)] × 500 = $93,600
(c) With a capacity of 9,000 units, and regular production of only

4,000 units, CFC has plenty of excess capacity to produce the
racks for the transit authority. Their incremental cost of
production in this case would be equal to the variable cost of
producing the units, which is $156. However, they will want to
earn some profit on the sale, so they would need to charge more
than $156. .....On the other hand, the transit authority is not
prepared to pay for costs that are not relevant to their product, so
will reject the $224 amount. The most appropriate cost should be
somewhere in between the two extremes.
_____________________________________________________________________________________________________________

9-39
PROBLEM 9.53B
(a) Total cost per unit

Direct materials $ 30
Direct labour 20
Fixed MOH: ($2,500,000 ÷ 100,000) 25
Fixed S&A: ($500,000 ÷ 100,000) 5
$105
Desired ROI per unit = ($3,000,000 × 30%) ÷ 100,000 = $9
Markup percentage = $9 ÷ $105 = 8.57%
(b) Total cost per unit

Direct materials $ 30.00
Direct labour 20.00
Variable manufacturing overhead 17.00
Variable S&A expenses 8.00
Fixed MOH: ($2,500,000 ÷ 80,000) 31.25
Fixed S&A: ($500,000 ÷ 80,000) 6.25
$112.50
Desired ROI per unit = ($3,000,000 × 30%) ÷ 80,000 = $11.25
Markup percentage = $11.25 ÷ $112.50 = 10%
_____________________________________________________________________________________________________________

9-40
PROBLEM 9.54B
(a) Labour rate:

$70,000 ÷ 2,500 hours $28
Required profit per hour 5
$33
(b) Material loading charge %:

$45,000 ÷ $75,000 = 60%
Required profit 15%
75%
(c) LEMOND BIKE REPAIR SHOP

Time and Material Price Quotation
January 5, 2020
Labour: 4 hours × $33 per hour $132

Material charges:
Invoice cost $200
Material loading charge at 75% 150 350
Total for labour and material $482
_____________________________________________________________________________________________________________

9-41
PROBLEM 9.55B
(a) Given that division A is operating at full capacity, the appropriate

transfer price would be the market price of $520, which is the
incremental variable costs plus opportunity cost.
(b) If division A had excess capacity the opportunity cost of

transferring the components to division B would be zero. The
minimum transfer price would be $400. However if this price is
used then division A would not show a profit on these units, and
in fact they would incur a loss because they would not be
receiving any contribution margin towards fixed costs.
The most appropriate transfer price in this situation, and the one
that would achieve goal congruence between the divisions and
the company as a whole, would be a negotiated price between
$400 and $520, which would split the profits between the two
divisions.
_____________________________________________________________________________________________________________

9-42
PROBLEM 9.56B
(a) If required to pay the $504 transfer price for the components from
division A, the division B manager would refuse the special offer
as shown below.
Offered price $550

Less: variable costs $100
transfer costs 504 604
Loss per unit $(54)
(b) No, this is not in the best interests of the company as a whole.
The following calculation shows that the income for the company
would increase if the offer was accepted.
Offered price $550

Less: Div A variable costs* $400
Div B variable costs 100 500
Income per unit $ 50
*Variable cost of component A = total cost less fixed cost

= $420 – ($200,000 ÷ 10,000)
Because both divisions have excess capacity, the only relevant

costs in making the decision would be the incremental variable
costs.
(c) The best way to remedy the situation would be to allow the two
divisions to establish a negotiated transfer price that would divide
the profits equally between the two divisions.
_____________________________________________________________________________________________________________

9-43
PROBLEM 9.57B
(a) (1) Assuming no available capacity, the studio’s variable cost is

$600 and its opportunity cost is $500 ($1,100 – $600). The
minimum transfer price would be $1,100 ($500 + $600). Therefore,
the studio would not accept the internal transfer price of $800.
(2) Assuming that the studio has available capacity, the studio’s
variable cost is $600 and its opportunity cost is $0. The minimum
transfer price would be $600 ($600 + $0). Therefore, in this case,
the recording studio should accept the offer to record internally.
The $800 transfer price would provide a contribution margin of
$200 ($800 – $600) per hour.
Depending on its bargaining strength, the studio might want to
ask for a transfer price higher than $800, since the company is
saving money at any price below the $1,000 price that the record
label pays to outside recording studios.
(b) The advantages of having all of the company’s recoding done

internally 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 studio to record internal work when
it doesn’t feel it is in its best interest are: (1) the studio manager
loses control over the studio’s performance, resulting in a loss of
morale, and (2) the profitability of the studio, as well as the
company as a whole, will decline.
(c) The record label would save:

($1,000 – $800) × 80 hours = $16,000
The recording studio would lose:
($1,100 – $800) × 80 hours = $24,000
Therefore, the company as a whole would suffer a loss in

contribution margin of $8,000 ($24,000 – $16,000).
_____________________________________________________________________________________________________________

9-44
PROBLEM 9.58B
(a) Using the general transfer-pricing approach, the minimum

transfer price is $270, the variable costs. Because the airbag
division is currently working at 75% of capacity it will not lose
any external sales by making the transfer. Therefore, its
opportunity cost is zero.
(b) Transferring products internally at incremental cost has the

following properties.
 Goal congruence—is achieved because the safety division will

pay the incremental costs instead of buying from an outsider
at higher price.
 Division performance—will be affected because transfer price
does not exceed full costs. By selling at incremental costs
and not full costs, the airbag division will show a loss. This
loss, the result of the incremental cost-based transfer price, is
not a good measure of the economic performance of the
division.
 Division autonomy—would not exist because when the
transfer price is rule-based, the airbag division has no
negotiating power in setting the transfer price.
(c) The airbag division has excess capacity that it can use to supply
airbags to the safety division. The airbag division will be willing
to supply the airbags only if the transfer price equals or exceeds
$270, its incremental costs of manufacturing the airbags.
The safety division will be willing to buy airbags from the airbag
division only if the price does not exceed $300 per airbag, the
price at which the safety division can buy airbags in the market
from outside suppliers. Within the negotiated price range of
$270 to $300, each division will be willing to transact with the
other, which will eliminate the problems described in part (b).
_____________________________________________________________________________________________________________

9-45
PROBLEM 9.59B
(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 $2.70
($3.20 – $0.50). The opportunity cost would be $1.40 ($4.60 –
$3.20). Therefore, the minimum transfer price would be $4.10
($2.70 + $1.40). Since the $4.00 transfer price offered by the pump
division is less than the minimum transfer price, the washer
division should not sell the washer internally.
(b) If the washer division rejects the offer, the contribution margin
earned by the washer division is $1.40, while the additional cost
the pump division would have to pay externally would be only
$0.30. The advantage ($1.10 × 50,000 units) is calculated as
follows:
Pump Division:
Cost of buying externally, per unit $4.30
Cost of buying internally, per unit 4.00
Decrease in contribution margin, per unit $0.30
Total lost contribution for 50,000 units $(15,000)
Washer Division:
Unit contribution margin on external sales
($4.60 – $3.20) $1.40
Increased contribution for 50,000 units 70,000
Overall increased contribution margin for

company $55,000
_____________________________________________________________________________________________________________

9-46
PROBLEM 9.60B
(a) Assuming no available capacity, variable cost of the special

engine would be $96 ($55 + $41) and the opportunity cost would
be $33 ($88 – $55). Therefore, the minimum transfer price would
be $129 ($96 + $33). Since this is higher than the $110 transfer
price, the Heartland Engines division should reject the offer.
(b) Assuming no available capacity, and that in order to produce the

8,500 special units, 12,000 standard units would be forgone, the
minimum variable cost would be $96 ($55 + $41) and the
opportunity cost would be: (($88 – $55) × 12,000) ÷ 8,500 = $46.59
Therefore, the minimum transfer price would be $142.59 [($55 +

$41) + $46.59]. Since the $170 transfer price being offered
exceeds the minimum transfer price of $142.59, the Heartland
Engines division should accept the offer.
(c) Assuming that the Heartland Engine Division has available

capacity, variable cost would be $96 ($55 + $41) and the
opportunity cost would be zero. Therefore, the minimum transfer
price would be $96 ($96 + $0). Since the $110 transfer price being
offered exceeds the $96 minimum transfer price, the offer should
be accepted.
_____________________________________________________________________________________________________________

9-47
PROBLEM 9.61B
(a) Comput Industries is fixing the transfer price below the market
price to reduce total taxes paid on profits. Since Heavencomput
is located in a tax shelter, it is more profitable for the company
as a whole to make as much profit as possible in that
subsidiary. Taxation authorities are aware of this type of
situation, and this is why transfer-pricing rules require the use
of market value.
(b) Since the two subsidiaries are evaluated as profit centres, the
consequences of the transfer pricing policy are important.
Transfer-pricing affects the distribution of profits among the
subsidiaries, and since division managers' compensation is
affected by divisional profits, Cancomput is penalized. It should
be considered as a cost centre because it has no control over
the price of the component. On the other hand, Heavencomput
is making more profit than it actually generates because of the
transfer-pricing policy.
(c) Many transfer pricing methods can be used, such as market-

based transfer prices, variable-cost transfer prices, total-cost
transfer prices, or negotiated transfer prices. Another solution is
to use a double price, one for the tax and the other for the
performance measure.
_____________________________________________________________________________________________________________

9-48
PROBLEM 9.62B
(a) Net income calculations (in 000’s)
(1) (2) (3)

Bottle Perfume Corp.
Revenue $10,020 $63,900 $63,900
Costs:
Bottles 7,200 10,020 7,200
Perfume 48,420 48,420
Total costs 7,200 58,440 55,620
Net income $2,820 $ 5,460 $ 8,280
(b) The optimal production volume for each division and the
corporation are determined below:
(1) Bottle Division: 6,000,000 units- Capacity
2,000 4,000 6,000

Revenue $4,000 $7,000 $10,020
Costs:
Bottles 3,200 5,200 7,200
Perfume
Total costs 3,200 5,200 7,200
Net income $ 800 $1,800 $2,820
(2) Perfume Division: 4,000,000 units
2,000 4,000 6,000

Revenue $25,000 $45,600 $63,900
Costs:
Bottles 4,000 7,000 10,020
Perfume 16,400 32,400 48,420
Total costs 20,400 39,400 58,440
Net income $ 4,600 $ 6,200 $ 5,460
_____________________________________________________________________________________________________________

9-49
PROBLEM 9.62B (Continued)
(3) Corporation: 6,000,000 units
2,000 4,000 6,000

Revenue $25,000 $45,600 $63,900
Costs:
Bottles 3,200 5,200 7,200
Perfume 16,400 32,400 48,420
Total costs 19,600 37,600 55,620
Net income $5,400 $8,000 $8,280
While the bottle division and the company as a whole can

optimize their profit by producing and selling 6 million units, the
perfume division should sell 4 million units to make the highest
net profit. This illustrates the importance of having transfer
prices that will motivate managers to act in the best interest of
the corporation, and to make decisions that address the
operations of the company as a whole, instead of focusing on
only their division.
_____________________________________________________________________________________________________________

9-50
PROBLEM 9.63B
Computation of unit manufacturing cost and target selling price

Direct labour 25
Fixed manufacturing overhead ($4,000,000 ÷
4
1,000,000)
Unit manufacturing cost 58
Markup: 65% × $58 37.70
Target selling price $95.70
The markup of $37.70 per unit must cover selling and

administrative expenses (variable and fixed) plus provide a
desired return on investment.
(b) Variable-cost pricing:
Computation of total variable cost and target selling price

Direct labour 25
Variable selling and administrative expenses 12
Unit variable manufacturing cost 66
Markup: 45% × $66 29.70
Target selling price $95.70
The markup of $29.70 per unit must cover fixed manufacturing

and fixed selling and administrative costs plus provide a desired
return on investment.
_____________________________________________________________________________________________________________

9-51
PROBLEM 9.64B
Computation of unit manufacturing cost

Direct labour 80
Fixed manufacturing overhead ($180,000 ÷ 3,000) 60
Unit manufacturing cost $320
Desired ROI per unit = (0.30 × $700,000) ÷ 3,000 = $70

Variable selling and administration per unit: $20
Fixed selling and administration per unit: $90,000 ÷ 3,000 = $30
Mark up percentage = ($70 + $20 + $30) ÷ $320 = 37.5%
(b) Target price: $320 + [37.5% × $320) = $440
Proof of 30% ROI under absorption-cost pricing:
SANTANA FURNITURE INC.

Budgeted Absorption-Cost Income Statement
(Leather Recliner Sofa)
Revenues (3,000 units × $440) $1,320,000

Cost of goods sold (3,000 units × $320) 960,000
Gross profit 360,000
Selling and admin. [(3,000 units × $20) + $90,000] 150,000
Net income $210,000
Desired ROI = $210,000 ÷ $700,000 = 30%
_____________________________________________________________________________________________________________

9-52
(c) Variable-cost pricing
Computation of unit variable cost

Direct labour 80
Variable selling and administration 20
Unit manufacturing cost $280
Desired ROI per unit = (0.30 × $700,000) ÷ 3,000 = $70

Fixed manufacturing overhead per unit: $180,000 ÷ 3,000 = $60
Fixed selling and administration per unit: $90,000 ÷ 3,000 = $30
Markup percentage = ($70 + $60 + $30) ÷ $280 = 57.143%
(d) Target price: $280 + (57.143% × $280) = $440
Proof of 30% ROI under variable-cost pricing:
SANTANA FURNITURE INC.

Budgeted Variable-Cost Income Statement
(Leather Recliner Sofa)
Revenues (3,000 units × $440) $1,320,000

Variable costs (3,000 units × $280) 840,000
Fixed costs ($180,000 + $90,000) 270,000
Net income $210,000
Desired ROI = $210,000 ÷ $700,000 = 30%
_____________________________________________________________________________________________________________

9-53
(e) Both absorption-cost pricing and variable-cost pricing are used

because they have differing merits.
Absorption-cost pricing, especially when it includes total 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 provided 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 variable-cost
based and therefore 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.
_____________________________________________________________________________________________________________

9-54
PROBLEM 9.65B
(a) The minimum transfer price for division B would be variable

costs, which are $27 per unit ($29, variable cost – $2, variable
selling expense that can be avoided in sales that are internal).
The maximum price would be the external price paid by division

A, which is $30 per unit.
(b) Minimum transfer price = variable costs + opportunity cost

Therefore the minimum transfer price should be $33 ($27 + $6)

division A, which is $30 per unit. When the minimum transfer
price is greater than the market value of the unit, there should be
no internal transfer.
(c) The number of ties produced above capacity is 5,000; therefore,

the opportunity cost will apply only to these 5,000 units.

Therefore the minimum transfer price should be $29 ($27 + $2)

division A, which is $30 per unit.
_____________________________________________________________________________________________________________

9-55
PROBLEM 9.66B
(a) Per unit: Div A Div B Company

Sales $2,400 $3,400 $3,400
Less: Costs
Variable costs 2,040 1,200 3,240
Transfer costs 2,400
Total costs 2,040 3,600 3,240
Contribution to income $ 360 $ (200) $160
Although division B is showing a negative contribution, the total

company is showing an increase. Therefore, transfers should
be made at market prices less any avoidable costs. In the
current situation, with the managers having full autonomy,
division B would probably not accept the market-based transfer
price.
(b) If division A can sell all of its product in the open market, then
the transfer price would be the market price: Minimum transfer
price = variable cost + opportunity cost.
$2,040 + ($2,400 – $2,040) = $2,400 or market price
(c) (i) Maintain price, no transfers

[500 × ($2,400 – $2,040)] = $180,000 Increase
(ii) Cut price, no transfers

[1,000 × ($2,120 – $2,040)] = $80,000 Increase
(ii) Maintain price and transfer 500 units to B

(500 × ($2,400 – $2040)) + (500 × ($3,400 – $3,240)) = $260,000
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 $2,040 to $2,400 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).
_____________________________________________________________________________________________________________

9-56
SOLUTIONS TO CASES
CASE 9.67
(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
comparable 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 incentive to make it in the
division’s best interest to sell internally.
(c) The wheel division would find this desirable. It would be able to
get higher quality bearings at a cost savings of $2 per set. The
bearing division would find this very undesirable. Instead of
making a profit of $13 ($35 – $22) per set, it would just be
breaking even. The overall company would be worse off because
it would be losing $13 per set of profit and only making $2 per set
of savings. Thus, it would be $11 worse off per set.
(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. The company
could also investigate the economics of expanding its capacity to
make bearings.
_____________________________________________________________________________________________________________

9-57
CASE 9.68
(a) Since the total production can be sold on the market, the
transfer price should be equal to the market price of $250. If the
transfer price is set below the market price, Vancouver's
performance would appear to be worse and Kamloops' would
appear better.
(b) Since Vancouver has some excess capacity (30,000 units), the
minimum transfer price would be equal to the variable costs of
$150. However, if the transfer price is equal to $150, Vancouver
would not earn any additional profit. The difference between the
transfer price and $150 will represent an increase in
Vancouver's profits. For instance, if the transfer price is set at
$175, the increase in Vancouver's profit would be $250,000
[10,000 × ($175 – $150)].
(c) Since Vancouver has some excess capacity (20,000 units), the
minimum transfer price for these units should be equal to the
variable costs of $150. The other 10,000 units should be
transferred at a price at least equal to variable costs + opportunity
costs. Opportunity costs here are equal to the contribution margin
of the units sold on the market. Thus, the transfer price for these
units should be $150 + ($250 – $150) = $250.
The first 20,000 units should be sold at $150 and the other
10,000 units at $250. Or, use the transfer-pricing formula as
follows.
Transfer price = variable costs + opportunity costs
Variable costs per unit = $150
Opportunity costs per unit = [($250 – $150) × 10,000] ÷ 30,000 = $33.33
Transfer price = $150 + $33.33 = $183.33
(d) Advantages:
 can generate savings for the divisions and the firm
 can promote collaboration between divisions
Disadvantages:
 can be time-consuming
 can produce conflicts between divisions
_____________________________________________________________________________________________________________

9-58
CASE 9.69
(a) Variable cost of raw diamonds = 75% × $60 = $45
Contribution margin from selling 300,000 kilograms of raw

diamonds: ($75 – $45) × 300,000 = $9,000,000
Contribution margin from selling 300,000 kilograms of polished

diamonds: [$175 – $45 – (10 + 30 + 20)] × 300,000 = $21,000,000
Net increase in contribution margin is $12,000,000. Therefore, it

is beneficial for Solco to transfer the raw diamonds at $60 per
kilogram.
Another approach
Selling 1 kilogram of polished diamonds increases revenues by
$100 (from $75 to $175) while variable costs increase by $60
(from $45 to $105), so there is a net increase in income of $40 ×
300,000 = $12,000,000.
(b) In the case where there is excess capacity, it is sometimes

acceptable to sell below total cost but above variable costs.
This provides for a positive contribution margin, which
increases income. In this situation, the total cost policy is
justified because the mining division is operating at full
capacity.
(c) Minimum transfer price is equal to variable costs of $45 (75% ×

$60), and the maximum transfer price is the market price of $75.
(d) The appropriate transfer price is the market price of $75 per
kilogram because the mining division is operating at full
capacity.
(e) If the mining division was not operating at full capacity, the
appropriate transfer price would be between $45 and $75.
_____________________________________________________________________________________________________________

9-59
_____________________________________________________________________________________________________________

9-60
CASE 9.70
(a) Variable costs:

Compressor $ 70
Other materials 37
Direct labour 30
Variable overhead 45
Variable selling 18
$200
Fixed costs:
Fixed overhead $ 480,000
Fixed selling 285,000
Fixed administrative 570,000
$1,335,000
New selling price = $400 – $20 = $380
New sales volume = 15,000 + 2,400 = 17,400
Sales – Variable costs – fixed costs = Net income

($380 × 17,400) – ($200 × 17,400) – $1,335,000 = $1,797,000
Yes, the firm should reduce its selling price.

Income will increase by $1,797,000 – $1,665,000 = $132,000.
(b) If the compressor division supplies WindAir with 17,400

compressors, the minimum transfer price would be variable cost
plus opportunity cost.
Variable cost = ($12.00 – $1.50) + $8 + $10 = $28.50
_____________________________________________________________________________________________________________

9-61
CASE 9.70 (Continued)
The raw materials for the new compressor will cost $1.50 less
than the previous units, and the variable selling expenses will be
avoided if the compressor division supplies WindAir.
Opportunity cost = (CM on external sales lost) ÷ (# of units

supplied to WindAir).
The total demand for units is 64,000 for external sale plus 17,400
for transfer to WindAir. The compressor division has the
capacity to produce 75,000 compressors. In order to supply
WindAir, the compressor division would have to give up 6,400
external sales units (64,000 + 17,400 – 75,000).
Variable cost of current sales = $12 + $8 + $10 + $6 = $36
Opportunity cost = [($100 – $36) × 6,400] ÷ 17,400 = $23.54
The minimum transfer price would be $28.50 + $23.54 = $52.04.

The $50 price offered by WindAir is less than the minimum
transfer price; therefore, the compressor division should reject
the offer. They would be losing about $35,500 [($52.04 – $50.00)
× 17,400].
(c) Cost savings from the internal transfer:

[($70.00 – $28.50) × 17,400] $722,100
Lost CM from forgone external sales:
[($100 – $36) × 6,400] 409,600
Corporate advantage from internal sales $312,500
Yes, the corporation (and WindAir) would be better off making

the internal transfer. However, to motivate the compressor
division to make the transfer, WindAir will have to offer a price in
excess of the minimum transfer price of $52.04. Note that, at
any price less than $70, WindAir is better off.
_____________________________________________________________________________________________________________

9-62
CASE 9.71
(a) Using the general transfer-pricing approach, the minimum

transfer price is equal to the variable costs of $4.60, ($1.60 +
$2.00 + $1.00) if the transistor division has excess capacity, or
the market price of $7.40 if the transistor division is operating at
full capacity.
(b) The maximum transfer price at which the systems division would buy
the transistor from the internal division is the market price of $7.40
per unit.
(c) Transferring products internally at incremental cost ($4.60)

instead of paying an outside source $5.80 has the following
properties if the transistor division has excess capacity.
 Goal congruence—Yes, it will be achieved because the buying

division will pay the incremental costs instead of buying from
an outsider at the higher price of $5.80.
 Division performance—No, because the transfer price does not

exceed total costs. By selling at incremental costs and not
total costs, the transistor division will show a loss. This loss,
the result of the incremental cost-based transfer price, is not a
good measure of the economic performance of the division.
(d) The board division has excess capacity that it can use to supply
its products to the systems division. The board division will be
willing to sell its products internally only if the transfer price
equals or exceeds $27, its incremental costs of manufacturing
the unit. The systems division will be willing to buy PCBs
internally only if the price does not exceed $36.75 per PCB,
which is equal to the marked-up price, not the market price
(because this board is not sold externally).
_____________________________________________________________________________________________________________

9-63
At a negotiated transfer price of $33 per unit, the board division

realizes a profit of $3.60 per board ($33.00 — $29.40), and the
systems division realizes a reduction in cost of $3.75 per board
($36.75 – 33.00). Within the price range each division will be
willing to transact with the other.
The negotiated transfer price has the following advantages.
 Goal congruence—will be achieved.
 Division performance—Yes, because both the buying and

selling divisions have participated in the negotiations and are
likely to believe they have agreed on the best deal possible.
 Division autonomy—Yes, determining transfer prices by

division managers will enhance the autonomy of the divisions.
_____________________________________________________________________________________________________________

9-64
CASE 9.72
(a) Jay 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 closer to housing, and thus more convenient. 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 Jay 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
Direct materials $0.25 $0.75 $1.05
Direct labour 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
$0.45 $1.45 $3.75
Fixed overhead per unit: $112,500 ÷ 45,000 = $2.50
_____________________________________________________________________________________________________________

9-65

Fixed selling and administrative per unit: $121,500 ÷ 45,000 = $2.70
Desired ROI per unit: ($324,000 × 0.25) ÷ 45,000 = $1.80
Computation of selling price (45,000 units)
Basic Deluxe Prem.

Variable cost per unit $0.45 $1.45 $ 3.75
Fixed cost per unit 5.20 5.20 5.20
Total unit cost 5.65 6.65 8.95
Desired ROI per unit 1.80 1.80 1.80
Target selling price $7.45 $8.45 $10.75
(c) Income statement for Year 1
Revenues: Basic ($7.45 × 3,000) $ 22,350

Deluxe ($8.45 × 31,000) 261,950
Premium ($10.75 × 9,000) 96,750 $381,050
Less: variable costs
Basic ($0.45 × 3,000) 1,350
Deluxe ($1.45 × 31,000) 44,950
Premium ($3.75 × 9,000) 33,750 80,050
Less: fixed costs ($112,500 + $121,500) 234,000
Net income $67,000
ROI = $67,000 ÷ $324,000 = 20.68%; his desired ROI was 25%.
(e) 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 significantly 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
deluxe and premium.
_____________________________________________________________________________________________________________

9-66
(f)
CASE 9.73
(a) The stakeholders in this case are:
 The two airlines

 The flying public in the affected cities
 Federal transportation regulators
 Owners and employees of Mosquito Airlines
(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.
(c) Giant services many different locations. If it loses money for a

while on one location, it can make it up on other locations.
Mosquito 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 Giant’s actions are anti-competitive, it can take

Giant to court. The problem is that anti-competitive behaviour is
difficult to prove, and legal remedies are slow. It is likely that
Mosquito 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 Giant’s. This way, it might not have caused
Giant 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 behaviour is difficult to say. On the one

hand, it can be argued that Giant is simply acting to protect its
interests by maintaining its market share. it can also be argued
that the flying public benefited because of the lower fares.
Unfortunately, the fares are only lower as long as the competitor
_____________________________________________________________________________________________________________

9-67
stays in business. Cases such as this have been very difficult for
regulators and the courts to resolve.
_____________________________________________________________________________________________________________

9-68
SOLUTION TO “ALL ABOUT YOU” ACTIVITY

CASE 9.74
The factors include:
The variable and fixed costs associated with the parking function.
Variable costs include wages for parking staff, credit card
commissions, collection and enforcement costs, meter repairs, and
parking management fees. Fixed costs include rent/ building
interest costs, depreciation, utilities, cleaning, and maintenance.
The minimum charge required to recover all fixed and variable

costs. This could be calculated on a per-stall/ per-hour basis
taking account of the expected average occupancy.
The required contribution from parking services to the general

hospital revenues. Canadian publicly funded hospitals are not
required to make a “profit,” but most hospitals face a shortage of
funding for core patient services, so parking services are required
to make a contribution to help reduce this funding shortfall.
Availability of public transit. If parking charges are too high,

patients, visitors, and staff may use public transit to get to the
hospital, thereby reducing the revenue earned.
Availability of parking close by the hospital site. If cheaper or free

parking is close by (e.g., at a shopping mall), there may be reduced
use of hospital parking facilities.
_____________________________________________________________________________________________________________

9-69
SOLUTION TO DECISION-MAKING AT CURRENT DESIGNS DM9.1
Total Total Per Hour

Cost Hours Charge
Repair technician’s wages $30,000
Fringe benefits 10,000
Overhead 10,000
$50,000 2,000 $25
Profit margin 20
Rate charged per hour of $45
labour
Job: Composite kayak repair

Labour charges: 3 hours @ $45 $135
Materials charges
Cost of materials $100
Materials loading charge (50% x $100) 50 150
Total price of labour and material $285
_____________________________________________________________________________________________________________

9-70
SOLUTION TO WATERWAYS CONTINUING PROBLEM WCP.9
Part 1:
(a) Labour rate per hour:

$357,12
Total labour costs 0
5,76
Total number of hours 0
$62
Plus: margin on labour 23
Rate charged per labour hour $85
(b) Material loading charge:

$125,0
Total loading costs 00
Invoice cost for materials 500,000
25%
Plus: profit margin 25%
Material loading percentage 50%
(c)
Waterways Corporation
Time and Materials Price Quote for
Multi-use City Park
Labour (450 hours × $85) $ 38,250

Material charges:
Invoice cost of materials $75,000
Material loading charge (50%) 37,500 112,500
Total bid price for city park $150,750
_____________________________________________________________________________________________________________

9-71
WCP.9 (Continued)
Part 2:
(a) (1) Selling price $5.55

Less: variable cost * 2.95
Per unit CM $2.60
The contribution margin that Ryan receives from the transfer
of 20,000 units to the installation division is zero, so by
selling to the outside customer he would be increasing his
department income by $52,000 ($2.60 × 20,000 units).
* Variable cost per unit = $2,053,200 ÷ 696,000 units = $2.95
(2) Purchase price (market) 5.50

Less: internal cost 2.95
Difference 2.55
On the other hand, the installation division would show a
decrease in operating income because they would be paying
$5.50 each for units that previously were being transferred
for $2.95. This would be an extra cost of $51,000 ($2.55 x
20,000 units).
(3) Increase from outside sale $52,000

Decrease from outside purchase 51,000
Difference $ 1,000
If Ryan were to accept the offer, Waterways Corporation
would increase their operating income by $1,000. Fixed
costs are not relevant in making any of these decisions as
they will be incurred either way.
_____________________________________________________________________________________________________________

9-72
WCP.9 (Continued)
(b) If managers are compensated based on operating income, they

should have authority to make their own decisions about what
prices to pay for their supplies and to whom they sell. In this
case, it appears that Ryan did not have a choice. It might be wise
for him to consider approaching top management to see if they
could allow him to negotiate a price with Lee so they will both
benefit from the internal transfer. Currently it is profitable for Lee
to purchase his supplies on the market so that Ryan can sell at
the higher price, but there is no guarantee that prices will not rise,
especially considering that demand has already driven the price
up to $5.55.
Other factors to consider:
 If the installation division continues to purchase externally,

they risk losing control over the quality of the product,
which may impact their business in the long run. As long as
their product is made in their own plant, they will always be
able to monitor quality standards.
 Waterways should look at the cost-benefit of making the

change. If the new customer is not going to be a repeat
customer, then it might cost more than the $1,000 increase
in operating income to disrupt the supply to the installation
division.
_____________________________________________________________________________________________________________

9-73
Legal Notice
Copyright
Copyright © 2018 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished
under licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning, or otherwise without the prior written permission of John Wiley &
Sons Canada, Ltd.
MMXVII xii F1
_____________________________________________________________________________________________________________

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CHAPTER 9

Self-Study Brief Do It! A&B

1. Calculate a target cost 2, 3 1 12 16, 17, 18

3. Calculate a target selling 9 10 31, 32, 33 46A, 47A, 48A, 63B,

4. Calculate a target selling 10 11 31, 32, 33 36A, 46A, 47A, 48A,

5. Use time-and-material 6 6 14 23, 24, 25, 38A, 54B

34A Use cost-plus pricing to determine various amounts. Moderate 15-25

35A Use cost-plus pricing to determine various amounts. Easy 10-20

36A Use cost-plus pricing to determine various amounts. Moderate 15-25

38A Use time-and-material pricing to determine bill. Easy 10-20

39A Determine the minimum transfer price under different

40A Determine the minimum transfer price with no excess

41A Determine the minimum transfer price with no excess

42A Determine the minimum transfer price under different

43A Determine the minimum transfer price under different

44A Determine the minimum transfer price under different

46A Calculate the target price using the absorption-cost and

47A Calculate various amounts using the absorption-cost and

48A Determine the minimum transfer price under different

49A Determine the minimum transfer price with no excess

Problem Difficulty Allotted Time

51B Use cost-plus pricing to determine various amounts. Easy 20-30

52B Use cost-plus pricing to determine various amounts. Challenging 20-30

53B Use cost-plus pricing to determine various amounts. Easy 15-25

54B Use time-and-material pricing to determine bill. Easy 10-20

55B Determine the minimum transfer price with no excess

57B Determine the minimum transfer price with no excess

58B Determine the minimum transfer price under different

59B Determine the minimum transfer price with no excess

60B Determine the minimum transfer price under different

63B Calculate the target price using absorption-cost pricing and

64B Calculate various amounts using absorption-cost pricing

65B Determine the minimum transfer price under different

66B Determine the minimum transfer price under different

Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9.2

Target selling price: $56 + (0.30 × $56) = $72.80

BRIEF EXERCISE 9.3

ROI per unit = (0.16 × $10,000,000) ÷ 50,000 units = $32

BRIEF EXERCISE 9.4

The markup percentage would be:

BRIEF EXERCISE 9.5

The markup percentage is equal to desired ROI per unit divided by

Desired ROI per unit = ($300,000 ÷ 10,000) = $30

The markup percentage = $30 ÷ $120 = 25%

BRIEF EXERCISE 9.6

Swayze’s total bill would equal:

BRIEF EXERCISE 9.7

With a capacity of 2,000 units, the machining division would have to

BRIEF EXERCISE 9.8

The company profits would increase by the difference between what

(400 units × $75) – (400 units × $50) = $10,000

BRIEF EXERCISE 9.9

The minimum transfer price is equal to the division’s variable cost

BRIEF EXERCISE 9.10

The markup percentage using the absorption-cost approach is

BRIEF EXERCISE 9.11

The markup percentage using variable-cost pricing is calculated by

Markup $30 + ($40 + $28)

SOLUTIONS TO DO IT! REVIEW

DO IT! REVIEW 9.12

Expected market sales (1,000,000 × $3) $3,000,000