Question

Note: All asterisked Questions, Exercises, and Problems relate to material in the appendices to this chapter. Questions 1. What are the two types of pricing environments for sales to exter- nal parties? 2. In what situation does a company place the greatest focus on its target cost? How is the target cost determined? 3. What is the basic formula to determine the target selling price in cost-plus pricing? 4. Benz Corporation produces a filter that has a per unit cost of $18. The company would like a 30% markup. Using cost-plus pricing, determine the per unit selling price. 5. What is the basic formula for the markup percentage? 6. Stanley Corporation manufactures an electronic switch for dish- washers. The cost base per unit, excluding selling and administra- tive expenses, is $60. The per unit cost of selling and administrative expenses is $15. The company's desired ROI per unit is $6. Calculate its markup percentage on total unit cost. 7. Sheen Co. manufactures a standard cabinet for a Blu-ray player. The variable cost per unit is $16. The fixed cost per unit is $9. The desired ROI per unit is $6. Compute the markup percentage on total unit cost and the target selling price for the cabinet. 8. In what circumstances is time-and-material pricing most often used? 9. What is the material loading charge? How is it expressed? 10. What is a transfer price? Why is determining a fair transfer price important to division managers? 11. When setting a transfer price, what objective(s) should the com- pany have in mind? 12. What are the three approaches for determining transfer prices? 13. Describe the cost-based approach to transfer pricing. What is the strength of this approach? What are the weaknesses of this approach? 14. What is the general formula for determining the minimum trans- fer price that the selling division should be willing to accept? 15. When determining the minimum transfer price, what is meant by the opportunity cost"?

1,3,5 then 9 through 16

Answer 1

1. The two types of pricing environments are:

When firm is a Price Taker i.e. when firm takes the price that are set by market forces and competitors

When firm is a Price Maker i.e. when firm is in a major position and is able to change the market forces and can set the price of products followed by other competitors.

3. Target Price = Cost + (Markup Percentage*Cost)

5. Markup Percentage = Desired Return on Investment per unit / Total Unit Cost

9. Material loading charge is the fees added for receiving, handling, storage of materials. This also includes the markup percentage i.e. desired profit margin. This is expressed as a percentage of total material for the year.

10. Transfer price is the price for transfer of goods or services from one division to other within the same organisation. It is necessary to set a fair transfer price as it should be equal to all divisions and should benefit all and should not be a burden on any.

11. The Objective should be to maximise profit for overall company and to minimise the burden on any divisional performance and to avoid any decline in it.

12. Three approaches for determining transfer prices are :

Cost Based

Negotiated

Market Based

13. Cost Based Approach is the using of selling division costs i.e. the variable costs or variable plus markup to cover fixed costs.

This approach is easy to use.

It does not consider selling division's contribution to the contribution margin of the company.

14. Minimum Transfer Price = Variable Cost + Opportunity Cost

15. Opportunity Cost is the price that will be received if goods were sold to external party.

16. When the selling capacity is high or when market price is not set for some specific orders.