Time-and-material Pricing is Widely Used in Service Industries

Q1. Time-and-material pricing is widely used in service industries. True False Q2. As more companies “globalize” their operations, fewer transfers are happening between divisions that are in different countries. True False Q3. Under the variable cost-plus pricing approach, the cost base consists of all of the variable costs associated with a product except variable selling and administrative costs. True False Q4. Differences in tax rates between countries can complicate the determination of the appropriate transfer price. True False A price used to transfer between two divisions is called a transfer price. True False An increasing number of companies rely on outsourcing. True False With time-and-material pricing, the material charge is based on the cost of direct parts and material used and a material loading charge for related overhead costs. True False When a division has no excess capacity, the market-based system works reasonably well. True False Q5. A company must price its product to cover its costs and earn a reasonable profit in all cases. its early years. the long run. the short run. Q6. All of the following are correct statements about the target price except it is the price the company believes would place it in the optimal position for its target audience. is used to determine a product's target cost. is determined after the company has identified its market and does market research. is determined after the company sets its desired profit amount. Q7. Which of the following has the most impact on setting a market-based price? changes in quality of the product or service prices charged by the company’s suppliers the efficiency of the company’s supply chain demand for the service or product Q8. In cost-plus pricing, the target selling price is calculated as variable cost per unit + desired ROI per unit. fixed cost per unit + desired ROI per unit. total unit cost + desired ROI per unit. variable cost per unit + fixed manufacturing cost per unit + desired ROI per unit. Q13. What is a critical reason for a company to use cost-plus pricing? The company has significant differences between its variable and fixed costs. The company’s suppliers have recently increased prices. The company operates in a highly competitive market. The company operates in a less competitive market. Q14. Which of the following is consistent with generally accepted accounting principles? absorption-cost approach variable cost-plus approach variable-cost approach both absorption cost and variable cost-plus approach Q15. The first step in the absorption-cost approach is to calculate the desired ROI per unit. markup percentage. target selling price. unit manufacturing cost Q16. In the absorption-cost approach, the markup percentage covers the desired ROI only. desired ROI and selling and administrative expenses. desired ROI and fixed costs. selling and administrative expenses only. Q17. The markup percentage denominator in the variable cost-plus approach is the desired ROI per unit. fixed costs per unit. manufacturing cost per unit. variable costs per unit. Q18. The labour charge per hour in time-and-material pricing includes all of the following except an allowance for a desired profit. charges for labour loading. selling and administrative costs. overhead costs. Q19. The last step in determining the material loading charge percentage is to estimate annual costs for purchasing, receiving, and storing materials. estimate the total cost of parts and materials. divide material charges by the total estimated costs of parts and materials. add a desired profit margin on the materials themselves. Q20. In time-and-material pricing, the charge for a particular job is the sum of the labour charge and the materials charge. material loading charge. materials charge + desired profit. materials charge + the material loading charge. Q22. A firm’s transfer pricing policy should accomplish all of the following except promote goal congruence. maintain divisional autonomy. provide accurate performance evaluation. maximize the taxes paid in a foreign country. Q23. The transfer price approach that is often considered the best approach because it generally provides the proper economic incentives is the cost-based approach. market-based approach. negotiated price approach. time-and-material pricing approach. Q24. Division A produces a product that it sells to the outside market. It has compiled the following: Variable manufacturing cost per unit Variable selling costs per unit Total fixed manufacturing costs $10 $3 $150,000 Total fixed selling costs Per unit selling price to outside buyers Capacity in units per year $30,000 $40 30,000 Division B of the same company is currently buying an identical product from an outside provider for $38 per unit. It wishes to purchase 5,000 units per year from Division A. Division A is currently selling 25,000 units of the product per year. If the internal transfer is made, Division A will not incur any selling costs. At what price would the internal transfer occur? At the lowest price that is acceptable to Division A. At the maximum price that is acceptable to Division B. It depends on the negotiation skills of the division managers. No transfer will occur. Q25. What would be a legitimate reason for upper management to insist on an internal transfer even though the product could be sourced outside the company at a price that is lower than the company’s variable cost? Management is concerned that its manufacturing equipment will soon be obsolete, and it wants to get full use out of it before it happens. Management wants to ensure a secure supply of the product. The company has excess capacity. There is never a legitimate reason that justifies an internal transfer if a product can be sourced outside the company at a price that is lower than the company’s variable cost. Q26. What should be the objective(s) of a firm’s transfer pricing policy? Ensure a secure source of inputs at the best price possible. Promote goal congruence, while maintaining divisional autonomy so that accurate performance evaluation can be made. Develop a cooperative relationship between divisions, while maintaining enough competitiveness to ensure the survival of the firm. Develop a pricing system that facilitates good record keeping that is acceptable under GAAP. Q27. Generally, a transfer of products between two divisions should take place if it allows one division to benefit from technology developed in another division. results in increased incremental income to the company as a whole. increases awareness within the company of activity in the various divisions. assists the management to evaluate performance of the divisions. Q28. In setting internal transfer prices, the minimum price that the selling division would accept is a price that will result in a profit to the selling division. a price that will result in a profit to the purchasing division. its variable cost of the product plus opportunity costs lost by the transfer. its variable cost plus an internal profit margin. Q29. In setting internal transfer prices, the maximum price that the purchasing division would accept is its external cost to purchase the product. The ___________________ approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost. market-based transfer pricing full cost-based transfer pricing variable cost-plus pricing absorption cost-plus pricing Return on investment equals: profit plus the product of required return and investment. profit less the division of required return and investment. profit less the product of required return and investment. percentage return desired multiplied by the total investment. Target selling price is equal to: (Cost + Markup Percentage) X Cost Cost + (Markup Percentage X Cost) Cost - (Markup Percentage X Cost) (Cost - Markup Percentage) X Cost Markup percentage is equal to: Desired ROI per unit / Total Unit Cost. Desired ROI per unit - Total Unit Cost. Desired ROI per unit + Total Unit Cost. None of the above. ___________________ is particularly useful for making short-term decisions because it considers variable-cost and fixed cost behaviour patterns separately. Absorption cost-plus pricing Variable cost-plus pricing Time-and-material pricing Transfer pricing Basing the cost-plus formula on only ______________ could encourage managers to set too low a price in order to boost sales. fixed costs transfer prices variable costs time-and-material prices The _________________ is the easiest basis to defend when prices need to be justified to all interested parties. variable cost absorption cost negotiated cost transfer cost The major disadvantage of variable-cost pricing is that managers may: set the price too high. buy outside instead of inside. set the price too low. cost products inaccurately. Time-and-material pricing includes the following items: company sets two pricing rates. company sets two pricing rates: one for labour and another for advertising. company sets two pricing rates: one for labour and another for materials. MATH Q9. Red Grass Company produces high definition television sets and uses total cost-plus pricing. The following information is available for this product: Fixed cost per unit Variable cost per unit Total cost per unit Desired ROI per unit $100 240 340 119 Red Grass Company's markup percentage would be 119%. 71%. 19%. 35%. Q10. Red Grass Company produces high definition television sets and uses total cost-plus pricing. The following information is available for this product: Fixed cost per unit Variable cost per unit Total cost per unit Desired ROI per unit $100 330 430 150 The target selling price for this television is 580 Q11. Hen Company has developed a new product, egg crates that prevent breakage. The cost per crate is $75 and the company expects to sell 1000 crates per year. Hen Company has invested $1350000 in equipment to produce the crates and desires a 8% return on investment. What is Hen Company’s desired markup percentage? 8% 18% 80% 144% =0.08*1,350,000/1000)/75 Q12. Partridge Co. has produced a product with a total unit cost of $75 and a desired ROI per unit of $33. If Partridge Co.’s target selling price is $108, what is its percentage markup on cost? 144% 100% 50% 44.00% =33/75 Q21. The following data are available for Wheels ‘N Spokes Repair Shop for 2020: Repair technician's wages Fringe benefits Overhead Total $105000 67000 88000 $260000 The desired profit margin is $11 per labour hour. The material loading charge is 35% of invoice cost. It is estimated that 4000 labour hours will be worked in 2020. In March 2020, Wheels ‘N Spokes repairs a bicycle that takes three hours to repair and uses parts of $65. The bill for this repair would be $238.75. $271.75. $282.75. $315.75. Q30. The machining division of ITA International has a capacity of 2,240 units. Its sales and cost data are: Selling price per unit $ 85 Variable manufacturing costs per unit 20 Variable selling costs per unit 7 Total fixed manufacturing overhead 175,500 The machining division is currently selling 2,040 units to outside customers, and the assembly division of ITA International wants to purchase 400 units from machining. If the transaction takes place, the variable selling costs per unit on the units transferred to assembly will be $0/unit, and not $7/unit. What should be the transfer price in order not to affect the machining division’s current profit? (Round answer to 2 decimal places e.g. 5.25.) Q31. Schuman Corporation produces microwave units. The following per-unit cost information is available: direct materials $36; direct labour $23; variable manufacturing overhead $18; fixed manufacturing overhead $40; variable selling and administrative expenses $13; and fixed selling and administrative expenses $30. Its desired ROI per unit is $29.90. Calculate the markup percentage using variable-cost pricing. (Round answer to 2 decimal places, e.g. 15.25%.) Markup percentage: 111 Q32. Padong Remanufacturing rebuilds spot welders for manufacturers. The following budgeted cost data for 2020 are available for Padong: Technicians’ wages and benefits Parts manager’s salary and benefits Office employee’s salary and benefits Material Loading Charges Time Charges $204,400 Other overhead Total budgeted costs $44,400 51,100 14,600 11,100 27,750 $270,100 $83,250 The company wants a $30 profit margin per hour of labour and a 30% profit margin on parts. It has budgeted for 7,300 hours of repair time in the coming year and estimates that the total invoice cost of parts and materials in 2020 will be $444,000. QUIZLET Q33. Roxy’s Recording Studio rents studio time to musicians in two-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,100 sessions. The company has invested $2,085,600 in the studio and expects a return on investment of 25%. Budgeted costs for the coming year are as follows: Direct materials (tapes, CDs, etc.) Direct labour Per Session $20 425 Variable overhead 60 Fixed overhead Variable selling and administrative expenses 40 Fixed selling and administrative expenses Total $1,039,500 533,500 If CPCM's Calgary division has a divisional investment of $9,000,000 and operating profit of $900,000, then the division's return on investment (ROI) equals: 10%. 9%. 90%. 11%. Calculation $900,000/$9,000,000=10%. For further information, please see the section on Pricing Goods for External Sales. I. Classic Toys has examined the market for toy train locomotives. It believes there is a market niche in which it can sell locomotives at $80 each. It estimates that it could sell 10,000 of these locomotives annually. Variable costs to make a locomotive are expected to be $25. Classic anticipates a profit of $15 per locomotive. What is the target cost for the locomotive? $80. $65. $40. $25. Selling price less profit = cost, so $80 - $65 = $15. For further information, please see the section on Pricing Goods for External Sales. II. Adler Company is considering developing a new product. The company has gathered the following information on this product: Expected total unit cost - $25 Estimated investment for new product - $500,000 Desired ROI - 10% Expected number of units to be produced and sold - 1,000 The desired markup percentage and selling price are: markup percentage 10%; selling price $55. markup percentage 200%; selling price $75. markup percentage 10%; selling price $50. See Illustration 9-9: Desired ROI per unit = 10% x $500,000 ÷ 1,000 = $50. So $50 ÷ $25 = 200% markup and $50 + $25 = $75 selling price. For further information, please see the section on Pricing Goods for External Sales. III. Mystique Co. provides the following information for the new product it recently introduced: Total unit cost - $30 Desired ROI per unit - $10 Target selling price - $40 What would be Mystique Co.’s percentage markup on cost? 125% 75% 33% 25% Desired ROI Per Unit ÷ Total Unit Cost = Markup Percentage, $10 ÷ $30 = 33%. For further information, please see the section on Pricing Goods for External Sales. IV. Clear Water is considering introducing a water filtration device for its one-litre water bottles. Market research indicates that 1,000,000 units can be sold if the price is no more than $5. If Clear Water decides to produce the filters, it will need to invest $2,100,000 in new production equipment. Clear Water requires a minimum rate of return of 20% on all investments. Determine the target cost per unit for the filter. (Round answer to 2 decimal places, e.g. 15.25.) $5,000,00 Expected market sales (1,000,000 × $5) 0 Less: required ROI (0.20 × $2,100,000) Target cost for 1,000,000 units ÷ 420,000 4,580,000 1,000,000 Target cost per unit V. $4.58 Floor Show Corporation produces area rugs. The following per-unit cost information is available: direct materials $20, direct labour $8, variable manufacturing overhead $6, fixed manufacturing overhead $7, variable selling and administrative expenses $2, and fixed selling and administrative expenses $7. Using a 30% markup on total per-unit cost, calculate the target selling price. (Round answer to 2 decimal places, e.g. 15.25.) Total per-unit cost = $20 + $8 + $6 + $7 + $2 + $7 = $50 Target selling price = $50 + ($50 × 0.30) = $65.00 VII. Presented below are data for ProTech Appliance Repair Shop: Repair technicians’ wages Fringe benefits Overhead $152,250 42,000 68,250 The desired profit margin per hour is $16. The material loading charge is 30% of invoice cost. ProTech estimates that 5,250 labour hours will be worked next year. If ProTech repairs a dishwasher that takes 1.5 hours to repair and uses parts that cost $75, calculate the bill for the job. (Round answer to 2 decimal places, e.g. 15.25.) Cost per hour ($262,500 ÷ 5,250 hours) Desired profit margin $50.00 16.00 Labour rate per hour $66.00 Billing: Labour (1.5 hrs × $66.00) Material costs $99.00 75.00 Material handling ($75.00 × 30%) Total 22.50 $196.50 VII. The fastener division of Northern Textile Industries manufactures zippers and then sells them to customers for $8 per unit. Its variable cost is $4 per unit, and its fixed cost per unit is $1.10. Management would like the fastener division to transfer 14,300 of these zippers to another division within the company at a price of $4. The fastener division could avoid $0.30 per zipper of variable packaging costs by selling internally. Determine the minimum transfer price, assuming the fastener division is not operating at full capacity. (Round answer to 2 decimal places, e.g. 15.25.) Minimum transfer price = $4.00 – $0.30 = $3.70 Determine the minimum transfer price, assuming the fastener division is operating at full capacity. (Round answer to 2 decimal places, e.g. 15.25.) Minimum transfer price = $3.70 + ($8.00 – $4.00) = $7.70