TEST BANK managerial accounting by 5e kieso weygand ch08

CHAPTER 8
PRICING
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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a

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Multiple Choice Questions
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Brief Exercises
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Exercises
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AN
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This question covers a topic in an Appendix to the chapter.

170.


8-2

Test Bank for ISV Managerial Accounting, Fourth Edition

Completion Statements
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SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
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Study Objective 1
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Study Objective 2
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Study Objective 3
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80. MC
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Study Objective 4
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Study Objective 5
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Study Objective 6a
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BE

Note: TF = True-False
BE = Brief Exercise

C = Completion
MC = Multiple Choice
Ex = Exercise
The chapter also contains one set of eight Matching questions and two Short-Answer Essay
questions.


Pricing

8-3

CHAPTER STUDY OBJECTIVES
1. Compute a target cost when the market determines a product price. To compute a
target cost, the company determines its target selling price. Once the target selling price is
set, it determines its target cost by setting a desired profit. The difference between the target
price and desired profit is the target cost of the product.
2. Compute a target selling price using cost-plus pricing. Cost-plus pricing involves
establishing a cost base and adding to this cost base a markup to determine a target selling
price. The cost-plus pricing formula is expressed as follows: Target selling price = Cost +
(Markup percentage × Cost).
3. Use time-and-material pricing to determine the cost of services provided. Under timeand-material pricing, two pricing rates are set—one for labor used on a job and another for
the material. The labor rate includes direct labor time and other employee costs. The
material charge is based on the cost of direct parts and materials used and a material
loading charge for related overhead cost.
4. Determine a transfer price using the negotiated, cost-based, and market-based
approaches. The negotiated price is determined through agreement of division managers.
Under a cost-based approach, the transfer price may be based on variable cost alone or on
variable cost plus fixed costs. Companies may add a markup to these numbers. The costbased approach often leads to poor performance evaluations and purchasing decisions. A
market-based transfer price is based on existing competing market prices and services. A
market-based system is often considered the best approach because it is objective and

generally provides the proper economic incentives.
5. Explain issues involved in transferring goods between divisions in different countries.
Companies must pay income tax in the country where they generate the income. In order to
maximize income and minimize income tax, many companies prefer to report more income in
countries with low tax rates, and less income in countries with high tax rates. This is
accomplished by adjusting the transfer prices they use on internal transfers between
divisions located in different countries.
*6. Determine prices using absorption-cost pricing and variable-cost pricing. Absorptioncost pricing uses total manufacturing cost as the cost base and provides for selling and
administrative costs plus the target ROI through the markup. The target selling price is
computed as: Manufacturing cost per unit + (Markup percentage × Manufacturing cost per
unit). Variable-cost pricing uses all of the variable costs, including selling and administrative
costs, as the cost base and provides for fixed costs and target ROI through the markup. The
target selling price is computed as: Variable cost per unit + (Markup percentage × Variable
cost per unit).


8-4

Test Bank for ISV Managerial Accounting, Fourth Edition

TRUE-FALSE STATEMENTS
1.

In most cases, a company sets the price instead of it being set by the competitive market.

2.

In a competitive market, a company is forced to act as a price taker and must emphasize
minimizing and controlling costs.

3.

The difference between the target price and the desired profit is the target cost of the
product.

4.

In a competitive environment, the company must set a target cost and a target selling
price.

5.

The cost-plus pricing approach establishes a cost base and adds a markup to this base to
determine a target selling price.

6.

The cost-plus pricing model gives consideration to the demand side—whether customers
will pay the target selling price.

7.

Sales volume plays a large role in determining per unit costs in the cost-plus pricing
approach.

8.

In time-and-material pricing, the material charge is based on the cost of direct materials
used and a material loading charge for related overhead costs.

9.

The first step for time-and-material pricing is to calculate the material loading charge.

10.

The material loading charge is expressed as a percentage of the total estimated cost of
materials for the year.

11.

Divisions within vertically integrated companies normally sell goods only to other divisions
within the same company.

12.

Using the negotiated transfer pricing approach, a minimum transfer price is established by
the selling division.

13.

There are two approaches for determining a transfer price: cost-based and market-based.

14.

If a cost-based transfer price is used, the transfer price must be based on variable cost.

15.

A problem with a cost-based transfer price is that it does not provide adequate incentive

for the selling division to control costs.

16.

In the formula for a minimum transfer price, opportunity cost is the contribution margin of
goods sold externally.

17.

The market-based transfer price approach produces a higher total contribution margin to
the company than the cost-based approach.

18.

A negotiated transfer price should be used when an outside market for the goods does
not exist.


Pricing

a

8-5

19.

The number of transfers between divisions that are located in different countries has
decreased as companies rely more on outsourcing.

20.

Differences in tax rates between countries can complicate the determination of the
appropriate transfer price.

21.

The absorption-cost approach is consistent with generally accepted accounting principles
because it defines the cost base as the manufacturing cost.

a

22.

The first step in the absorption-cost approach is to compute the markup percentage used
in setting the target selling price.

a

23.

Because absorption cost data already exists in general ledger accounts, it is cost effective
to use it for pricing.

a

24.

The markup percentage in the variable-cost approach is computed by dividing the desired
ROI/unit plus fixed costs/unit by the variable costs/unit.

a

25.

Under the variable-cost approach, the cost base consists of all of the variable costs
associated with a product except variable selling and administrative costs.

Answers to True-False Statements
Item

1.
2.
3.
4.
5.

Ans.

F
T
T
F
T

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8.
9.

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Ans.

F
T
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Ans.

F
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F
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Item

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19.
20.

Ans.

T
F
T
F
T

Item
a

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22.
a
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a
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a
25.
a

Ans.

T
F
T

T
F


8-6

Test Bank for ISV Managerial Accounting, Fourth Edition

MULTIPLE CHOICE QUESTIONS
26.

Factors that can affect pricing decisions include all of the following except
a. cost considerations.
b. environment.
c. pricing objectives.
d. all of these are factors.

27.

In most cases, prices are set by the
a. customers.
b. competitive market.
c. largest competitor.
d. selling company.

28.

A company must price its product to cover its costs and earn a reasonable profit in
a. all cases.
b. its early years.

c. the long run.
d. the short run.

29.

Prices are set by the competitive market when
a. the product is specially made for a customer.
b. there are no other producers capable of manufacturing a similar item.
c. a company can effectively differentiate its product from others.
d. a product is not easily distinguished from competing products.

30.

All of the following are correct statements about the target price except it
a. is the price the company believes would place it in the optimal position for its target
audience.
b. is used to determine a product's target cost.
c. is determined after the company has identified its market and does market research.
d. is determined after the company sets its desired profit amount.

31.

Companies that sell products whose prices are set by market forces are called
a. price givers.
b. price leaders.
c. price takers.
d. price setters.

32.

In which of the following situations would a company not set the prices of its products?
a. When the product is not easily differentiated from competing products
b. When the product is specially made for a customer
c. When there are few or no other producers capable of making a similar product
d. When the product can be effectively differentiated from others

33.

The calculation to determine target cost is
a. variable manufacturing costs + fixed manufacturing costs.
b. sales price – (variable manufacturing costs + fixed manufacturing costs).
c. variable manufacturing costs + selling and administrative variable costs.
d. sales price – desired profit.


Pricing

8-7

34.

Target cost is comprised of
a. variable and fixed manufacturing costs only.
b. variable manufacturing and selling and administrative costs only.
c. total manufacturing and selling and administrative costs.
d. fixed manufacturing and selling and administrative costs only.

35.

A company that is a price taker would most likely use which of the following methods?

a. Time-and-material pricing
b. Target costing
c. Cost plus pricing, contribution approach
d. Cost plus pricing, absorption approach

36.

Bond Co. is using the target cost approach on a new product. Information gathered so far
reveals:
Expected annual sales
Desired profit per unit
Target cost

600,000 units
$0.25
$168,000

What is the target selling price per unit?
a. $0.28
b. $0.50
c. $0.25
d. $0.53
37.

Well Water Inc. wants to produce and sell a new flavored water. In order to penetrate the
market, the product will have to sell at $2.00 per 12 oz. bottle. The following data has
been collected:
Annual sales
Projected selling and administrative costs
Desired profit

50,000 bottles
$8,000
$80,000

The target cost per bottle is
a. $0.24.
b. $0.40.
c. $0.16.
d. $0.60.
38.

Larry Cable Inc. plans to introduce a new product and is using the target cost approach.
Projected sales revenue is $810,000 ($4.50 per unit) and target costs are $748,800. What
is the desired profit per unit?
a. $0.34
b. $2.08
c. $4.16
d. None of the above

39.

Wasson Widget Company is contemplating the production and sale of a new widget.
Projected sales are $187,500 (or 75,000 units) and desired profit is $22,500. What is the
target cost per unit?
a. $2.50
b. $2.20
c. $2.80
d. $3.00

8-8

Test Bank for ISV Managerial Accounting, Fourth Edition

40.

Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit
per unit is $2.30. The expected unit sales price is $27.50 based on 10,000 units. What is
the total target cost?
a. $252,000
b. $275,000
c. $23,000
d. $298,000

41.

In cost-plus pricing, the markup consists of
a. manufacturing costs.
b. desired ROI.
c. selling and administrative costs.
d. total cost and desired ROI.

42.

The desired ROI per unit is calculated by
a. multiplying the ROI times the investment and dividing by the estimated volume.
b. multiplying the unit selling price by the ROI.
c. dividing the total cost by the estimated volume and multiplying by the ROI.
d. dividing the ROI by the estimated volume and subtracting the result from the unit cost.

43.

Bellingham Suit Co. has received a shipment of suits that cost $250 each. If the company
uses cost-plus pricing and applies a markup percentage of 60%, what is the sales price
per suit?
a. $417
b. $400
c. $350
d. $625

Use the following information for questions 44–47.
Custom Shoes Co. has gathered the following information concerning one model of shoe:
Variable manufacturing costs
Variable selling and administrative costs
Fixed manufacturing costs
Fixed selling and administrative costs
Investment
ROI
Planned production and sales
44.

What is the total cost per pair of shoes?
a. $50
b. $85
c. $210
d. $120

45.

What is the desired ROI per pair of shoes?
a. $85.00
b. $210.00
c. $127.50
d. $212.50

$50,000
$25,000
$200,000
$150,000
$2,125,000
30%
5,000 pairs


Pricing
46.

What is the target selling price per pair of shoes?
a. $177.50
b. $212.50
c. $142.50
d. $197.50

47.

What is the markup percentage?
a. 150%
b. 255%
c. 850%

d. 182%

8-9

Use the following information for questions 48 and 49.
Lock Inc. has collected the following data concerning one of its products:
Unit sales price
Total sales
Unit cost
Total investment

$145
10,000 units
$115
$1,200,000

48.

The ROI percentage is
a. 20%.
b. 30%.
c. 35%.
d. 25%.

49.

The markup percentage is
a. 26.09%.
b. 20.69%.
c. 25%.

d. 22.59%.

50.

A company using cost-plus pricing has an ROI of 24%, total sales of 12,000 units and a
desired ROI per unit of $30. What was the amount of investment?
a. $86,400
b. $1,500,000
c. $273,600
d. $473,685

Use the following information for questions 51–53.
Brislin Products has a new product going on the market next year. The following data are
projections for production and sales:
Variable costs
Fixed costs
ROI
Investment
Sales

$250,000
$450,000
15%
$1,400,000
200,000 units


8 - 10

Test Bank for ISV Managerial Accounting, Fourth Edition

51.

What is the target selling price per unit?
a. $4.55
b. $3.50
c. $2.30
d. $3.30

52.

What is the markup percentage?
a. 84%
b. 15%
c. 40%
d. 30%

53.

What would the markup percentage be if only 150,000 units were sold and Brislin still
wanted to earn the desired ROI?
a. 24.71%
b. 40.0%
c. 26.25%
d. 32.94%

54.

When using cost-plus pricing, which amount per unit does not change when the expected
volume differs from the budgeted volume?

a. Variable cost
b. Fixed cost
c. Desired ROI
d. Target selling price

55.

Why does the unit selling price increase when expected volume is lower than budgeted
volume?
a. Variable costs and fixed costs have to be spread over fewer units.
b. Fixed costs and desired ROI have to be spread over fewer units.
c. Variable costs and desired ROI have to be spread over fewer units.
d. Fixed costs only have to be spread over fewer units.

56.

In cost-plus pricing, the target selling price is computed as
a. variable cost per unit + desired ROI per unit.
b. fixed cost per unit + desired ROI per unit.
c. total unit cost + desired ROI per unit.
d. variable cost per unit + fixed manufacturing cost per unit + desired ROI per unit.

57.

In cost-plus pricing, the markup percentage is computed by dividing the desired ROI per
unit by the
a. fixed cost per unit.
b. total cost per unit.
c. total manufacturing cost per unit.
d. variable cost per unit.

58.

The cost-plus pricing approach's major advantage is
a. it considers customer demand.
b. that sales volume has no effect on per unit costs.
c. it is simple to compute.
d. it can be used to determine a product’s target cost.


Pricing
59.

8 - 11

The following per unit information is available for a new product of Red Ribbon Company:
Desired ROI
Fixed cost
Variable cost
Total cost
Selling price

$ 50
80
120
200
250

Red Ribbon Company's markup percentage would be
a. 20%.

b. 25%.
c. 40%.
d. 60%.
60.

Bryson Company has just developed a new product. The following data is available for
this product:
Desired ROI per unit
Fixed cost per unit
Variable cost per unit
Total cost per unit

$ 24
40
60
100

The target selling price for this product is
a. $124.
b. $100.
c. $84.
d. $64.
61.

All of the following are correct statements about the cost-plus pricing approach except that it
a. is simple to compute.
b. considers customer demand.
c. includes only variable costs in the cost base.
d. will only work when the company sells the quantity it budgeted.

62.

In the cost-plus pricing approach, the desired ROI per unit is computed by multiplying the
ROI percentage by
a. fixed costs.
b. total assets.
c. total costs.
d. variable costs.

Use the following information for questions 63–64.
Red Grass Company produces high definition television sets. The following information is
available for this product:
Fixed cost per unit
Variable cost per unit
Total cost per unit
Desired ROI per unit
63.

$150
450
600
180

Red Grass Company's markup percentage would be
a. 120%.
b. 60%.
c. 40%.
d. 30%.

8 - 12

Test Bank for ISV Managerial Accounting, Fourth Edition

64.

The target selling price for this television is
a. $330.
b. $600.
c. $630.
d. $780.

65.

In time-and-material pricing, a material loading charge covers all of the following except
a. purchasing costs.
b. related overhead.
c. desired profit margin.
d. All of these are covered.

66.

The first step for time-and-material pricing is to calculate the
a. charge for obtaining materials.
b. charge for holding materials.
c. labor charge per hour.
d. charges for a particular job.

67.

The labor charge per hour in time-and-material pricing includes all of the following except
a. an allowance for a desired profit.
b. charges for labor loading.
c. selling and administrative costs.
d. overhead costs.

68.

The last step in determining the material loading charge percentage is to
a. estimate annual costs for purchasing, receiving, and storing materials.
b. estimate the total cost of parts and materials.
c. divide material charges by the total estimated costs of parts and materials.
d. add a desired profit margin on the materials themselves.

69.

In time-and-material pricing, the charge for a particular job is the sum of the labor charge
and the
a. materials charge.
b. material loading charge.
c. materials charge + desired profit.
d. materials charge + the material loading charge.

Use the following information for questions 70-72.
The following data is available for Wheels ‘N Spokes Repair Shop for 2008:
Repair technicians’ wages
Fringe benefits
Overhead
Total

$270,000
60,000
45,000
$375,000

The desired profit margin is $30 per labor hour. The material loading charge is 40% of invoice
cost. It is estimated that 5,000 labor hours will be worked in 2008.
70.

Wheels ‘N Spokes’ labor charge in 2008 would be
a. $75.
b. $84.
c. $96.
d. $105.


Pricing

8 - 13

71.

In January 2008, Wheels ‘N Spokes repairs a bicycle that uses parts of $120. Its material
loading charge on this repair would be
a. $48.
b. $72.
c. $120.
d. $168.

72.

In March 2008, Wheels ‘N Spokes repairs a bicycle that takes two hours to repair and
uses parts of $180. The bill for this repair would be
a. $390.
b. $420.
c. $444.
d. $462.

73.

Which of the following organizations would most likely not use time-and-material pricing?
a. Automobile repair company
b. Engineering firm
c. Custom furniture manufacturer
d. Public accounting firm

Use the following information for questions 74–76.
Carlos Consulting Inc. provides financial consulting and has collected the following data for the
next year’s budgeted activity for a lead consultant.
Consultant’s wages
Fringe benefits
Related overhead
Supply clerk’s wages
Fringe benefits
Related overhead
Profit margin per hour
Profit margin on materials
Total estimated consulting hours
Total estimated supply costs

$90,000
$22,500
$17,500
$18,000
$4,000
$20,000
$10
15%
5,000
$168,000

74.

The labor rate per hour is
a. $32.50.
b. $26.00.
c. $31.50.
d. $36.00.

75.

The material loading charge is
a. 25%.
b. 40%.
c. 55%.
d. 15%.

76.

A consulting job takes 20 hours of consulting time and $180 of supplies. The client’s bill

would be
a. $972.
b. $772.
c. $945.
d. $745.


8 - 14

Test Bank for ISV Managerial Accounting, Fourth Edition

Use the following information for questions 77–78.
Lonely Guy Repair Service recently performed repair services for a customer that totaled $400.
Somehow the bill was lost and the company accountant was trying to recreate the bill from
memory. This is what was remembered:
Total bill
Labor profit margin
Materials profit margin
Total labor charges
Cost of materials used
Total hourly cost

$400
$10
20%
$260
$100
$22.50

77.

What was the material loading charge?
a. 20%
b. 25%
c. 35%
d. 40%

78.

How many hours were billed on the job?
a. 13.0
b. 12.3
c. 11.5
d. 8.0

79.

Lawrence Legal Services recently billed a customer $750. Labor hours were 6 and the
cost of the materials used was $150. If the company’s hourly labor rate was $75, what
material loading charge was used?
a. 40%
b. 50%
c. 100%
d. 80%

80.

Dudly Drafting Services uses a 45% material loading charge and a labor rate of $40 per
hour. How much will be charged on a job that requires 3.5 hours of work and $80 of
materials?

a. $256
b. $220
c. $176
d. $266

81.

The time component under time-and-material pricing includes a
a. loading charge.
b. charge for receiving, handling, and storing materials.
c. portion of the materials clerk’s wages.
d. profit margin.

82.

Using time-and-material pricing involves how many steps?
a. 4
b. 3
c. 2
d. 1


Pricing
83.

8 - 15

The last step in calculating the hourly rate to be charged in time-and-material pricing is to
a. estimate the total labor costs plus fringe benefits.
b. estimate the total labor hours.

c. add a profit margin.
d. add a charge for overhead costs.

Use the following information for questions 84–86.
Jaycee Auto Repair has the following budgeted costs for the next year:
Shop employees’ wages and benefits
Parts manager’s salary and benefits
Office employee’s salary and benefits
Other overhead
Invoice cost of parts and materials
Total budgeted costs

Time Charges
$120,000
30,000
15,000
$165,000

Material Charges
$
45,000
15,000
40,000
400,000
$500,000

84.

The labor rate to be used next year assuming 7,500 hours of repair time and a profit
margin of $15 per labor hour is

a. $22.
b. $31.
c. $33.
d. $37.

85.

The material loading charge to be used next year assuming a 40% markup on material
cost is
a. 65%.
b. 40%.
c. 80%.
d. 20%.

86.

Jaycee estimates that the repairs to a Cadillac Escalade damaged in a rollover will take
45 hours of labor and $3,500 in parts and materials. The total cost of the repairs is
a. $5,165.
b. $7,440.
c. $5,365.
d. $6,390.

87.

The price used to record a sale between divisions within the same vertically integrated
company is called the
a. sales price.
b. integrated price.
c. transfer price.

d. bargain price.

88.

The overall objective in the determination of a transfer price is to
a. maximize the return of the selling division.
b. minimize the cost to the purchasing division.
c. minimize the return of the selling division.
d. maximize the return to the whole company.


8 - 16
89.

Test Bank for ISV Managerial Accounting, Fourth Edition
Which two methods are used most often when establishing a transfer price?
a. Negotiated transfer pricing and cost-based transfer pricing
b. Cost-based transfer pricing and market-based transfer pricing
c. Negotiated transfer pricing and market-based transfer pricing
d. Cost-based transfer pricing and standard-based pricing

Use the following information for questions 90 and 91.
The Selling Division’s unit sales price is $15 and its unit variable cost is $9. Its capacity is 10,000
units. Fixed costs per unit are $4. Current outside sales are 8,000 units.
90.

What is the Selling Division’s opportunity cost per unit from selling 2,000 units to the
Purchasing Division?
a. $6
b. $15

c. $2
d. $0

91.

What is the Selling Division’s opportunity cost per unit from selling 3,000 units to the
Purchasing Division?
a. $6
b. $15
c. $2
d. $0

92.

In the minimum transfer price formula, variable cost is defined as the variable cost of
a. all units sold, both internally and externally.
b. units sold externally.
c. units not sold.
d. units sold internally.

93.

Under the negotiated transfer pricing approach, the minimum transfer price is established
by the
a. purchasing division.
b. corporate headquarters management.
c. selling division.
d. corporate negotiator.

94.

Under the negotiated transfer pricing approach, the maximum transfer price is established
by the
a. purchasing division.
b. corporate headquarters management.
c. selling division.
d. corporate negotiator.

95.

Assume the Thread Division has excess capacity. The Garment Division wants the Thread
Division to furnish them additional spools of thread that could be made using the excess
capacity. In a negotiated transfer price, the Thread Division should accept as a minimum
any transfer price that exceeds the
a. total cost of producing spools for outside sales.
b. variable costs of producing the additional spools for the Garment Division.
c. contribution margin and outside spool sales.
d. foregone contribution margin on outside spool sales.


Pricing

8 - 17

96.

The most common method used to establish transfer prices is
a. negotiated transfer pricing.
b. market-based transfer pricing.
c. cost-plus transfer pricing.

d. cost-based transfer pricing.

97.

When a sale occurs between divisions of the same company, which transfer pricing
approach may lead to the buying division overpricing its product?
a. Cost based transfer pricing
b. Market-based transfer pricing
c. Negotiated transfer pricing
d. Cost-plus transfer pricing

Use the following information for questions 98–100.
The Lumber Division of Paul Bunyon Homes Inc. produces and sells lumber that can be sold to
outside customers or within the company to the Construction Division. The following data have
been gathered for the coming period:
Lumber Division:
Capacity
Price per board foot
Variable production cost per bd. ft.
Variable selling cost per bd. ft.
Construction Division:
Board feet needed
Outside price paid per bd. ft.

200,000 board feet
$2.00
$1.00
$0.40
60,000
$1.60

If the Lumber Division sells to the Construction Division, $0.30 per board foot can be saved in
shipping costs.
98.

If current outside sales are 130,000 board feet, what is the minimum transfer price that the
Lumber Division could accept?
a. $1.00
b. $1.10
c. $1.40
d. $2.00

99.

If current outside sales are 150,000 board feet, what is the minimum transfer price that the
Lumber Division could accept?
a. $1.60
b. $1.30
c. $1.10
d. $1.70

100.

If the Lumber Division has sufficient excess capacity to fulfill the Construction Division’s
needs, what will be the effect on the company’s overall contribution margin?
a. Decrease by $24,000
b. Decrease by $18,000
c. Increase by $30,000
d. Increase by $27,000

8 - 18

Test Bank for ISV Managerial Accounting, Fourth Edition

Use the following information for questions 101 and 102.
Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division
produces and sells engines to other motorcycle companies and internally to the Production
Division. It has been decided that the Engine Division will sell 20,000 units to the Production
Division at $700 a unit. The Engine Division, currently operating at capacity, has a unit sales price
of $1,700 and unit variable costs and fixed costs of $700 and $500, respectively. The Production
Division is currently paying $1,600 per unit to an outside supplier. $60 per unit can be saved on
internal sales from reduced selling expenses.
101.

What is the minimum transfer price that the Engine Division should accept?
a. $1,640
b. $1,700
c. $1,600
d. $1,000

102.

What is the increase/decrease in overall company profits if this transfer takes place?
a. Decrease $800,000
b. Increase $1,680,000
c. Decrease $2,000,000
d. Increase $18,000,000

Use the following information for questions 103 and 104.

The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.50 per
can. Its unit variable costs and unit fixed costs are $0.20 and $0.07, respectively. The Packaging
Division wants to purchase 50,000 cans at $0.27 a can. Selling internally will save $0.02 a can.
103.

Assuming the Can Division has sufficient capacity, what is the minimum transfer price it
should accept?
a. $0.20
b. $0.27
c. $0.18
d. $0.25

104.

Assuming the Can Division is already operating at full capacity, what is the minimum
transfer price it should accept?
a. $0.48
b. $0.55
c. $0.24
d. $0.28

Use the following information for questions 105 and 106.
The Dairy Division of Famous Foods, Inc. produces and sells milk to outside customers. The
operation has the capacity to produce 250,000 gallons of milk a year. Last year’s operating
results were as follows:
Sales (200,000) gallons
Variable costs
Contribution margin
Fixed costs
Net Income

$500,000
312,000
188,000
100,000
$ 88,000


Pricing

8 - 19

105.

Assume the Yogurt Division wants to purchase 30,000 gallons of milk from the Dairy
Division. The minimum price that will increase the Dairy Division’s profit is
a. $2.50 per gallon.
b. $0.94 per gallon.
c. $1.56 per gallon.
d. $0.44 per gallon.

106.

Assume the Dairy Division is operating at capacity. If the Yogurt Division wants to
purchase 30,000 gallons of milk from the Dairy Division, what is the minimum price that
will allow the Dairy Division to maintain its current net income?
a. $2.50 per gallon
b. $0.94 per gallon
c. $1.56 per gallon
d. $0.44 per gallon

107.

Negotiated transfer pricing is not always used because of each of the following reasons
except that
a. market price information is sometimes not easily obtainable.
b. a lack of trust between the negotiating divisions may lead to a breakdown in the
negotiations.
c. negotiations often lead to different pricing strategies from division to division.
d. opportunity cost is sometimes not determinable.

108.

All of the following are approaches for determining a transfer price except the
a. cost-based approach.
b. market-based approach.
c. negotiated approach.
d. time-and-material approach.

109.

When a cost-based transfer price is used, the transfer price may be based on any of the
following except
a. fixed cost.
b. full cost.
c. variable cost.
d. All of these may be used.

110.

All of the following are correct statements about the cost-based transfer price approach
except that it
a. can understate the actual contribution to profit by the selling division.
b. can reduce a division manager's control over the division's performance.
c. bases the transfer price on standard cost instead of actual cost.
d. provides incentive for the selling division to control costs.

111.

The general formula for the minimum transfer price is: minimum transfer price equals
a. fixed cost + opportunity cost.
b. external purchase price.
c. total cost + opportunity cost.
d. variable cost + opportunity cost.


8 - 20

Test Bank for ISV Managerial Accounting, Fourth Edition

112.

Variable costs of units sold internally will always be
a. lower than the variable costs of units sold externally.
b. higher than the variable costs of units sold externally.
c. the same as the variable costs of units sold externally.
d. Variable costs of units sold internally may be either higher or lower than for units sold
externally.

113.

In the formula for the minimum transfer price, opportunity cost is the __________ of the
goods sold externally.
a. variable cost
b. total cost
c. selling price
d. contribution margin

114.

The transfer price approach that conceptually should work the best is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time-and-material pricing approach.

115.

The transfer price approach that is often considered the best approach because it
generally provides the proper economic incentives is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time-and-material pricing approach.

116.

All of the following are correct statements about the market-based approach except that it
a. assumes that the transfer price should be based on the most objective inputs possible.
b. provides a fairer allocation of the company's contribution margin to each division.

c. produces a higher company contribution margin than the cost-based approach.
d. ensures that each division manager is properly motivated and rewarded.

117.

The negotiated transfer price approach should be used when
a. the selling division has available capacity and is willing to accept less than the market
price.
b. an outside market for the goods does not exist.
c. no market price is available.
d. any of these situations exist.

118.

Assuming the selling division has available capacity, a negotiated transfer price should be
within the range of
a. fixed cost per unit and the external purchase price.
b. total cost per unit and the external purchase price.
c. variable cost per unit and the external purchase price.
d. variable cost per unit and the opportunity cost.

119.

The transfer price approach that will result in the largest contribution margin to the buying
division is the
a. cost-based approach.
b. market-based approach.
c. negotiated price approach.
d. time-and-material pricing approach.

Pricing
120.

8 - 21

The maximum transfer price from the buying division's standpoint is the
a. total cost + opportunity cost.
b. variable cost + opportunity cost.
c. external purchase price.
d. external purchase price + opportunity cost.

Use the following information for questions 121 and 122.
The Wood Division of Fir Products, Inc. manufactures rubber moldings and sells them externally
for $110. Its variable cost is $50 per unit, and its fixed cost per unit is $14. Fir's president wants
the Wood Division to transfer 5,000 units to another company division at a price of $64.
121.

Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer
price it should accept is
a. $14.
b. $50.
c. $64.
d. $110.

122.

Assuming the Wood Division does not have any available capacity, the minimum transfer
price it should accept is
a. $14.

b. $50.
c. $64.
d. $110.

Use the following information for questions 123 and 124.
Management of the Catering Company would like the Food Division to transfer 10,000 cans of its
final product to the Restaurant Division for $80. The Food Division sells the product to customers
for $140 per unit. The Food Division’s variable cost per unit is $70 and its fixed cost per unit is
$20.
123.

If the Food Division is currently operating at full capacity, what is the minimum transfer
price the Food Division should accept?
a. $20
b. $70
c. $90
d. $140

124.

If the Food Division has 10,000 units available capacity, what is the minimum transfer
price the Food Division should accept?
a. $20
b. $70
c. $90
d. $140


8 - 22

Test Bank for ISV Managerial Accounting, Fourth Edition

125.

All of the following are correct statements about transfers between divisions located in
countries with different tax rates except that
a. differences in tax rates across countries complicate the determination of the appropriate transfer price.
b. many companies prefer to report more income in countries with low tax rates.
c. companies must pay income tax in the country where income is generated.
d. a decreasing number of transfers are between divisions located in different countries.

126.

Transfers between divisions located in countries with different tax rates
a. simplify the determination of the appropriate transfer price.
b. are decreasing in number as more companies "localize" operations.
c. encourage companies to report more income in countries with low tax rates.
d. all of these are correct.

a

Which of the following is consistent with generally accepted accounting principles?
a. Absorption-cost approach
b. Contribution approach
c. Variable-cost approach
d. Both absorption-cost and contribution approach

127.

a

128. Under the absorption-cost approach, all of the following are included in the cost base
except
a. direct materials.
b. fixed manufacturing overhead.
c. selling and administrative costs.
d. variable manufacturing overhead.

a

129. The first step in the absorption-cost approach is to compute the
a. desired ROI per unit.
b. markup percentage.
c. target selling price.
d. unit manufacturing cost.

a

130. The markup percentage in the absorption-cost approach is computed by dividing the sum
of the desired ROI per unit and
a. fixed costs per unit by manufacturing cost per unit.
b. fixed costs per unit by variable costs per unit.
c. selling and administrative expenses per unit by manufacturing cost per unit.
d. selling and administrative expenses per unit by variable costs per unit.

a

131. In the absorption-cost approach, the markup percentage covers the
a. desired ROI only.
b. desired ROI and selling and administrative expenses.

c. desired ROI and fixed costs.
d. selling and administrative expenses only.


Pricing

8 - 23

a

132. The absorption-cost approach is used by most companies for all of the following reasons
except that
a. absorption cost information is readily provided by a company's cost accounting
system.
b. absorption cost provides the most defensible bases for justifying prices to interested
parties.
c. basing prices on only variable costs could encourage managers to set too low a price
to boost sales.
d. this approach is more consistent with cost-volume-profit analysis.

a

133. Under the variable-cost approach, the cost base includes all of the following except
a. variable selling and administrative costs.
b. variable manufacturing costs.
c. total fixed costs.
d. All of the above are included.

a

134. In the variable-cost approach, the markup percentage covers the
a. desired ROI only.
b. desired ROI and fixed costs.
c. desired ROI and selling and administrative expenses.
d. fixed costs only.

a

135. The markup percentage denominator in the variable-cost approach is the
a. desired ROI per unit.
b. fixed costs per unit.
c. manufacturing cost per unit.
d. variable costs per unit.

a

136. The reasons for using the variable-cost approach include all of the following except this
approach
a. avoids arbitrary allocation of common fixed costs to individual product lines.
b. is more consistent with cost-volume-profit analysis.
c. provides the most defensible bases for justifying prices to all interested parties.
d. provides the type of data managers need for pricing special orders.

a

137. Maggie Co. has variable manufacturing costs per unit of $40, and fixed manufacturing
cost per unit is $30. Variable selling and administrative costs per unit are $8, while fixed
selling and administrative costs per unit are $12. Maggie desires an ROI of $15 per unit.
If Maggie Co. uses the absorption-cost approach, what is its markup percentage?
a. 8.33%

b. 50%
c. 16.67%
d. 25%

a

138. Maggie Co. has variable manufacturing costs per unit of $40, and fixed manufacturing
cost per unit is $20. Variable selling and administrative costs per unit are $10, while fixed
selling and administrative costs per unit are $4. Maggie desires an ROI of $16 per unit. If
Maggie Co. uses the variable-cost approach, what is its markup percentage?
a. 50%
b. 80%
c. 30%
d. 100%


8 - 24

Test Bank for ISV Managerial Accounting, Fourth Edition

Use the following information for questions 139–144.
Papillon Co. has determined the following per unit amounts:
Direct materials
Direct labor
Desired ROI
Fixed overhead

$10
12
11

15

Fixed selling and administrative
$20
Variable overhead
8
Variable selling and administrative
5

a

139.

The cost base using the absorption-cost approach is
a. $30.
b. $35.
c. $65.
d. $45.

a

140.

The markup percentage using the absorption-cost approach is
a. 80%.
b. 102%.
c. 131%.
d. 90%.

a

141.

The target selling price using the absorption-cost approach is
a. $117.
b. $81.
c. $54.
d. $123.50.

a

142.

The cost base using the variable-cost approach is
a. $30.
b. $35.
c. $65.
d. $45.

a

143.

The markup percentage using the variable-cost approach is
a. 80%.
b. 102%.
c. 131%.
d. 90%.

a

144.

The target selling price using the variable-cost approach is
a. $103.95.
b. $69.30.
c. $70.70.
d. $80.85.

a

145.

Alfredo Co. has collected the following per unit data:
Direct labor
Direct materials
Variable overhead

$15
10
8

Variable selling and admin.
Fixed overhead
Fixed selling and admin.

$ 6
20
14

The markup percentage is 120%. What is the target selling price under the variable-cost
approach?


Pricing
a.
b.
c.
d.

8 - 25

$54.20
$46.80
$39.60
$87.60

Answers to Multiple Choice Questions
Item

26.
27.
28.
29.
30.
31.
32.
33.
34.
35.

36.
37.
38.
39.
40.
41.
42.
43.

Ans.

d
b
c
d
d
c
a
d
c
b
d
b
a
b
a
b
a
b

Item

44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.

Ans.

b
c
b
a
d
a
b

a
d
d
a
b
c
b
c
b
a
c

Item

62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.

78.
79.

Ans.

b
d
d
d
c
b
d
d
d
a
d
c
d
b
a
d
d
c

Item

80.
81.
82.
83.

84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.

Ans.

a
d
b
c
d
a
b
c
d
b
d
a
d

c
a
b
d
b

Item

98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.

Ans.

b

d
c
a
a
c
a
c
a
d
d
a
d
d
d
d
c
b

Item

116.
117.
118.
119.
120.
121.
122.
123.
124.
125.

126.
a
127.
a
128.
a
129.
a
130.
a
131.
a
132.
a
133.

Ans.

c
d
c
a
c
b
d
d
b
d
c
a

c
d
c
b
d
c

Item
a

134.
135.
a
136.
a
137.
a
138.
a
139.
a
140.
a
141.
a
142.
a
143.
a
144.

a
145.
a

Ans.

b
d
c
b
b
d
a
b
b
c
d
b

BRIEF EXERCISES
BE 146
Home Appliances Co. wants to introduce a new digital display, laser driven iron to the market.
The estimated unit sales price is $85. The required investment is $3,500,000. Unit sales are
expected to be 250,000 and the minimum required rate of return on all investments is 15%.
Instructions
Compute the target cost per iron.
Solution 146

(5 min)

Sales (250,000 × $85)
Less desired ROI ($3,500,000 × 15%)
Target cost
Number of irons
Target cost per iron

$21,250,000
525,000
20,725,000
÷ 250,000
$
82.90