ch08 M

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8-1

In order to obtain a profit of $14 per drive, Anna must set its target cost at
$31 per drive ($45 $14). 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 8-2

Direct materials ........................................................................................................
Direct labor ................................................................................................................
Variable manufacturing overhead......................................................................
Fixed manufacturing overhead...........................................................................
Variable selling and administrative expenses ...............................................
Fixed selling and administrative expenses ....................................................
Total unit cost..................................................................................................
$12
8
6
14
4
12
$56
Total unit cost + (Markup percentage X Total unit cost) = Target selling price
$56
+
(32% X $56)
=
$73.92
BRIEF EXERCISE 8-3

ROI per unit =
=
(Total investment X Desired ROI percentage)

Number of units
($10,000,000 X 18%)
= $36.00
50,000
BRIEF EXERCISE 8-4

The markup percentage would be:
$30
= 18.52%
$36 + $24 + $18 + $42 + $14 + $28
8-6
Copyright 2010 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
BRIEF EXERCISE 8-5

The markup percentage is equal to Desired ROI per unit divided by total
unit cost. The desired ROI per unit is computed as follows:
Desired ROI per unit =
$1,500,000 X 20%
= $30
10,000 units
The total unit cost is computed as follows:

Total unit cost =
$1,100,000 + $100,000
= $120
10,000 units
The markup percentage is computed as follows:

Desired ROI per unit
$30
=
= 25%
Total unit cost
$120
BRIEF EXERCISE 8-6

Chudzicks total bill would equal:
(10.5 hours X $45) + $700 + ($700 X 40%) = $1,452.50
BRIEF EXERCISE 8-7
The minimum transfer price is equal to the divisions variable cost plus its
opportunity cost. The opportunity cost is equal to its contribution margin
on goods sold to external parties. Thus, the minimum transfer price in this
case is:
Minimum transfer price = $19 + ($42 $19) = $42.
BRIEF EXERCISE 8-8
If the division has excess capacity, then its opportunity cost is zero. In this
case, the minimum transfer price is:
Minimum transfer price = $19 + $0 = $19.
8-7
BRIEF EXERCISE 8-9

The minimum transfer price is equal to the divisions variable cost plus its
opportunity cost. In this case the minimum transfer price is:
Minimum transfer price = $24 + ($42 $19) = $47.
*BRIEF EXERCISE 8-10

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
added back in the numerator.
Markup percentage =
$30 + ($14 + $28)

= 60%
$36 + $24 + $18 + $42
*BRIEF EXERCISE 8-11

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 added back in the numerator.
Markup percentage =
$30 + ($42 + $28)

= 108.7%
$36 + $24 + $18 + $14
SOLUTIONS TO DO IT! REVIEW EXERCISES

DO IT! 8-1
The desired profit for this new product line is $400,000 ($2,000,000 X 20%)
Each filter must result in $.40 of profit ($400,000/1,000,000 units)
Market price Desired profit = Target cost per unit
$3
$.40
=
$2.60 per unit
8-8
DO IT! 8-2
Direct materials ...........................................................................
Direct labor ...................................................................................
Variable manufacturing overhead.........................................
Fixed manufacturing overhead ..............................................
Variable selling and administrative expenses ..................
Fixed selling and administrative expenses .......................
Total unit costs .....................................................................
$18
9
5
6
3
7
$48
Total unit cost + (Total unit cost X Markup percentage) = Target selling price
$48
+
($48 X 35%)
=
$64.80
DO IT! 8-3
Total Cost /
$120,000
40,000
50,000
$210,000
Repair-technicians wages
Fringe benefits
Overhead
Total Hours =
5,000
5,000
5,000
5,000
Profit margin
Rate charged per hour of labor
Materials cost .......................................................
Materials loading charge ($80 X 50%) ..........
Total materials cost............................................
$ 80
40
$120
Cost of dishwasher repair

Labor costs ($60 X 1.5) ............................
Materials cost..............................................
Total repair cost...................................................
$ 90
120
$210
Per Hour
Charge
$24.00
8.00
10.00
$42.00
18.00
$60.00
DO IT! 8-4
Minimum transfer price
$2.75
=
=
Variable cost
+
$2.75 ($3 $.25) +
Opportunity cost
$0
Minimum transfer price

$7.75
=
=
Variable cost
+
$2.75 ($3 $.25) +
Opportunity cost
$5 ($8 $3)
8-9
SOLUTIONS TO EXERCISES
EXERCISE 8-1
(a)
The target cost formula is: Target cost = Market price Desired profit.
In this case, the market price is $15 and the desired profit is $4.50
(30% X $15). Therefore the target cost is $10.50 ($15.00 $4.50).
(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 8-2
The following formula may be used to determine return on investment
Investment
$8,500,000
X
X
ROI percentage
20%
= Return on investment
=
$1,700,000
Return on investment per unit is then $17 ($1,700,000 100,000)

The target cost is therefore $73 computed as follows:
Target cost
$73
= Market Price Desired profit

=
$90
$17
EXERCISE 8-3
(a)
(1) In this case the selling price would be $125 ($100 + [$100 X 25%]).
The problem with the $125 is that it is unlikely that Schopp will be
able to sell any All-Body suits at that price. Market research seems to
indicate that it will sell for only $110. (2) One way that Schopp might
consider manufacturing the All-Body swimsuit is if it has excess
capacity and therefore manufacturing the All-Body will not affect fixed
costs. Thus if the company can cover its variable costs it might want
to sell at the $110 level.
(b)
In this case the amount would be the selling price of $110.
8-10
EXERCISE 8-3 (Continued)

(c)
The highest acceptable cost would be the target cost. The target cost
is $85 as shown below:
Target cost = Market price Desired profit
$85
=
$110
$25
EXERCISE 8-4
(a) Total cost per unit:
Per Unit
Direct materials........................................................................................
$17
Direct labor................................................................................................
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% X $57) = $79.80
EXERCISE 8-5
(a) Total cost per unit:
Per Unit
Direct materials........................................................................................ $ 7.00
Direct labor................................................................................................
9.00
15.00
($3,300,000/500,000)...........................................................................
6.60
14.00
($1,500,000/500,000)...........................................................................
3.00
$54.60
(b) Desired ROI per unit = (25% X $24,000,000)/500,000 = $12
8-11

(c) Markup percentage using total cost per unit:
$12
= 21.98%
$54.60
(d) Target selling price = $54.60 + ($54.60 X 21.98%) = $66.60
EXERCISE 8-6
(a)
Total cost per session:
Direct materials ...........................................................

Direct labor ...................................................................
Variable overhead ......................................................
Fixed overhead ($950,000 1,000) .......................
Variable selling & administrative expenses ......
Fixed selling & administrative expenses
($500,000 1,000) ..................................................
Total cost per session.....................................
Per Session
$ 20
400
50
950
40
500
$1,960
(b)
Desired ROI per session = (20% X $2,058,000) 1,000 = $411.60
(c)
Mark-up percentage on total cost per session = $411.60 $1,960 = 21%
(d)
Target price per session = $1,960 + ($1,960 X 21%) = $2,371.60
EXERCISE 8-7
(a) Fixed manufacturing overhead per unit =
$1,800,000
= $600 per unit
3,000
Fixed selling and administrative = $327,000 = $109 per unit

expenses per unit
3,000
(b) Desired ROI per unit =
8-12
20% X $49,600,000
= $3,307 per unit
3,000

(c)
Direct labor................................................................................................
Fixed manufacturing overhead...........................................................
Fixed selling and administrative expenses ....................................
Total cost per unit...................................................................................
Desired ROI per unit...............................................................................
Target selling price.................................................................................
Per Unit
$ 380
290
72
600
55
109
1,506
3,307
$4,813
EXERCISE 8-8
(a)
Total
Cost
Hourly labor rate for repairs
Technicians wages and benefits
Overhead costs
Office employees salary and
benefits
Other overhead
Total
Per Hour
Hours = Charge
$228,000
7,600
$30
38,000
15,200
$281,200
7,600
7,600
7,600
=
=
=
5
2
37
35
$72
Profit margin
(b)
Total
Material
Invoice Cost,
Material
Loading
Parts and
Loading
Charges
Materials = Percentage
Overhead costs
Parts managers salary and
benefits
Office employees salary
Other overhead
$42,500
9,000
51,500
24,000
$75,500
$400,000
$400,000
$400,000
Profit margin
Material loading percentage
=
=
=
12.875%
6.000%
18.875%
25.000%
43.875%
8-13

(c) Job: Sharrer CorporationRebuild spot welder
Labor charges
40 hours @ $72....................................................
Material charges
Cost of parts and materials.............................
Material loading charge
(43.875% X $2,500)..........................................
$2,880.00
$2,500.00
3,596.88
1,096.88
Total price of labor and material ............
$6,476.88
EXERCISE 8-9
(a)
Total
Cost
Technicians wages and benefits
Overhead costs
Office employees salary and
benefits
Other overhead
Total
Per Hour
Hours = Charge
$150,000
6,000
$25.00
28,000
15,000
$193,000
6,000
6,000
6,000
=
=
=
4.67
2.50
32.17
38.00
$70.17
Profit margin
(b)
Total
Material
Invoice Cost,
Material
Loading
Parts and
Loading
Charges
Materials = Percentage
Overhead costs
Parts managers salary and
benefits
and benefits
Other overhead
$34,000
12,000
46,000
$700,000
6.57%
42,000
$88,000
$700,000
$700,000
6.00%
12.57%
100.00%
112.57%
Profit margin
8-14

(c) Job: Sublette Builders
Labor charges
80 hours @ $70.17 .....................................
Material charges
Cost of parts and materials ....................
(112.57% X $40,000) ..............................
$ 5,613.60
$40,000.00
85,028.00
45,028.00
Total price of labor and material....
$90,641.60
EXERCISE 8-10
(a)
Total
Cost
Hourly labor rate:

Restorers wages and fringes
$270,000
Overhead costs:
Administrative salaries & fringes
54,000
Other overhead costs
21,600
Total hourly cost
$345,600
Total
Hours
Hourly
Charge
12,000 =
$22.50
12,000 =
12,000 =
12,000 =
4.50
1.80
$28.80
Profit margin = Hourly rate total hourly cost

= $68.80 $28.80
= $40.00
8-15

(b)
Material
Loading
Charges
Overhead costs:
Purchasing agents
salary and fringes
Administrative salaries
and fringes
Other overhead costs

Total
Total Invoice
Cost, Parts &
Materials
Material
Loading
= Percentage
$ 67,500
21,960
89,460
$1,260,000
7.10%
75,600
$165,060
$1,260,000
$1,260,000
=
=
6.00%
13.10%
Material loading charge (with profit)

Material loading charge (without profit)
Profit margin on materials
(c) Labor charges:
150 hours @ $68.80
Material charges:
Cost of parts & materials
($60,000 X 93.10%)
Total price of labor and materials
93.10%
13.10%
80.00%
$ 10,320
$60,000
55,860
115,860
$126,180
EXERCISE 8-11
(a)
The minimum transfer price is:

Minimum transfer price = Variable cost + opportunity cost
Given that the Small Motor Division has excess capacity, the minimum
transfer price is the variable cost of $8.00 per unit.
(b)
8-16
Given no excess capacity, the minimum transfer price is $30, which is

its variable cost plus the lost contribution margin.

(c)
The level of capacity plays a significant role in determining the appropriate transfer price. If a division has no excess capacity, why should
it sell its product below a selling price it can 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.
EXERCISE 8-12
(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 effect on Cycle Division is as follows:
Selling price
Variable cost of goods sold
Body frame
Other variable costs
Contribution margin
Purchase from
FrameBody
$2,200
Present Situation
$2,200
$300
900
1,200
$1,000
$275
900
1,175
$1,025
In this case, Cycle Division makes $25 ($1,025 $1,000) more

per cycle sold and therefore if it sells 1,000 cycles, it makes an
additional $25,000.
2.
The effect on FrameBody is that it makes $15 on each frame sold

as shown below:
Selling price to Cycle Division
Variable cost
$275
260
$ 15
Thus the FrameBody Division gains $15,000 ($15 X 1,000).

3.
As a result, the overall income from Sarrel increases $40,000 ($25,000

from Cycle Division and $15,000 from FrameBody).
8-17

(b) 1.
The answer would not change from (a)(1). Cycle Division would
gain $25,000 if it purchased the frames from FrameBody.
2.
However, FrameBody would incur a loss of $75,000 as computed

below:
Selling price to outside buyer
Selling price to Cycle Division
Lost contribution margin per cycle
Number of cycles
Lost contribution margin
3.
350
275
$
75
X 1,000
$75,000
The effect on the overall income to Sarrel is a net loss of $50,000 as

shown below:
Cycle Division gain
Frame Body loss
Overall loss
$25,000
75,000
($50,000)
EXERCISE 8-13
(a) The minimum transfer price that Twyla should accept is:
Minimum transfer price = ($34 $4) + ($85 $34) = $81
(b) The lost contribution margin per unit to the company is:
Contribution margin lost by Twyla [($85 $34) $4] ................
Increased contribution margin to vehicle division
($80 $34)............................................................................................
Net loss in contribution margin ........................................................
$47
46
$ 1
Total lost contribution margin is $1 X 200,000 units = $200,000

(c) If management insists that it wants Twyla to provide the stereo units,
and Twyla is operating at full capacity, then it must be willing to pay
the minimum transfer price for those units. Otherwise it will be penalizing
the managers of Twyla by not giving them adequate credit for their
contribution to the corporations contribution margin.
8-18
EXERCISE 8-14
The minimum transfer price on this special order would be:
Minimum transfer price = ($135 $6) + ($50 $29) = $150.
Since the $160 price offered by the Bathtub Division exceeds this minimum
price, the offer should probably be accepted. However, given that the
division is operating at full capacity, it should give some consideration to
the chance that it may anger existing customers if it has to turn away
business.
EXERCISE 8-15
(a) Minimum transfer price = ($126 $6) + $0 = $120
(b) Minimum transfer price = ($126 $6) + ($160 $126) = $154
(c) No. By forcing the Appraisal Department to accept the $150 per
appraisal price, management is penalizing the Appraisal department. If
the department was allowed to sell its services to outside customers
it could earn $34 ($160 $126) in contribution margin per appraisal.
Forcing them to sell their services internally would allow them to earn
only $30 ($150 $120) in contribution margin. A loss of $4 per appraisal
or a total of $4,800 (1,200 X $4) would result.
EXERCISE 8-16
(a) The minimum transfer price for Division B would be variable costs,
which are $7.00 per unit ($8.00, 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 = $7.00 (as in (a))
Opportunity cost = (($8 $6) X 20,000) 10,000 = $4.00
Therefore the minimum transfer price should be $11.00 ($7 + $4)
The maximum price would still be the external price paid by Division A,
8-19

(c) Minimum transfer price = variable costs + opportunity cost
Variable costs = $7.00 (as in (a))
Opportunity cost = (($12 $8) X 5,000) 15,000 = $1.33
Therefore the minimum transfer price should be $8.33 ($7 + $1.33)
The maximum price would still be the external price paid by Division A,
EXERCISE 8-17
(a)
Sales
Less: Costs
Variable costs
Transfer costs
Total costs
Contribution to income
Division
A
$1,400
$1,040
0
$1,040
$ 360
Division
B
$2,400
Total
Company
$2,400
$1,200
1,400
$2,600
$ (200)
$2,240
0
$2,240
$ 160
(b) The opportunity cost is the market price. Transfers should be made at
market prices less any avoidable costs. In the current situation, it
would appear that no transfers would be made.
(c) (i)
(ii)
Maintain price, no transfers

(500 X $1,400) $520,000 = $180,000
Cut price, no transfers
(1,000 X $1,120) $1,040,000 = $80,000
(iii) Maintain price and transfers

(500 X $2,400) + (500 X $1,400) $1,640,000* = $260,000
*(500 X $2,240) + (500 X $1,040)
The firm is better off by maintaining the current market price for
Division As product and transferring 500 units to Division B. 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).
8-20
*EXERCISE 8-18
(a) Cost per unit:
Direct labor................................................................................................
Fixed manufacturing overhead ($3,300,000/500,000)..................
($1,500,000/500,000)...........................................................................
Per Unit
$ 7.00
9.00
15.00
6.60
14.00
3.00
$54.60
(b) Desired ROI per unit = (25% X $24,000,000)/500,000 = $12

(c) Absorption-cost pricing
markup percentage
(d) Variable-cost pricing
markup percentage
$12 + ($14 + $3)

= 77.13%
($7 + $9 + $15 + $6.60)
$12 + ($6.60 + $3)

= 48%
($7 + $9 + $15 + $14)
*EXERCISE 8-19
(a) The cost base of absorption-cost pricing includes only manufacturing
costs. All selling and administrative costs are excluded from the cost
base and are added back in the numerator of the markup percentage.
Absorption-cost pricing
markup percentage
$20 + ($9 + $15)

= 51.76%
($21 + $26 + $16 + $22)
(b) The cost base of variable-cost pricing includes only variable costs. All
fixed costs are excluded from the cost base and are added back in the
numerator of the markup percentage.
Variable-cost pricing
markup percentage
$20 + ($22 + $15)

= 79.17%
($21 + $26 + $16 + $9)
8-21
*EXERCISE 8-20
(a) Fixed manufacturing $1,800,000
=
= $600 per unit
overhead per unit
3,000
Fixed selling and administrative
$327,000
=
= $109 per unit
expenses per unit
3,000
(b) Desired ROI per unit =
(c)
20% X $49,600,000
= $3,307 per unit
3,000
$3,307 + ($55 + $109)
=
= 258.644%
markup percentage
$380 + $290 + $72 + $600
Target selling price = $1,342 + ($1,342 X 258.644%) = $4,813.00
(d) Variable-cost pricing

markup percentage
$3,307 + ($600 + $109)

= 503.89%
$380 + $290 + $72 + $55
Target selling price = $797 + ($797 X 503.890%) = $4,813.00
8-22
SOLUTIONS TO PROBLEMS
PROBLEM 8-1A
(a) Direct materials.......................................................................................

Direct labor...............................................................................................
Variable manufacturing overhead ....................................................
Variable selling and administrative expenses..............................
Variable cost per unit............................................................................

expenses
Fixed cost per unit
$20
42
10
5
$77
Total
Budgeted
Cost
Costs
Volume = Per Unit
$18
$1,440,000 80,000 =
1,040,000
$2,480,000
80,000
80,000
13
$31
=
=

Fixed cost per unit .................................................................................
Total cost per unit..................................................................................
$
$
77
31
108
(b) Total cost per unit..................................................................................

Markup .......................................................................................................
Desired ROI per unit..............................................................................
$ 108
X 30%
$ 32.40
(c) Total cost per unit..................................................................................

Target selling price................................................................................
$108.00
32.40
$140.40
(d) Variable cost per unit............ $ 77.00

Fixed cost per unit .................
41.33
Total cost per unit .................. $118.33
(same as above)
($1,440,000 + $1,040,000) 60,000
8-23
PROBLEM 8-2A
(a) Direct materials .......................................................................................

Direct labor ...............................................................................................
Variable manufacturing overhead.....................................................
Variable selling and administrative expenses ..............................
Variable cost per unit ............................................................................

expenses
Fixed cost per unit
$ 50
25
20
18
$113
Total
Budgeted
Cost
Costs
Volume = Per Unit
$ 600,000 50,000 =
$12
400,000
$1,000,000
50,000
50,000
=
=
Variable cost per unit ............................................................................

Total cost per unit ..................................................................................
25% X $1,200,000
= $6
50,000
Markup percentage =
$6
$133
8
$20
$113
20
$133
= 4.51%
Total cost per unit ..................................................................................

Desired ROI per unit ..............................................................................
Target selling price ................................................................................
$133
6
$139
(b) Variable cost per unit ...................................................... $113 (same as (a))

expenses
Fixed cost per unit
8-24
Total
Budgeted
Cost
Costs
Volume = Per Unit
$ 600,000 40,000 =
$15
400,000
$1,000,000
40,000
40,000
10
$25
PROBLEM 8-2A (Continued)

Markup percentage =
25% X $1,200,000
= $7.50
40,000
$7.50
= 5.43%
$138

Target selling price................................................................................
$113
25
$138
$138.00
7.50
$145.50
8-25
PROBLEM 8-3A
(a) Computation of time charge rate

Total
Cost
Shop employees wages and benefits
Overhead costs
Office employees salary and benefits
Other overhead
Total
Profit margin
Total
Per Hour
Hours = Charge
$108,000 5,000 =
$21.60
20,000 5,000 =
26,000 5,000 =
$154,000 5,000 =
4.00
5.20
30.80
5.00
$35.80
(b) Computation of material loading charge

Material
Material
Loading Total Invoice Cost,
Loading
Charges Parts and Materials = Percentage
Overhead costs
Parts managers salary
and benefits
and benefits
Other overhead
Total
Profit margin
8-26
$25,400
13,600
39,000
18,000
$57,000
$100,000
100,000
100,000
=
=
=
39%
18%
57%
30%
87%
PROBLEM 8-3A (Continued)

(c) Price quotation for time and material
DAVES ELECTRONIC REPAIR SHOP
Time and Material Price Quotation
January 5, 2011
Job: Fix big screen TV set
Labor charges: 20 hours @ $35.80 .....................
Material charges
Cost of parts and materials .............................
Material loading charge (87% X $500)..........
Total price of labor and material...........................
$ 716
$500
435
935
$1,651
8-27
PROBLEM 8-4A
(a) Assuming no available capacity, the printing operations variable cost

is $0.006 per page and its opportunity cost is $0.004 ($0.01 $0.006)
per page. The minimum transfer price would be $0.01 ($0.006 + $0.004).
Therefore, the printing operation would not accept the internal transfer
price of $0.007.
(b) Assuming that the printing operation has available capacity, the printing operations 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.
(c) The advantages of having all of the companys printing done internally include: (1) ensuring that the companys 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
companys priorities. The primary disadvantages of forcing the printing
operation to print internal work when it doesnt feel it is in its best
interest are: (1) the division manager loses control over the divisions
performance, resulting in a loss of morale, and (2) the profitability of
the division, as well as the company as a whole, will decline.
(d) The printing operation would lose:
($0.01 $0.007) X 500 pages X 1,200 copies
= $1,800
Business Books would save:

($0.009 $0.007) X 500 pages X 1,200 copies =
Overall loss to the company as a whole
8-28
1,200
= ($ 600)
PROBLEM 8-5A
(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 $4). The opportunity cost would be $8.50 ($22.50 $14.00). Therefore, the minimum
transfer price would be $18.50 ($10.00 + $8.50). Since the $20.00 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
Cost of buying internally, per chip
Increased cost, resulting in lower
unit contribution margin
Number of units purchased
Total lost contribution margin
Lost contribution margin by Chip Division:
Unit contribution margin on internal sales
($20 $10)
Unit contribution margin on external sales
($22.50 $14.00)
Lost unit contribution margin
Number of units sold
Total lost contribution margin
$21.00
20.00
1.00
X 40,000
$ 40,000
$10.00
8.50
1.50
X 40,000
Overall lost contribution margin for the company
60,000
$100,000
8-29
PROBLEM 8-6A
(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 pager would be $85 ($50 + $35) and the
opportunity cost would be $45 ($95 $50). Therefore, the minimum
transfer price would be $130 ($85 + $45). Since this is higher than the
$105 transfer price, the PM Division should reject the offer.
(b) Assuming no available capacity, and that in order to produce the
10,000 special pagers, 14,000 standard pagers would be forgone, the
minimum variable cost would be ($50 + $35) or $85 and the opportunity
cost would be:
Total contribution margin on standard pagers
($95 $50) X 14,000
=
= $63
Number of special pagers
10,000
Therefore, the minimum transfer price would be $148 [($50 + $35) +

$63]. Since the $160 transfer price being offered exceeds the minimum
transfer price of $148, the PM Division should accept the offer.
(c) Assuming that the PM Division has available capacity, variable cost
would be $85 ($50 + $35) and the opportunity cost would be zero.
Therefore, the minimum transfer price would be $85 ($85 + $0). Since
the $105 transfer price being offered exceeds the $85 minimum
transfer price, the offer should be accepted.
8-30
*PROBLEM 8-7A
(a) Absorption-cost pricing:

Computation of unit manufacturing cost and target selling price
Direct materials......................................................................................
Direct labor..............................................................................................
Variable manufacturing overhead ...................................................
Fixed manufacturing overhead ($1,400,000 80,000)...............
Unit manufacturing cost ............................................................
Markup: 50% X $87.50 ........................................................................
Target selling price...............................................................................
$ 20.00
40.00
10.00
17.50
87.50
43.75
$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......................................................................................
Direct labor..............................................................................................
Variable manufacturing overhead ...................................................
Variable selling and administrative expense ...............................
Unit total variable cost ...............................................................
Markup: 75% X $75 ..............................................................................
Target selling price...............................................................................
$ 20.00
40.00
10.00
5.00
75.00
56.25
$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.
8-31
*PROBLEM 8-8A
(a) Step oneComputation of unit manufacturing cost:
Direct materials .....................................................................................
Direct labor .............................................................................................
Variable manufacturing overhead...................................................
Fixed manufacturing overhead ($120,000 4,000)....................
Total manufacturing cost..........................................................
Per Unit
$100
70
20
30
$220
Step twoComputation of markup percentage to provide a 30% ROI:

Markup
=
Percentage
[(30% X $700,000) 4,000] + [$10 + ($102,000 4,000)]

$220
$88
= 40%
$220
(b) Step threeComputation of target price:

Target price: $220 + [40% X $220) = $308
Proof of 30% ROI under absorption-cost pricing:
SWENSON WINDOWS INC.
Budgeted Absorption-Cost Income Statement
(Tinted Window)
Revenues (4,000 units X $308.00) .........................................
Cost of goods sold (4,000 units X $220) .............................
Gross profit...................................................................................
Selling and administrative expenses
[(4,000 units X $10) + $102,000].........................................
Net income....................................................................................
Desired ROI =
$1,232,000
880,000
352,000
142,000
$ 210,000
$210,000
= 30%
$700,000
Markup percentage =
$210,000 + $142,000
= 40%
*$880,000*
*$220 X 4,000
8-32
*PROBLEM 8-8A (Continued)

Variable-cost pricing
(c) Step oneComputation of unit variable cost:
Direct materials...................................................................................
Direct labor...........................................................................................
Variable manufacturing overhead ................................................
Variable selling and administrative
expenses ..........................................................................................
Total variable cost.....................................................................
Per Unit
$100
70
20
10
$200
Step twoComputation of markup percentage to provide a 30% ROI:

Markup
[(30% X $700,000) 4,000] + [($120,000 + $102,000) 4,000]
$108
=
=
= 54%
Percentage
$200
$200
(d) Step threeComputation of target price:

Target price: $200 + (54% X $200) = $308
Proof of 30% ROI under variable-cost pricing:
SWENSON WINDOWS INC.
Budgeted Variable-Cost Income Statement
(Tinted Window)
Revenue (4,000 units X $308) ..................................
Variable costs (4,000 units X $200) .......................
Contribution margin ...................................................
Fixed costs
Fixed manufacturing overhead costs ..............
Fixed selling and administrative expenses ......
Net income.....................................................................
Desired ROI =
$1,232,000
800,000
432,000
$120,000
102,000
222,000
$ 210,000
$210,000
= 30%
$700,000
Markup percentage =
$222,000 + $210,000
= 54%
$800,000
8-33
*PROBLEM 8-8A (Continued)

(e) Both absorption-cost pricing and variable-cost pricing are used because
they have differing merits.
Absorption-cost pricing, especially when it includes full 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.
8-34

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 8-1

BRIEF EXERCISE 8-2

BRIEF EXERCISE 8-3

(Total investment X Desired ROI percentage)

BRIEF EXERCISE 8-4

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 8-5

The total unit cost is computed as follows:

The markup percentage is computed as follows:

BRIEF EXERCISE 8-6

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 8-9

*BRIEF EXERCISE 8-10

$30 + ($14 + $28)

*BRIEF EXERCISE 8-11

$30 + ($42 + $28)

SOLUTIONS TO DO IT! REVIEW EXERCISES

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Cost of dishwasher repair

Minimum transfer price

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Return on investment per unit is then $17 ($1,700,000 100,000)

= Market Price Desired profit

In this case the amount would be the selling price of $110.

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8-3 (Continued)

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8-5 (Continued)

Total cost per session:

Direct materials ...........................................................

Desired ROI per session = (20% X $2,058,000) 1,000 = $411.60

Mark-up percentage on total cost per session = $411.60 $1,960 = 21%

Target price per session = $1,960 + ($1,960 X 21%) = $2,371.60

Fixed selling and administrative = $327,000 = $109 per unit

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8-7 (Continued)

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8-8 (Continued)

Total price of labor and material ............

Copyright 2010 John Wiley & Sons, Inc.

Weygandt, Managerial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 8-9 (Continued)

Total price of labor and material....

Hourly labor rate:

Profit margin = Hourly rate total hourly cost

Copyright 2010 John Wiley & Sons, Inc.