Ex.

160
Stone Company is considering introducing a new line of pagers, targeting the preteen
population. Stone believes that if the pagers can be priced competitively at P45, approximately
300,000 units can be sold. The controller has determined that an investment in new equipment
totaling P4,000,000 will be required. Stone requires a minimum rate of return of 16% on all
investments.

Instructions
Compute the target cost per unit of the pager.
Solution 160 (6-10 min.)
Sales (300,000 × P45) P13,500,000
Less desired ROI (P4,000,000 × 16%) 640,000
Target cost for 300,000 units P12,860,000

Target cost per unit = P12,860,000 ÷ 300,000 = P42.87

Ex. 161
Mellie Computer Devices Inc. is considering the introduction of a new printer. The company’s
accountant had prepared an analysis computing the target cost per unit but misplaced his
working papers. From memory he remembers the estimated unit sales price was P200 and the
target unit cost was P195. Sales were projected at 100,000 units with a required P5,000,000
investment.

Instructions
Compute the required minimum rate of return.

Solution 161 (5–10 min.)

Sales (100,000 × P200) P20,000,000
Less target cost (100,000 × P195) 19,500,000
Desired ROI (in dollars) 500,000
Investment ÷ 5,000,000
Minimum ROI 10%

Ex. 162
Laserspot is involved in producing and selling high-end golf equipment. The company has
recently been involved in developing various types of laser guns to measure yardages on the
golf course. One small laser gun, called LittleLaser, appears to have a very large potential
market. Because of competition, Laserspot does not believe that it can charge more than P80
for LittleLaser. At this price, Laserspot believes it can sell 100,000 of these laser guns.
LittleLaser will require an investment of P7,500,000 to manufacture, and the company wants an
ROI of 16%.

Instructions
Determine the target cost for one LittleLaser.

Solution 162 (6–8 min.)

The following formula may be used to determine return on investment

Investment  ROI percentage = Return on investment

P7,500,000  16% = P1,200,000

Return on investment per unit is then P12 (P1,200,000  100,000)

The target cost is therefore P68 computed as follows:

Target cost = Market Price  Desired profit

P68 = P80  P12

DL
Ex. 163
Joey’s Recording Studio rents studio time to musicians in 2-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 1,000 sessions. The company has invested
P2,000,000 in the studio and expects a return on investment (ROI) of 16.5%. Budgeted costs for
the coming year are as follows.

Per Session Total

Direct materials (tapes, CDs, etc) P60
Direct labor P400
Variable overhead P50
Fixed overhead P850,000
Variable selling and administrative expenses P40
Fixed selling and administrative expenses P800,000

Instructions

(a) Determine the total cost per session.

(b) Determine the desired ROI per session.
(c) Calculate the mark-up percentage on the total cost per session.
(d) Calculate the target price per session.
Solution 163 (12 min)

(a) Total cost per session:

Per Session
Direct materials P 60
Direct labor 400
Variable overhead 50
Fixed overhead (P850,000 ÷ 1,000) 850
Variable selling & administrative expenses 40
Fixed selling & administrative expenses (P800,000 ÷ 1,000) 800
P2,200

(b) Desired ROI per session = (16.5% × P2,000,000) ÷ 1,000 = P330

(c) Mark-up percentage on total cost per session = P330 ÷ 2,200 = 15%

(d) Target price per session = P2,200 + (P2,200 × 15%) = P2,530

Ex. 164
Rita Corporation produces commercial fertilizer spreaders. The following information is available
for Rita’s anticipated annual volume of 400,000 units.
Per Unit Total
Direct materials P32
Direct labor 54
Variable manufacturing overhead 72
Fixed manufacturing overhead P12,000,000
Variable selling and administrative expenses 34
Fixed selling and administrative expenses 7,200,000

The company has a desired ROI of 20%. It has invested assets of P120,000,000.

Instructions
Compute each of the following:
1. Total cost per unit.
2. Desired ROI per unit.
3. Markup percentage using total cost per unit.
4. Target selling price.
Solution 164 (12 min.)
1. Total cost per unit:
Per Unit
Direct materials P 32
Direct labor 54
Variable manufacturing overhead 72
Fixed manufacturing overhead (P12,000,000 ÷ 400,000) 30
Variable selling and administrative expenses 34
Fixed selling and administrative expenses (P7,200,000 ÷ 400,000) 18
P240

Solution 164 (Cont.)

2. Desired ROI per unit = (20% × P120,000,000) ÷ 400,000 = P60

$60
3. Markup percentage using total cost per unit = $240 = 25%

4. Target selling price = P240 + (P240 × 25%) = P300

Ex. 165
Goliath Corporation is in the process of setting a selling price for a new product it has just
designed. The following data relate to this product for a budgeted volume of 60,000 units.
Per Unit Total
Direct materials P30
Direct labor 40
Variable manufacturing overhead 10
Fixed manufacturing overhead P1,800,000
Variable selling and administrative expenses 6
Fixed selling and administrative expenses 1,440,000
Goliath uses cost-plus pricing to set its target selling price. The markup on total unit cost is 30%.

Instructions
Compute each of the following for the new product:
1. Total variable cost per unit, total fixed cost per unit, and total cost per unit.
2. Desired ROI per unit.
3. Target selling price.
Solution 165 (18 min.)
1. Direct materials P30
Direct labor 40
Variable manufacturing overhead 10
Variable selling and administrative expenses 6
Variable cost per unit P86

Budgeted Cost
Total Costs Volume Per Unit
Fixed manufacturing overhead P1,800,000 ÷ 60,000 = P30
Fixed selling and administrative expenses 1,440,000 ÷ 60,000 = 24
Fixed cost per unit P54

Variable cost per unit P 86

Fixed cost per unit 54
Total cost per unit P140

2. Total cost per unit P140

Markup × 30%
Desired ROI per unit P 42

3. Total cost per unit P140

Desired ROI per unit 42
Target selling price P182

Ex. 166
Skyhigh Company is in the process of setting a selling price for its newest model stunt kite, the
Looper. The controller of Skyhigh estimates variable cost per unit for the new model to be as
follows:
Direct materials P15
 Direct labor 8
Variable manufacturing overhead 4
Variable selling and administrative expenses 5
P32

In addition, Skyhigh anticipates incurring the following fixed cost per unit at a budgeted sales
volume of 20,000 units:
Total Costs ÷ Budget Volume = Cost per
Unit
Fixed manufacturing overhead P240,000 20,000 P12
Fixed selling and administrative expenses 260,000 20,000 13
Fixed cost per unit P25

Skyhigh uses cost-plus pricing and would like to earn a 10 percent return on its investment
(ROI) of P400,000.

Instructions
Compute the selling price that would provide Skyhigh a 10 percent ROI.

Solution 166 (6–10 min.)

Variable cost per unit P32
Fixed cost per unit 25
Desired ROI per unit 2*
Target selling price P59
*P400,000 × .10 = P40,000; P40,000 ÷ 20,000 = P2 per unit

Ex. 167
Silver Spoon Service repairs commercial food preparation equipment. The following budgeted
cost data is available for 2016:
Time Material
Charges Charges
Technicians’ wages and benefits P500,000
Parts manager’s salary and benefits P 72,000
Office manager’s salary and benefits 112,000 18,000
Other overhead 48,000 135,000
Total budgeted costs P660,000 P225,000

Silver Spoon has budgeted for 10,000 hours of technician time during the coming year. It
desires a P54 profit margin per hour of labor and a 40% profit margin on parts. Silver Spoon
estimates the total invoice cost of parts and materials in 2016 will be P500,000.

Instructions
1. Compute the rate charged per hour of labor.
2. Compute the material loading charge.
3. Silver Spoon has received a request from Lime Corporation for an estimate to repair a
commercial fryer. The company estimates that it would take 20 hours of labor and P8,000 of
parts. Compute the total estimated bill.
Solution 167 (18-20 min.)
1. Per Hour
Total Cost Total Hours Charge
Hourly labor rate for repairs
Technicians’ wages and benefits P500,000 ÷ 10,000 = P 50.00
Overhead costs
Office manager’s salary and benefits 112,000 ÷ 10,000 = 11.20
Other overhead 48,000 ÷ 10,000 = 4.80
P660,000 ÷ 10,000 = 66.00
Profit margin 54.00
Rate charged per hour of labor P120.00

2.
Material
Material Total Invoice Cost,
Loading
Charges Parts and Materials
Charge
Overhead costs
Parts manager’s salary and benefits P 72,000
Office manager’s salary and benefits 18,000
P 90,000 ÷ P500,000 = 18%
Other overhead 135,000 ÷ P500,000 = 27%
45%
Profit margin 40%
Material loading charge 85%

3. Job: Lime Corporation

Labor charges
20 hours @ P120 P 2,400
Material charges
Cost of parts and materials P8,000
Material loading charge (85% × P8,000) 6,800 14,800
Total price of labor and materials P17,200

Ex. 168
Forrest Painting Service has budgeted the following time and material for 2016:

BUDGETED COSTS FOR 2016

Time Material
Charges Charges
Painters’ wages and benefits P 36,000
Service manager’s salary and benefits P23,000
 Office employee’s salary and benefits 12,000 3,000
Cost of paint 50,000
Overhead (supplies, utilities, etc.) 16,000 8,500
Total budgeted costs P64,000 P84,500

Forrest budgets 4,000 hours of paint time in 2016 and will charge a profit of P12 per hour, in
addition to a 25% markup on the cost of paint.

On February 15, 2016, Forrest is asked to prepare a price estimate to paint a building. Forrest
estimates that this job will take 12 labor hours and P500 in paint.

Instructions
1. Compute the labor rate for 2016.
2. Compute the material loading charge rate for 2016.
3. Prepare a time-and-material price estimate for painting the building.
Solution 168 (18-20 min.)
1. Computation of labor rate
Total Cost Total Hours Per Hour Charge
Hourly labor rate
Painters’ wages and benefits P36,000 ÷ 4,000 = P9
Overhead costs
Office employee’s salary and benefits 12,000 ÷ 4,000 = 3
Other overhead 16,000 ÷ 4,000 = 4
P64,000 ÷ 4,000 = 16
Profit margin 12
Rate charged per hour of labor P28

2. Computation of material loading charge

Material
Material Total Invoice Cost Loading
Charges of Paint Charge
Overhead costs
Service manager’s salary and benefits P23,000
Office employee’s salary and benefits 3,000
26,000 ÷ P50,000 = 52%
Other overhead 8,500 ÷ 50,000 = 17%
P34,500 ÷ 50,000 = 69%
Profit margin 25%
Material loading charge 94%

3. Price estimate for time and materials

Job: Paint building

Labor charges: 12 hours @ P28 P 336

Material charges
Cost of paint P500
Material loading charge (94% × P500) 470 970
Total price of labor and materials P1,306
Ex. 169
Chuck’s Classic Cars restores classic automobiles to showroom status. Budgeted data for the
current year are:
Material
Time Loading
Charges Charges
Restorers’ wages and fringe benefits P270,000
Puchasing agent’s salary and fringe benefits P 67,500
Administrative salaries and fringe benefits 60,000 22,500
Other overhead costs 20,000 75,600
Total budgeted costs P350,000 P165,600

The company anticipated that the restorers would work a total of 10,000 hours this year.
Expected parts and materials were P1,200,000.

In late January, the company experienced a fire in its facilities that destroyed most of the
accounting records. The accountant remembers that the hourly labor rate was P60 and that the
material loading charge was 83.80%.

Instructions
(a) Determine the profit margin per hour on labor.
(b) Determine the profit margin on materials.
(c) Determine the total price of labor and materials on a job that was completed after the fire
that required 150 hours of labor and P60,000 in parts and materials.
Solution 169 (10–12 min.)

(a)
Total Cost ÷ Total Hours Hourly Charge
Hourly labor rate:
Restorers’ wages and fringes P270,000 ÷ 10,000 = P27
Overhead costs:
Administrative salaries & fringes 60,000 ÷ 10,000 = 6
Other overhead costs 20,000 ÷ 10,000 = 2
Total hourly cost P350,000 ÷ 10,000 = P35

Profit margin = Hourly rate  total hourly cost

= P60  P35
= P25

(b)
Material Total Invoice Material
Loading Cost, Parts & Loading
Charges ÷ Materials = Percentage
Overhead costs:
Purchasing agent’s
salary and fringes P 67,500
Administrative salaries & fringes 22,500
90,000 ÷ P1,200,000 = 7.50%
 Other overhead costs 75,600 ÷ P1,200,000 = 6.30%
Total P165,600 ÷ P1,200,000 = 13.80%

Material loading charge (with profit) 83.80%

Material loading charge (without profit) 13.80%
Profit margin on materials 70.00%

(c)
Labor charges: 150 hours @ P60 P 9,000
Material charges:
Cost of parts & materials P60,000
Material loading charge (P60,000 × 83.80%) 50,280 110,280
Total price of labor and materials P119,280
Ex. 170
The Appraisal Department of Easy Mortgage Bank performs appraisals of business properties
for loans being considered by the bank and appraisals for home buyers that are financing their
purchase through some other financial institution. The department charges P280 per home
appraisal, and its variable costs are P220 per appraisal.
Recently, Easy Mortgage Bank has opened its own Home-Loan Department and wants the
Appraisal Department to perform 1,500 appraisals on all Easy Mortgage Bank-financed home
loans. Bank management feels that the cost of these appraisals to the Home-Loan Department
should be P265. The variable cost per appraisal to the Home-Loan Department would be P10
less than those performed for outside customers due to savings in administrative costs.

Instructions
(a) Determine the minimum transfer price, assuming the Appraisal Department has excess
capacity.
(b) Determine the minimum transfer price, assuming the Appraisal Department has no excess
capacity.
(c) Assuming the Appraisal Department has no excess capacity, should management force the
department to charge the Home-Loan Department only P265? Discuss.

Solution 170 (8-10 min.)

(a) Minimum transfer price = (P220  P10) + P0 = P210

(b) Minimum transfer price = (P220  P10) + (P280  P220) = P270

(c) No. By forcing the Appraisal Department to accept the P265 per appraisal price,
management is penalizing the Appraisal department. If the department was allowed to sell
its services to outside customers it could earn P60 (P280  P220) in contribution margin per
appraisal. Forcing them to sell their services internally would allow them to earn only P55
(P265  P210) in contribution margin. A loss of P5 per appraisal or a total of P7,500 (1,500 
P5) would result.

Ex. 171
The Pacific Company is a multidivisional company. Its managers have full responsibility for
profits and complete autonomy to accept or reject transfers from other divisions. Division A
produces a sub-assembly part for which there is a competitive market. Division B currently uses
this sub-assembly for a final product that is sold outside at P1,200. Division A charges Division
B market price for the part, which is P700 per unit. Variable costs are P530 and P600 for
Divisions A and B, respectively.
The manager of Division B feels that Division A should transfer the part at a lower price than
market because at market, Division B is unable to make a profit.

Instructions
(a) Calculate Division B’s contribution margin if transfers are made at the market price, and
calculate the company’s total contribution margin.
(b) Assume that Division A can sell all its production in the open market. Should Division A
transfer the goods to Division B? If so, at what price?
(c) Assume that Division A can sell in the open market only 500 units at P700 per unit out of the
1,000 units that it can produce every month. Assume also that a 20% reduction in price is
necessary to sell all 1,000 units each month. Should transfers be made? If so, how many
units should the division transfer and at what price? To support your decision, submit a
schedule that compares the contribution margins under three different alternatives.

Solution 171 (8–10 min.)

(a)
Division A Division B Total Company
Sales P700 P1,200 P1,200
Less: Costs
Variable costs P 530 P 600 P1,130
Transfer costs 0 700 0
Total costs P 530 P1,300 P1,130
Contribution to income P 170 P (100) P 70

(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) Maintain price, no transfers

(500 × P700)  P265,000 = P85,000
(ii) Cut price, no transfers
(1,000 × P560)  P530,000 = P30,000
(iii) Maintain price and transfers
(500 × P1,200) + (500 × P700)  P830,000* = P120,000
* (500 × P1,130) + (500 × P530)

The firm is better off by maintaining the current market price for Division A’s product and
transferring 500 units to Division B. A transfer price within the range of P530 to P600 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).
Ex. 172
Pert Corporation manufactures state-of-the-art DVD players. It is a division of Vany TV, which
manufactures televisions. Pert sells the DVD players to Vany, as well as to retail stores. The
following information is available for Pert’s DVD player: variable cost per unit P60; fixed costs
per unit P45; and a selling price of P150 to outside customers. Vany currently purchases DVD
players from an outside supplier for P140 each. Top management of Vany would like Pert to
provide 50,000 DVD players per year at a transfer price of P60 each.

Instructions
Compute the minimum transfer price that Pert should accept under each of the following
assumptions:
1. Pert is operating at full capacity.
2. Pert has sufficient excess capacity to provide the 50,000 players to Vany.

Solution 172 (9 min.)

1. The minimum transfer price is P150 [P60 + (P150 – P60)], the outside market price, since
Pert is operating at full capacity.

2. The minimum transfer price is P60, the variable cost of the DVD players, since Pert has
excess capacity. However, since the market price is P140 (Vany’s current cost), Pert should
be able to negotiate a price much higher than P60.

Ex. 173
Green Yard Company, a division of Lawn Supplies, Inc., produces lawn mowers. Green Yard
sells lawn mowers to home improvement stores, as well as to Lawn Supplies, Inc. The following
information is available for Green Yard’s mowers:
Fixed cost per unit P150
Variable cost per unit 100
Selling price per unit 375

Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for P340.
In order to ensure a reliable supply, the management of Lawn Supplies, Inc. ordered Green
Yard to provide 100,000 lawn mowers per year at a transfer price of P340 per unit. Green Yard
is currently operating at full capacity. It could avoid P6 per unit of variable selling costs by selling
internally.

Instructions
1. Compute the minimum transfer price that Green Yard should be required to accept.
2. Compute the increase (decrease) in contribution margin for Lawn Supplies, Inc. for this
transfer.

Solution 173 (9 min.)

1. The minimum transfer price that Green Yard should accept is:
(P100 – P6) + (P375 – P100) = P369

2. The decrease in contribution margin per unit to Lawn Supplies, Inc. is:
 Contribution margin lost by Green Yard (P375 – P100) P275
Increased contribution margin to Lawn Supplies (P340 – P94) 246
Net decrease in contribution margin P 29

Total contribution margin decrease is: P29 × 100,000 units = P2,900,000

Ex. 174
Spirit Manufacturing is a division of Birch Communications, Inc. Spirit produces cell phones and
sells these phones to other communication companies, as well as to Birch. Recently, the vice
president of marketing for Birch approached Spirit with a request to make 20,000 units of a
special cell phone that could be used anywhere in the world. The following information is
available regarding the Spirit division:

Selling price of regular cell phone P100

Variable cost of regular cell phone 50
Additional variable cost of special cell phone 35

Instructions
Calculate the minimum transfer price and indicate whether the internal transfer should occur for
each of the following:
1. The marketing vice president offers to pay Spirit P110 per phone. Spirit has available
capacity.

2. The marketing vice president offers to pay Spirit P110 per phone. Spirit has no available
capacity and would have to forgo sales of 20,000 phones to existing customers to meet this
request.

3. The marketing vice president offers to pay Spirit P175 per phone. Spirit has no available
capacity and would have to forgo sales of 30,000 phones to existing customers to meet this
request.

Solution 174 (13 min.)

1. Assuming that Spirit Manufacturing has available capacity, variable cost would be (P50 +
P35) or P85 and the opportunity cost would be zero. Therefore, the minimum transfer price
would be P85 = P85 + P0. Since the P110 transfer price being offered exceeds the P85
minimum transfer price, the offer should be accepted.

2. Assuming no available capacity, and that the new units produced would be equal to the
number of standard units forgone, variable cost of the special cell phone would be (P50 +
P35) or P85 and the opportunity cost would be (P100 – P50) or P50. Therefore, the
minimum transfer price would be P135 = P85 + P50. Since this is higher than the P110
transfer price, Spirit Manufacturing should reject the offer.

3. Assuming no available capacity, and that in order to produce the 20,000 special cell phones,
30,000 standard cell phones would be forgone, the minimum variable cost would be (P50 +
P35) or P85 and the opportunity cost would be:

Total contribution margin on standard cell phones (P100 – P50) × 30,000

—————————————————————— = —————————— = P75
Number of special cell phones 20,000
Therefore, the minimum transfer price would be P160 = (P50 + P35) + P75. Since the P175
transfer price being offered exceeds the minimum transfer price of P160, Spirit
Manufacturing should accept the offer.
Ex. 175
Pubworld is a textbook publishing company that has contracts with several different authors. It
also operates a printing operation called Printpro. Both companies operate as separate profit
centers. Printpro prints textbooks written by Pubworld authors, as well as books written by non-
Pubworld authors. The printing operation bills out at P0.06 per page and a typical textbook
requires 600 pages of print. A developmental editor from Pubworld approached the printing
operation manager offering to pay P0.045 per page for 5,000 copies of a 600-page textbook.
Outside printers are currently charging P0.05 per page. Printpro’s variable cost per page is
P0.04.

Instructions
1. Calculate the appropriate transfer price and indicate whether the printing should be done
internally by Printpro under each of the following situations:
a. Printpro has available capacity.
b. Printpro has no available capacity and would have to cancel an outside customer’s job to
accept the editor’s offer.

2. Calculate the change in contribution margin for each company, if top management forces
Printpro to accept the P0.045 transfer price when it has no available capacity.

Solution 175 (13 min.)

1a. Assuming that the printing operation has available capacity, the printing operation’s
variable cost is P0.04 and its opportunity cost is P0. The minimum transfer price would be
P0.04 = P0.04 + P0. Therefore, in this case, the printing operation should accept the offer
to print internally. The P0.045 transfer price would provide a contribution margin of P0.005
(P0.045 – P0.04) per page. Depending on its bargaining strength, the printing operation
might want to ask for a transfer price higher than P0.045, since the company is saving
money at any price below the P0.05 price charged by outside printers.

1b. Assuming no available capacity, the printing operation’s variable cost is P0.04 per page
and its opportunity cost is P0.02 (P0.06 – P0.04) per page. The minimum transfer price
would be P0.06 = P0.04 + P0.02. Therefore, the printing operation would not accept the
internal transfer price of P0.045.

2. Printpro would lose: (P0.06 – P0.04) × 600 pages × 5,000 copies = P60,000

Pubworld would save: (P0.05 – P0.045) × 600 pages × 5,000 copies = P15,000

a
Ex. 176
The following information is available for a product manufactured by Gardenia Corporation:
Per Unit Total
Direct materials P62
Direct labor 48
Variable manufacturing overhead 15
Fixed manufacturing overhead P250,000
Variable selling and admin. expenses 10
Fixed selling and admin. expenses 55,000
Gardenia has a desired ROI of 16%. It has invested assets of P8,250,000 and expects to
produce 5,000 units per year.

Instructions
Compute each of the following:
1. Cost per unit of fixed manufacturing overhead and fixed selling and administrative
expenses.
2. Desired ROI per unit.
3. Markup percentage using the absorption-cost approach.
4. Markup percentage using the variable-cost approach.

a
Solution 176 (12–14 min.)
P250,000
1. Fixed manufacturing overhead = ———— = P50 per unit
5,000
P55,000
Fixed selling and administrative expenses per unit = ———— = P11 per unit
5,000

16% × P8,250,000
2. Desired ROI per unit = ————————— = P264 per unit
5,000

P264 + (P10 + P11)

3. Absorption-cost markup percentage = ——————————— = 163%
P62 + P48 + P15 + P50

P264 + (P50 + P11)

4. Variable-cost markup percentage = ——————————— = 241%
P62 + P48 + P15 + P10

a
Ex. 177
Peachtree Doors, Inc. is in the process of setting a target price on its newly designed patio door.
Cost data relating to the door at a budgeted volume of 5,000 units is as follows:
Per Unit Total
Direct materials P100
Direct labor 170
Variable manufacturing overhead 80
Fixed manufacturing overhead P750,000
Variable selling and administrative expenses 25
Fixed selling and administrative expenses 375,000

Peachtree uses cost-plus pricing that provides it with a 25% ROI on its patio door line. A total of
P4,000,000 in assets is committed to production of the new door.

Instructions
1. Compute each of the following under the absorption-cost approach:
a. Markup percentage needed to provide desired ROI.
b. Target price of the patio door.
2. Compute each of the following under the variable-cost approach:
a. Markup percentage needed to provide desired ROI.
b. Target price of the patio door.
a
Solution 177 (12–14 min.)
1. Absorption-cost approach
a. Computation of unit manufacturing cost:
Per Unit
Direct materials P100
Direct labor 170
Variable manufacturing overhead 80
Fixed manufacturing overhead (P750,000 ÷ 5,000) 150
Total manufacturing cost P500

Computation of markup percentage to provide a 25% ROI:

Markup [25% × (P4,000,000 ÷ 5,000)] + [P25 + (P375,000 ÷ 5,000)] P300

Percentage = —————————————————————————— = —— =
60%
P500 P500

b. Computation of target price:

Target price: P500 + (60% × P500) = P800

2. Variable-cost approach
a. Computation of unit variable cost:
Per Unit
Direct materials P100
Direct labor 170
Variable manufacturing overhead 80
Variable selling and administrative expenses 25
Total variable cost P375

Computation of markup percentage to provide a 25% ROI:

Markup [25% × (P4,000,000 ÷ 5,000)] + [(P750,000 ÷ 5,000) + (P375,000 ÷

5,000)] Percentage =
—————————————————————————————————
P375
P425
= —— = 113.33%
P375

b. Computation of target price:

Target price: P375 + (113.33% × P375) = P800