8/13/2019 Pricing Prolicies, Transfer Pricing, & Constrained Op. Probs FA05

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ACCY 302 University of Illinois at Urbana-Champaign

Target costing vs. Target pricing

1. Marklee Industries makes electric motors for a variety of small appliances. Itsells the motors to manufacturers that assemble and sell the appliances. Thecompanys market research department has discovered a market for electricmotors used for trolling in small fishing boats, which Marklee presently does not

produce. The market research department has indicated that mors likely wouldsell for $! each. " similar motor currently being produced has the followingmanufacturing costs#

irect materials $%irect labor 1&'verhead (Total $%

"ssume that Marklee desires an operating profit margin of 1& percent.

a. )uppose that Marklee uses cost*plus pricing, setting the price 1&+ above themanufacturing cost. hat price should it charge for the motor-b. )uppose that Marklee uses target costing. hat price should it charge for a

trolling motor- hat is the highest acceptable manufacturing cost for whichMarklee would be willing to produce the motor-

c. ould you produce such a motor if you were a manager at Marklee- /plain.

Transfer pricing

%. The 0lass ivision of )onnet, Inc., manufactures a variety of glasses and vases forhousehold use. The vases can be sold e/ternally or internally to )onnets loristivision. )ales and cost data on a basic ten*inch vase are given below#

2nit selling price $%.3&2nit variable cost $1.1&2nit product fi/ed cost4 $&.3&5ractical capacity in units 3&&,&&&

4$%3&,&&63&&,&&&

uring the coming year, the 0lass ivision e/pects to sell 73&,&&& units of thisvase. The lorist ivision currently plans to buy 13&,&&& vases on the outside market for$%.3& each. 8eil 9arper, manager of the 0lass ivision, approached Martha )trahorn,manager of the lorist ivision, and offered to sell the 13&,&&& vases for $%.3 each.

8eil e/plained to Martha that he can avoid selling costs of $&.1& per vase by sellinginternally and that he would split the savings by offering a $&.&3 discount on the usualprice.

Required

1. hat is the minimum transfer price that the 0lass ivision would be willing toaccept- hat is the ma/imum transfer price that the lorist ivision would be

8/13/2019 Pricing Prolicies, Transfer Pricing, & Constrained Op. Probs FA05

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ACCY 302 University of Illinois at Urbana-Champaign

willing to pay- )hould an internal transfer take place- hat would be the benefit:or loss; to the firm as a whole if the internal transfer takes place-

%. )uppose Martha knows that the 0lass ivision has idle capacity. o you thin thatshe would agree to the transfer price of $%.3- )uppose she counters with anoffer to pay $%.&&. If you were 8eil, would you be interested in this price-

/plain with supporting computations.7. )uppose that )onnet, Inc., policy is that all internal transfers take place at fullmanufacturing cost. hat would the transfer price be- ould the transfer takeplace-

Constrained Optimization and the T.O.C.

%. ows ogs)ales price $13 $7% $?3

"nnual demand :units; %&,&&& 1&,&&& 7&,&&&Input re@uirement per unitirect material .3 yards .7 yards .! yardsirect labor .A hours % hours A hours

>ostsBariable costs

Materials $1& per yardC ( per hour '9 % per dl*hr.Marketing 1&+ of sales price

"nnual fi/ed costs Manufacturing $1(,&&&

Marketing ,&&&"dministration 13,&&&

The company faces two limits# :1; the volume of stuffed toys that it can sell and:%; 7&,&&& direct labor*hours per year caused by the plant layout.

a. 9ow much operating profit could the company earn if it were able to satisfythe annual demand-

b. hich of the three product lines makes the most profitable use of theconstrained resource, direct labor-

c. 0iven the information in the problem so far, what product mi/ do yourecommend-

d. 9ow much operating profit should your recommended product mi/ generate-e. )uppose that the company could e/pand its labor capacity by running an e/tra

shift that could provide up to 1&,&&& more hours. The cost would increasefrom $( to $?.3& per hour. hat additional product:s; should