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. It sells the motors to manufacturers that assemble and sell the appliances. The companys market research department has discovered a market for electric motors used for trolling in small fishing boats, which Marklee presently does not produce. The market research department has indicated that mors likely would sell for $ ! each. " similar motor currently being produced has the following manufacturing costs# $irect materials $irect labor 'verhead Total $% 1& ( $ %

"ssume that Marklee desires an operating profit margin of 1& percent. a. )uppose that Marklee uses cost*plus pricing, setting the price 1&+ above the manufacturing cost. ,hat price should it charge for the motorb. )uppose that Marklee uses target costing. ,hat price should it charge for a trolling motor- ,hat is the highest acceptable manufacturing cost for which Marklee would be willing to produce the motorc. ,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 for household use. The vases can be sold e/ternally or internally to )onnets 1lorist $ivision. )ales and cost data on a basic ten*inch vase are given below# 2nit selling price 2nit variable cost 2nit product fi/ed cost4 5ractical capacity in units
4$%3&,&&63&&,&&&

$%.3& $1.1& $&.3& 3&&,&&&

$uring the coming year, the 0lass $ivision e/pects to sell 73&,&&& units of this vase. The 1lorist $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 1lorist $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 selling internally and that he would split the savings by offering a $&.&3 discount on the usual price. Required 1. ,hat is the minimum transfer price that the 0lass $ivision would be willing to accept- ,hat is the ma/imum transfer price that the 1lorist $ivision would be

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 that she would agree to the transfer price of $%. 3- )uppose she counters with an offer 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 full manufacturing cost. ,hat would the transfer price be- ,ould the transfer take placeConstrained Optimization and the T.O.C. %. <ackson .nterprises makes and sells three types of stuffed toys. Management is trying to determine the most profitable mi/. )ales prices, demand, and use of manufacturing inputs follow# =ears >ows $ogs )ales price $13 $7% $?3 "nnual demand :units; %&,&&& 1&,&&& 7&,&&& Input re@uirement per unit $irect material .3 yards .7 yards .! yards $irect labor .A hours % hours A hours >osts Bariable costs Materials $1& per yard $C ( 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 satisfy the annual demandb. ,hich of the three product lines makes the most profitable use of the constrained resource, direct laborc. 0iven the information in the problem so far, what product mi/ do you recommendd. 9ow much operating profit should your recommended product mi/ generatee. )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 increase from $( to $?.3& per hour. ,hat additional product:s; should <ackson manufacture and what additional profit would be e/pected with the use of the added shift-