Soal 1

Ardmore Inc., manufactures heating and air conditioning units in its six divisions. One division the
Components Division, produces electronic components that can be used by the other five. All the
components produced by this division can be sold to outside customers; however, form the
beginning, about 70 percent of its output has been used internally. The current policy requires that
all internal transfer of components be transferred a full cost.
Recently, Chynthia Busby, the new chief executive officer of Ardmore, decided to
investigate the transfer pricing policy. She was concerned that the current method of pricing internal
transfers might force decisions by divisional managers that would be suboptimal for the firm. As
part of her inquiry, she gathered some information concerning part 4CM, used by the Small AC
Division in its production of a window air conditioner, Model 7AC.
The Small AC Division sells 10,000 units of Model 7AC each year at a unit price of $58.
Given current market conditions, this is the maximum price that the division can charge for Model
7AC. The cost of manufacturing the air conditioner is computed as follows :

Part4CM $ 6.45
Direct materials 23.00
Direct labor 15.00
Variable overhead 3.50
Fixed overhead 6.50
Total unit cost $ 54.45

The window unit is produced efficiently, and no further reduction in manufacturing costs is
possible.

The manager of the Components Division indicated that he could sell 10,000 units (the
division’s capacity for this part) of part 4CM to outside buyers at $12 per unit. The Small AC
Division could also buy the part for $12 from external suppliers. The following detail on the
manufacturing cost of the component was provided:

Direct materials $ 2.75

Direct labor 0.80
Variable overhead 1.10
Fixed overhead 1.80
Total unit cost $ 6.45

Required :

1. Compute the firmwide contribution margin associated with Part 4CM and Model 7AC. Also,
compute the contribution margin earned by each division.
2. Suppose that Cynthia Busby abolisher the current transfer pricing policy and gives divisions
autonomy in setting transfer prices. Can you predict what transfer price the manager of the
Components Division will set ? What should be the minimum transfer price for this part?
The maximum transfer price ?
3. Given the new transfer pricing policy, predict how this will affect the production decision
for Model 7AC of the manager of the Small AC Division. How many units of Part 4CM will
manager of the Small AC Division purchase, either internally or externally?
4. Given the new transfer price set by the Components Division and your answer to
Requirement 3, how many units of 4CM will be sold externally?
Soal 2
Salem Electronics currently produces two product: a programmable calculator and a tape recorder.
A recent marketing study indicated that consumers would react favorably to a radio with the Salem
brand name. Owner Kenneth Booth was interested in the possibility. Before any commitment was
made, however, Kenneth wanted to know what the incremental fixed costs would be and how many
radios must be sold to cover these costs.
In response, betty Johnson, the marketing manager, gathered data for the current products to
help in projecting overhead costs for the new product. The overhead costs based on 30,000 direct
labor hours follow. (the high-low method using direct labor hours as the independent variable was
used to determine the fixed and variable costs.)
Fixed Variable

Materials handling $ --- $18,000

Power --- 22,000
Engineering 100,000 ---
Machine costs 30,000* 80,000
Inspection 40,000 ---
Setups 60,000 ---

*All depreciation

The following activity data were also gathered :

Calculators Recorders

Units produced 20,000 20,000

Direct labor hours 10,000 20,000
Machine hours 10,000 10,000
Materials moves 120 120
Kilowatt-hours 1,000 1,000
Engineering hours 4,000 1,000
Hours of inspection 700 1,400
Number of setups 20 40

Betty was told that a plantwide overhead rate was used to assign overhead costs based on direct
labor hours. She was also informed by engineering that if 20,000 radios were produced and sold
(her projection based on her marketing study), they would have the same activity data as the
recorders (use the same direct labor hours, machine hours, setups, and so on.
Engineering also provided the following additional estimates for the proposed product line:

Prime costs per unit $ 18

Depreciation on new equipment 18,000

Upon receiving these estimates, Betty did some quick calculations and became quite excited. With a
selling price of $26 and just$18,000 of additional fixed costs, only 4,500 units had to be sold to
break even. Since Betty was confident that 20,000 units sold, she was prepared to stongly
recommend the new product line.
Required :

1. Reproduce Betty’s break-even calculation using conventional cost assignments. How much
additional profit would be expected under this scenario, assuming that 20,000 radios are sold?

2. Use an activity-based costing approach, and calculate the break-even point and the incremental
profit that would be earned on sales of 20, 000 units.

3. Explain why the CVP analysis done in Requirement 2 is more accurate that the analysis done in
Requirement 1. What recommendation would you make ?

Soal 3

Good Scent, Inc., produces two colognes: Rose and Violet. Of the two, Rose is more popular. Data
concerning the two products follow:

Rose Violet

Expected sales (in cases) 50,000 10,000

Selling price per case $100 $80
Direct labor hours 36,000 6,000
Machine hours 10,000 3,000
Receiving orders 50 25
Packing orders 100 50
Material cost per case $50 $43
Direct labor cost per case $10 $7

The company uses a conventional costing system and assigns overhead costs to product using direct
labor hours. Annual overhead costs follow. They are classified as fixed or variable with respect to
direct labor hours.

Fixed Variable

Direct labor benefits $ --- $200,000

Machine costs 200,000* 262,000
Receiving department 225,000 -----
Packing department 125,000 -----
Total costs 550,000 $462,000

*All depreciation.

Required :

1. Using the conventional approach, compute the number of cases of Rose and the number of
cases of Violet that must be sold for the company to break even.

2. Using an activity-based approach, compute the number of cases of each product that must be
sold for the company to break even.