Cost-plus pricing

MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

Question

Zora Shoes Ltd sells 5,000 pairs of shoes each month through its Production/Sales department. 25% of the shoes (by number) sold require repairs which are carried out by the company’s Repairs department. The Production/Sales department collects an additional GH¢5 for each pair of shoe requiring repairs as an anticipated repair charge when the shoes are sold to customers. The following additional information is available:

	GH¢
Material	2.50
Labour	1.5 per Labour hour
Variable Overheads	0.5 per Labour hour
Fixed Overheads	1.15 per Labour hour

Each repair takes 2 labour hours and the Repairs department processes 1,250 repairs each month (5,000 pairs × 25%). The Production/Sales department sells each pair of shoe for GH¢22.

Required:
(i) Calculate the individual profits of the Production/Sales department, Repairs department and Zora Ventures if repairs are done by the repairs department of Zora Ventures at either full cost plus 20% margin on sales or at marginal cost. (8 marks)
(ii) Lee Shoe Repairs has offered to repair each pair of shoe for Zora Ventures at GH¢10.00, a price which is cheaper than what the repairs department is offering. Should Zora Ventures accept this offer? (5 marks)
(iii) Identify THREE other factors Zora Ventures should consider in finalizing the decision in (ii) above? (3 marks)
(iv) Explain TWO principles of a good transfer pricing method.

Answer

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Tags: Cost-plus pricing, goal congruence, Marginal Costing, outsourcing decision, subunit autonomy, transfer pricing
Level: Level 2

Topic: Transfer pricing

MA – L2 – Q50 – Pricing Strategies

Calculate prices for simplified Product Z using full cost-plus and budgeted profit pricing policies for Nexco Industries.

Question

Nexco Industries Limited makes Product Z in department C. For the year commencing 1 January Year 7, the following budget has been formulated for department C:

	GH¢000
Direct costs
Materials	60
Labour	40
	100
Production overheads	100
Full production cost	200
Administrative and marketing overheads	50
Full cost of sale	250
Profit	50
Revenue (see note)	300

Note: This revenue is from budgeted sales of 20,000 units.
Production overheads are absorbed on the basis of 100% of direct costs. However, half of these costs are fixed, and the other half are variable. It is assumed that they vary with the cost of materials.
The administrative and marketing overheads are based on 25% of factory costs and do not vary within wide ranges of activity. A profit margin of 20% is applied to the full cost of sale. This also results in a price that appears to be fair to customers.
Halfway through the year to 31 December Year 7, it became clear that actual sales of Product Z would be 25% below budget. At about the same time that this shortfall in sales became evident, a customer asked about buying 5,000 units of a simplified version of Product Z. If Nexco Industries Limited were to produce this simplified model for the customer, the direct material and labour costs would be lower. It is estimated that materials costing GH¢12,000 and direct labour of GH¢8,000 would be required to produce the 5,000 units. As the production could take place within the firm’s existing capacity, fixed costs would not be affected.

Required:
(a) Calculate the prices that Nexco Industries Limited should quote to the customer for each unit of the simplified product, assuming that the following pricing policies are applied:
(i) Full cost plus pricing, on the current basis.
(ii) A price that would enable the company to achieve its original budgeted profit.

(b) Give your advice on the price that should be quoted to the customer.

Answer

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Tags: Budgeted profit, Cost-plus pricing, Overhead absorption, Pricing, Profit Margin, Selling price, variable costs
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q49 – Pricing Strategies

Calculate selling price for Product X using Nexco Limited’s normal pricing policy with a 16.67% profit margin.

Question

Nexco Limited has developed a new product, Product X, that it wishes to introduce to the market. The cost per unit is expected to be as follows, assuming annual sales of 40,000 units.

Cost per unit

Cost Item	GH¢
Direct materials:
Material M1 (2 litres at GH¢15)	30
Material M2 (0.5 litres at GH¢8)	4
Direct labour (3 hours at GH¢10)	30
Fixed overheads (3 hours at GH¢12)	36
Full cost	100

It has been company policy to price products to achieve a profit of 16.67% (one-sixth) on the sales price.

Required:
(a) Calculate the selling price that would be charged if Nexco Limited applies its normal pricing policy.

(b) If Nexco Limited decided to price products at marginal cost plus, what mark-up on the marginal cost would be required to obtain the same selling price as in (a)?

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost-plus pricing, decision making, Pricing, Profit Margin, Selling price
Level: Level 2

Topic: Decision making techniques

Tag (SQ): Cost-plus pricing

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MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

MA – L2 – Q50 – Pricing Strategies

Calculate prices for simplified Product Z using full cost-plus and budgeted profit pricing policies for Nexco Industries.

MA – L2 – Q49 – Pricing Strategies

Calculate selling price for Product X using Nexco Limited’s normal pricing policy with a 16.67% profit margin.

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MA – L2 – Q54 – Transfer pricing

Calculate profits for Zora Shoes Ltd's departments under different pricing methods, evaluate an outsourcing offer, and explain transfer pricing principles.

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MA – L2 – Q50 – Pricing Strategies

Calculate prices for simplified Product Z using full cost-plus and budgeted profit pricing policies for Nexco Industries.

You're reporting an error for "MA – L2 – Q50 – Pricing Strategies"

MA – L2 – Q49 – Pricing Strategies

Calculate selling price for Product X using Nexco Limited’s normal pricing policy with a 16.67% profit margin.

You're reporting an error for "MA – L2 – Q49 – Pricing Strategies"

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