Topic: Pricing Decisions

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  • 15 Marks

May 2023 – L2 – SA – Q7 – Pricing Decisions

Calculation of minimum price Kola Plc should quote for 400 units of special security padlock keys using learning curve principles.

Kola Plc produces and sells a brand of security padlock keys. Its budget for next year is as follows:

Further research showed that the time taken for the first 50 units was 1,800 hours and the first 100 units took 3,000 hours. The customer is insistent that Kola Plc at least quotes a price for his requirement of 400 units.

Kola Plc is reluctant because the order would divert labour away from the regular padlock keys, and they cannot recruit more staff. If the contract is taken on, the same material would be used, with fixed production overheads of N150,000 and N30,000 administration costs.

Required:

Calculate the minimum price Kola Plc should quote for the 400 units of the special padlock keys.
(Total 15 Marks)

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  • 20 Marks

PM – Nov 2019 – L2 – Q5 – Pricing Decisions

Evaluate profitability and ROI under different transfer pricing schemes between Division A and B of Ezeabunafo Nigeria Ltd.

Ezeabunafo Nigeria Limited, an aluminium company, has two divisions, A and B.
Division A manufactures a single uniform product, which is partly sold in the
external market and partly transferred to division B where it forms the major sub –
assembly for that division‟s product.
The unit cost for each division‟s product is as shown here under:

Past data shows that average of 10,000 units of its products are sold on the
external market each year by Division A at the standard price of N60.
In addition to the external sales, 5,000 units are transferred annually to Division B
at a transfer price of N58 per unit (as above). The transfer price is derived by
deducting variable selling and packaging expenses from the external price since
these expenses are not incurred for internal transfers.
Division B‟s manager disagrees with the basis used to set the transfer price. He
contends that the transfer price should be made at variable cost plus an agreed
(minimal) mark up. It is his view that under the present set-up, his division is
taking output that Division A would be unable to sell at the price of N60.
A study commissioned by the Marketing Director consequent on this disagreement
shows the following:

Division B‟s manager maintains that the study has buttressed his case and calls for
a transfer price of N24 which he points out, would give Division B a reasonable
contribution to its fixed overheads as well as enable B to earn a reasonable profit
which also leads to an enhanced company-wide output and profit performance.

Required:
a. Calculate the contribution at alternative selling prices shown in the study for Division A and identify the price that maximizes Division A’s profit. (6 Marks)
b. Calculate the contribution at alternative prices for Division B and determine if the current selling price of N180 maximizes the firm’s overall profit. (5 Marks)
c. Assuming a transfer price equal to Division A’s variable costs, calculate the contribution for Division B at alternative prices. (3 Marks)
d. Calculate the contribution per unit and comment on how the whole firm is affected under this situation. (3 Marks)
e. Evaluate the effect on company profits if Division B’s manager’s suggestion of a N24 transfer price is adopted. (3 Marks)

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  • 20 Marks

PM – Nov 2019 – L2 – Q3 – Pricing Decisions

Evaluate divisional and company profit, ROI, and RI for Rinc Nigeria Ltd.

Rinc Nigeria Limited has two divisions, A and B. Division A specializes in the manufacture of a special part of a product while Division B completes the production and sells the final product. Division A also sells its components to third parties, and Division B can buy parts from external suppliers. Both divisions are profit centers.

The following are for the month of November:

Required:
a. Calculate the profit made by each division and the company as a whole for November. (10 Marks)
b. Calculate the ROI and RI of the divisions and the company. (5 Marks)
c. Discuss the advantages and disadvantages of ROI and RI as parameters for appraising divisional performance. (5 Marks)

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  • 20 Marks

PM – Nov 2020 – L2 – Q4 – Pricing Decisions

Analyze profitability of divisions and the effect of transfer pricing changes for Adeb Nigeria Limited.

Adeb Nigeria Limited has two divisions, Eastern and Northern divisions. Eastern division makes materials that are used to manufacture special blocks. It transfers some of these materials to the Northern division and sells some of the materials externally to other block manufacturers. Northern division makes special blocks from the materials and sells them to traders in building materials.

The production capacity of Eastern division is 10,000 tonnes per month. At present, sales are limited to 5,000 tonnes to external customers and 3,000 tonnes to Northern division.

The transfer price was agreed at ₦200 per tonne in line with the external sales trade price at 1st July which was the beginning of the budget year. From 1st December, however, strong competition in the market has reduced the market price for the materials to ₦180 per tonne.

The manager of the Northern division has suggested that the transfer price for the materials from Eastern division should be the same as for external customers. The manager of Eastern division rejected this suggestion on the basis that the original budget established the transfer price for the entire financial year.

From each tonne of materials, Northern division produces 10 blocks, which it sells at ₦40 per block. It would sell a further 20,000 blocks if the price were reduced to ₦32 per block.

Other relevant data are given below:

Division Eastern Northern
Variable cost per tonne ₦70 ₦60
Fixed cost per month ₦150,000 ₦60,000

The variable costs of Northern division exclude the transfer price of materials from Eastern division.

Required:
a. Prepare estimated profit statements for the month of December for each division and for Adeb Nigeria Limited as a whole, based on transfer prices of ₦200 per tonne and ₦180 per tonne, when producing at:
i. 80% capacity
ii. 100% capacity, assuming Northern division reduces the selling price to ₦32. (10 Marks)

b. Comment on the effect that might result from a change in the transfer price from ₦200 to ₦180. (5 Marks)

c. Suggest an alternative transfer price that would provide an incentive for Northern division to reduce the selling price and increase sales by 20,000 blocks a month. (5 Marks)

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  • 15 Marks

PM – Nov 2021 – L2 – Q7 – Pricing Decisions

Calculate transfer prices to meet residual income targets and evaluate sub-optimal decisions for Garki plc.

Garki plc is a holding company with four divisions, including Alba and Beta Divisions. Alba Division produces a component that it sells externally and can also transfer to other divisions within the group. Beta Division uses the components from Alba Division as raw material for its final product. The division can also obtain components from external suppliers. The components from Alba Division undergo further processing at a cost of N4.50 per unit before they are sold to the external market.

The Board of Directors has set up a performance scheme for the divisional managers, including setting performance targets for the next financial year. The following budgeted information is available:

Alba Division Beta Division
Maximum Production Capacity 900,000 units –
Sales to External Customers 700,000 units –
Selling Price (N) N6.80 –
Variable Unit Cost (N) N4.90 –
Divisional Fixed Costs N160,000 N140,000
Capital Employed N4 million N3 million
Residual Income N700,000 N500,000
Divisional Cost of Capital 12% 10%

Beta Division has asked Alba Division to quote a transfer price for the components.

Required:
a. Calculate the transfer price per unit which Alba Division should quote to Beta Division in order for its budgeted residual income target to be achieved. (3 Marks)
b. Calculate the selling price per unit which Beta Division should quote to the external market in order for its budgeted residual income target to be achieved, based on the transfer price quotation. (State clearly your assumptions.) (3 Marks)
c. Explain why the transfer price calculated in (a) may lead to sub-optimal decision-making from the point of view of Garki plc as a whole. (5 Marks)
d. In what circumstances would a negotiated transfer price be used instead of a market-based price? (4 Marks)

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  • 15 Marks

PM – May 2019 – L2 – Q7 – Pricing Decisions

Evaluates various pricing methods for a new product and calculates prices based on different strategies.

Tetpack Nigerian Limited (TNL) produces various types of packaging products for the food industry. TNL has just introduced a new type of pack, and its marketing manager is considering how to penetrate the market with the pack. The following pricing strategies have been suggested:

i. Market skimming price
ii. Market penetration price
iii. Full cost plus price
iv. Return on investment price
v. Marginal cost plus price

The management accountant has provided the following data about the pack:

  • Non-current assets needed for the production of the pack: N2,000,000
  • Working capital requirements: N400,000
  • Expected annual sales volume: 40,000 units
  • Variable production costs: N60 per unit
  • Fixed production costs: N300,000 each year
  • Annual non-production costs: N100,000
  • Markup:
    • Full cost plus price: 25%
    • Marginal cost plus price: 40%
    • Target return on investment: 10% per year

Required:
a. Discuss the above pricing methods and advise when each could be used. (10 Marks)

b. Calculate what the price of the pack should be if its price is based on:
i. Full cost plus pricing (1½ Marks)
ii. Marginal cost plus pricing (1½ Marks)
iii. Return on investment pricing (2 Marks)

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  • 15 Marks

May 2023 – L2 – SA – Q7 – Pricing Decisions

Calculation of minimum price Kola Plc should quote for 400 units of special security padlock keys using learning curve principles.

Kola Plc produces and sells a brand of security padlock keys. Its budget for next year is as follows:

Further research showed that the time taken for the first 50 units was 1,800 hours and the first 100 units took 3,000 hours. The customer is insistent that Kola Plc at least quotes a price for his requirement of 400 units.

Kola Plc is reluctant because the order would divert labour away from the regular padlock keys, and they cannot recruit more staff. If the contract is taken on, the same material would be used, with fixed production overheads of N150,000 and N30,000 administration costs.

Required:

Calculate the minimum price Kola Plc should quote for the 400 units of the special padlock keys.
(Total 15 Marks)

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  • 20 Marks

PM – Nov 2019 – L2 – Q5 – Pricing Decisions

Evaluate profitability and ROI under different transfer pricing schemes between Division A and B of Ezeabunafo Nigeria Ltd.

Ezeabunafo Nigeria Limited, an aluminium company, has two divisions, A and B.
Division A manufactures a single uniform product, which is partly sold in the
external market and partly transferred to division B where it forms the major sub –
assembly for that division‟s product.
The unit cost for each division‟s product is as shown here under:

Past data shows that average of 10,000 units of its products are sold on the
external market each year by Division A at the standard price of N60.
In addition to the external sales, 5,000 units are transferred annually to Division B
at a transfer price of N58 per unit (as above). The transfer price is derived by
deducting variable selling and packaging expenses from the external price since
these expenses are not incurred for internal transfers.
Division B‟s manager disagrees with the basis used to set the transfer price. He
contends that the transfer price should be made at variable cost plus an agreed
(minimal) mark up. It is his view that under the present set-up, his division is
taking output that Division A would be unable to sell at the price of N60.
A study commissioned by the Marketing Director consequent on this disagreement
shows the following:

Division B‟s manager maintains that the study has buttressed his case and calls for
a transfer price of N24 which he points out, would give Division B a reasonable
contribution to its fixed overheads as well as enable B to earn a reasonable profit
which also leads to an enhanced company-wide output and profit performance.

Required:
a. Calculate the contribution at alternative selling prices shown in the study for Division A and identify the price that maximizes Division A’s profit. (6 Marks)
b. Calculate the contribution at alternative prices for Division B and determine if the current selling price of N180 maximizes the firm’s overall profit. (5 Marks)
c. Assuming a transfer price equal to Division A’s variable costs, calculate the contribution for Division B at alternative prices. (3 Marks)
d. Calculate the contribution per unit and comment on how the whole firm is affected under this situation. (3 Marks)
e. Evaluate the effect on company profits if Division B’s manager’s suggestion of a N24 transfer price is adopted. (3 Marks)

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  • 20 Marks

PM – Nov 2019 – L2 – Q3 – Pricing Decisions

Evaluate divisional and company profit, ROI, and RI for Rinc Nigeria Ltd.

Rinc Nigeria Limited has two divisions, A and B. Division A specializes in the manufacture of a special part of a product while Division B completes the production and sells the final product. Division A also sells its components to third parties, and Division B can buy parts from external suppliers. Both divisions are profit centers.

The following are for the month of November:

Required:
a. Calculate the profit made by each division and the company as a whole for November. (10 Marks)
b. Calculate the ROI and RI of the divisions and the company. (5 Marks)
c. Discuss the advantages and disadvantages of ROI and RI as parameters for appraising divisional performance. (5 Marks)

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  • 20 Marks

PM – Nov 2020 – L2 – Q4 – Pricing Decisions

Analyze profitability of divisions and the effect of transfer pricing changes for Adeb Nigeria Limited.

Adeb Nigeria Limited has two divisions, Eastern and Northern divisions. Eastern division makes materials that are used to manufacture special blocks. It transfers some of these materials to the Northern division and sells some of the materials externally to other block manufacturers. Northern division makes special blocks from the materials and sells them to traders in building materials.

The production capacity of Eastern division is 10,000 tonnes per month. At present, sales are limited to 5,000 tonnes to external customers and 3,000 tonnes to Northern division.

The transfer price was agreed at ₦200 per tonne in line with the external sales trade price at 1st July which was the beginning of the budget year. From 1st December, however, strong competition in the market has reduced the market price for the materials to ₦180 per tonne.

The manager of the Northern division has suggested that the transfer price for the materials from Eastern division should be the same as for external customers. The manager of Eastern division rejected this suggestion on the basis that the original budget established the transfer price for the entire financial year.

From each tonne of materials, Northern division produces 10 blocks, which it sells at ₦40 per block. It would sell a further 20,000 blocks if the price were reduced to ₦32 per block.

Other relevant data are given below:

Division Eastern Northern
Variable cost per tonne ₦70 ₦60
Fixed cost per month ₦150,000 ₦60,000

The variable costs of Northern division exclude the transfer price of materials from Eastern division.

Required:
a. Prepare estimated profit statements for the month of December for each division and for Adeb Nigeria Limited as a whole, based on transfer prices of ₦200 per tonne and ₦180 per tonne, when producing at:
i. 80% capacity
ii. 100% capacity, assuming Northern division reduces the selling price to ₦32. (10 Marks)

b. Comment on the effect that might result from a change in the transfer price from ₦200 to ₦180. (5 Marks)

c. Suggest an alternative transfer price that would provide an incentive for Northern division to reduce the selling price and increase sales by 20,000 blocks a month. (5 Marks)

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  • 15 Marks

PM – Nov 2021 – L2 – Q7 – Pricing Decisions

Calculate transfer prices to meet residual income targets and evaluate sub-optimal decisions for Garki plc.

Garki plc is a holding company with four divisions, including Alba and Beta Divisions. Alba Division produces a component that it sells externally and can also transfer to other divisions within the group. Beta Division uses the components from Alba Division as raw material for its final product. The division can also obtain components from external suppliers. The components from Alba Division undergo further processing at a cost of N4.50 per unit before they are sold to the external market.

The Board of Directors has set up a performance scheme for the divisional managers, including setting performance targets for the next financial year. The following budgeted information is available:

Alba Division Beta Division
Maximum Production Capacity 900,000 units –
Sales to External Customers 700,000 units –
Selling Price (N) N6.80 –
Variable Unit Cost (N) N4.90 –
Divisional Fixed Costs N160,000 N140,000
Capital Employed N4 million N3 million
Residual Income N700,000 N500,000
Divisional Cost of Capital 12% 10%

Beta Division has asked Alba Division to quote a transfer price for the components.

Required:
a. Calculate the transfer price per unit which Alba Division should quote to Beta Division in order for its budgeted residual income target to be achieved. (3 Marks)
b. Calculate the selling price per unit which Beta Division should quote to the external market in order for its budgeted residual income target to be achieved, based on the transfer price quotation. (State clearly your assumptions.) (3 Marks)
c. Explain why the transfer price calculated in (a) may lead to sub-optimal decision-making from the point of view of Garki plc as a whole. (5 Marks)
d. In what circumstances would a negotiated transfer price be used instead of a market-based price? (4 Marks)

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  • 15 Marks

PM – May 2019 – L2 – Q7 – Pricing Decisions

Evaluates various pricing methods for a new product and calculates prices based on different strategies.

Tetpack Nigerian Limited (TNL) produces various types of packaging products for the food industry. TNL has just introduced a new type of pack, and its marketing manager is considering how to penetrate the market with the pack. The following pricing strategies have been suggested:

i. Market skimming price
ii. Market penetration price
iii. Full cost plus price
iv. Return on investment price
v. Marginal cost plus price

The management accountant has provided the following data about the pack:

  • Non-current assets needed for the production of the pack: N2,000,000
  • Working capital requirements: N400,000
  • Expected annual sales volume: 40,000 units
  • Variable production costs: N60 per unit
  • Fixed production costs: N300,000 each year
  • Annual non-production costs: N100,000
  • Markup:
    • Full cost plus price: 25%
    • Marginal cost plus price: 40%
    • Target return on investment: 10% per year

Required:
a. Discuss the above pricing methods and advise when each could be used. (10 Marks)

b. Calculate what the price of the pack should be if its price is based on:
i. Full cost plus pricing (1½ Marks)
ii. Marginal cost plus pricing (1½ Marks)
iii. Return on investment pricing (2 Marks)

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