A proposed transfer price may be a cost-plus price. Variable-cost-plus price is the price
Answer (D) is correct. The variable-cost-plus price is the price set by charging for variable cost plus either a lump sum or an additional markup but less than the full markup price. This permits top management to enter the decision process and dictate that a division transfer at variable cost plus some appropriate amount.
A proposed transfer price may be based upon the full-cost price. Full-cost price is the price
Answer (C) is correct. Full-cost price is the price usually set by an absorption-costing calculation and includes materials, labor, and a full allocation of manufacturing O/H. This full-cost price may lead to dysfunctional behavior by the supplying and receiving divisions, e.g., purchasing from outside sources at a slightly lower price that is substantially above the variable costs of internal production.
A limitation of transfer prices based on actual cost is that they
Answer (B) is correct. The optimal transfer price of a selling division should be set at a point that will have the most desirable economic effect on the firm as a whole while at the same time continuing to motivate the management of every division to perform efficiently. Setting the transfer price based on actual costs rather than standard costs would give the selling division little incentive to control costs.
Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?
Answer (B) is correct. A cost center is responsible for costs only. A profit center is responsible for costs and revenues. Hence, the transfer from the cost center must, by definition, be at a cost-based figure. The transfer should be at standard variable cost so as to isolate any variance resulting from Core’s operations Assuming fixed costs are not controllable in the short run, the relevant variance is the difference between actual cost and the standard variable cost.
Pazer Inc produces portable televisions Pazer’s product manager proposes to increase the cost structure by adding voice-activated volume/channel controls to the television, and also adding three additional repair personnel to deal with products returned due to defects. Are these costs value-added or nonvalue-added?
Cost of Voice-Activated Controls
Cost of Additional Repair Personnel
Answer (B) is correct. The additional cost of the voice-activated controls is a value-added cost because it provides new functionality for the consumer. The cost of additional repair personnel, on the other hand, is nonvalue-added since it is incurred to address deficiencies in quality.
Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs is the definition of
Answer (D) is correct. Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs is the definition of value engineering.
Vince, Inc., has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device?
I. Quality of the new device
II. Life of the new device
III. Customers’ relative preference for quality compared with price
Answer (D) is correct. Product pricing is a function of consumer demand, competitive factors, and the seller’s cost structure and profit objectives Thus the seller must consider the trade-off between the price and quality effects on demand. A better-quality product, for example, one with a relatively long useful life, is more costly to produce and therefore sells for a higher price, which in turn reduces the amount demanded.
The advantages of incorporating full product costs in pricing decisions include all the following except
Answer (A) is correct. By their nature, fixed costs are difficult to associate with individual products.
Which one of the following situations best lends itself to a cost-based pricing approach?
Answer (D) is correct. A situation involving a job costing system (i.e., a made-to-order product) would be most conducive to the use of a cost-based pricing approach. The other alternatives involve standard products being sold to new types of customers.
Companies that manufacture made-to-order industrial equipment typically use which one of the following?
Answer (A) is correct. A situation involving a job costing system (i.e., a made-to-order product) would be most conducive to the use of a cost-based pricing approach. The other alternatives involve standard products being sold to new types of customers.