Pricing Calculations

Question 1

Product X is produced in two production cost centres. Budgeted data for product X are as follows:

Cost centre A:
Direct material cost per unit: £60.00
Direct labour hours per unit: 3
Direct labour rate per hour: £20.00
Production overhead absorption rate per direct labour hour: £12.24

Cost centre B:
Direct material cost per unit: £30.30
Direct labour hours per unit: 1
Direct labour rate per hour: £15.20
Production overhead absorption rate per direct labour hour: £14.94

General overheads are absorbed into product costs at a rate of 10% of total production cost.

If a 20% return on sales is required from product X, its selling price per unit should be:
A - £271.45
B - £282.31
C - £286.66
D - £298.60

Answer 1

D - £298.60

Total cost per unit:
Direct material: £60 + £30.30 = £90.30
Direct labour: £60.00 + £15.20 = £75.20
Production overhead: £36.72 + £14.94 = £51.66 (times the production overhead absorption rate by the amount of direct labour hours it takes)
——
Total production cost = £217.16

General overhead 10%: £21.72

Total cost = £217.16 + £21.72 = 238.88

Selling price = £298.60

Question 2

A company manufactures two products for which budgeted details for the forthcoming period are as follows:

£per unit:
Product L:
Materials 6.00
Labour (£15 per hour) 30.00

Product T:
Materials 9.00
Labour (£15 per hour) 22.50

Production overhead of £61,200 is absorbed on a labour hour basis. Budgeted output is 4,000 units of product L and 6,000 units of product T.

The company adds a mark up of 20% to total production cost in order to determine its unit selling prices.

The selling price per unit of product L is:
A - £47.52
B - £51.84
C - £54.00
D - £61.56

Answer 2

First total cost:

Product L:
Materials: £6.00
Labour: £30.00
Production overhead: 2 x 3.60 = 7.20
(£61,200/4,000 x 2 hours + 6,000 x 1,500)
—–
43.20

Selling price: £51.84

Question 3

Print Ltd manufactures ring binders which are embossed with the customer’s own logo. A customer has ordered a batch of 300 binders. The following data illustrate the cost for a typical batch of 100 binders:

£ per 100
Variable materials: 3
Wages (paid on a per binder basis): 10
Machine set up (fixed per batch): 3
Design and artwork (fixed per batch): 15
—-
58

Print Ltd absorbs production overhead at a rate of 20% of variable wages cost. A further 5% is added to the total production cost of each batch to allow for selling, distribution and administration overhead.

Print Ltd requires a profit margin of 25% of sales value.

The selling price for a batch of 300 binders should be:
A - £189.00
B - £193.20
C - £201.60
D - £252.00

Answer 3

Total cost:
Materials: 3 x 3 = 9
Wages: 10 x 3 = 30
Machine = 3
Design and artwork = 15
Variable wages: 30 x 20% = 6
—
Total production cost = 144.00

Total cost 151.20

Profit margin (151.20 x 25/75) = 50.40

Selling price for a batch of 300 = £201.60

C

Question 4

A firm makes special assemblies to customers’ orders and uses job costing.

The data for a period are:

Job A
Opening work in progress: £26,800
Material added in period: £17,275
Labour for period: £14,500

Job B
Opening work in progress: £42,790
Material added in period: 0
Labour for period: £3,500

Job C
Opening work in progress: 0
Material added in period: £18,500
Labour for period: £24,600

The budgeted overheads for the period were £126,000 and these are absorbed on the basis of
labour cost.

Job B was completed and delivered during the period and the firm wishes to earn a 33 1 /3% profit margin on sales

What should be the selling price of job B?

A - £69,435
B - £75,523
C - £84,963
D - £258,435

Answer 4

Job B:

Opening work in progress: 42,790
Material: 0
Labour for period:
(126,000/42,600) x 3,500 = 10,352
—-
Total cost: 56,642

84,963

Question 5

An item priced at £90.68, including local sales tax at 19%, is reduced in a sale by 20%.

The new price before sales tax is added is:

A - £58.76
B - £60.96
C - £72.54
D - £76.20

Answer 5

B - £60.96

Selling price = £90.68
= 119% of pre-tax price
∴ Selling price excluding tax = 100/119 × £90.68
= £76.20
∴ New price after 20% reduction = (100% – 20%) × £76.20
= £60.96

Question 6

Three years ago a retailer sold electronic calculators for £27.50 each. At the end of the first year he increased the price by 5% and at the end of the second year by a further 6%. At the end of the third
year the selling price was £29.69 each.

The percentage price change in Year 3 was a:
A - 2.7% decrease
B - 3% increase
C - 3% decrease
D - 3.4% decrease

Answer 6

C - 3% decrease

Selling price at end of Year 2 = £27.50 x 1.05 x 1.06 = £30.61

Change in selling price in Year 3 is therefore (30.61 - 29.69) = £0.92 reduction

Percentage change in Year 3 was therefore (-0.92/30.61) x 100% = -3%

Question 7

At a sales tax rate of 12%, an article sells for £84, including sales tax

if the sales tax rate increases to 17.5%, the new selling price will be:

A - £75.00
B - £86.86
C - £88.13
D - £88.62

Answer 7

C - £88.13

84 x 100/112
= £75

New price: 1.175 x £75
= £88.13

Question 8

A greengrocer sells apples either for 45p per kg, or in bulk at £9 per 25 kg bag.

The percentage saving per kg from buying a 25 kg bag is:

A - 9%
B - 11.25%
C - 20%
D - 25%

Answer 8

C - 20%

25 kg costs £9.00
∴ 1 kg costs = £9.00/25
= £0.36
∴ Percentage saving = (0.45 – 0.36)/0.45 × 100%
= 20%

Question 9

A skirt which cost a clothes retailer £50 is sold at a profit of 25% on the selling price

The profit is therefore:

A - £12.50
B - £16.67
C - £62.50
D - £66.67

Answer 9

B - £16.67

Cost = 75% of selling price
And cost = £50
Therefore, selling price = £50/75 × 100
= £66.67
Profit = (£66.67 – £50.00)
= £16.67

Question 10

Sunita sells an item for £240 on which there is a mark-up of 20%

What profit was made on this transaction?
A - £40
B - £48
C - £192
D - £200

Answer 10

A - £40

Cost + mark up = sales price
Assume cost = £100, then mark up is £20 and sales price = £120 (100 + 20 = 120)
Actual selling price = £240
The profit (mark up) is therefore £240/120 × 20 = £40

Question 11

A company calculates the prices of jobs by adding overheads to the prime cost and then adding 30% to total costs as a profit mark up. Job number Y256 was sold for £1,690 and incurred overheads
of £694

What was the prime cost of the job?

A - £489
B - £606
C - £996
D - £1,300

Answer 11

B - £606

1690 x 100/130 = 1,300
Less overhead: (694)
—
606

Question 12

A company prices its product at the full cost of £4.75 per unit plus 70%. A competitor has just launched a similar product selling for £7.99 per unit. The company wishes to change the price of its
product to match that of its competitor.

The product mark up percentage should be changed to:

A. 1.1%
B. 1.8%
C. 40.6%
D. 68.2%

Answer 12

D - 68.2%

£4.75 x 1.682 = £7.99

Question 13

Details from a retailer’s records concerning product D for the latest period are as follows.

Sales revenue 60,000
Purchases 40,000
Opening inventory 12,000
Closing inventory 2,000

The profit margin for product D is:
A - 16.7%
B - 20%
C - 33.3%
D - 50%

Answer 13

A - 16.7%

Cost of goods sold = purchases + opening inventory – closing inventory
= £40,000 + £12,000 – £2,000
= £50,000
Profit for period = £60,000 – £50,000
= £10,000
Percentage margin = (£10,000/£60,000) × 100%
= 16.7%

Question 14

A product’s marginal costs are 60% of its fixed costs. Selling prices are set on a full cost basis to achieve a margin of 20% of selling price.

To the nearest whole number, which percentage mark up on marginal costs would produce the same
selling price as the current pricing method?

A - 67%
B - 108%
C - 220%
D - 233%

Answer 14

D - 233%

%
Marginal cost 60
Fixed cost 100
——–
Full/total cost 160
Margin (160 × 20/80) 40
————
Selling price 200

Percentage mark up on marginal costs = 140/60 × 100% (fixed cost+ cost margin)/marginal cost
= 233%

Question 15

A company determines its selling prices by adding a mark up of 100% to the variable cost per unit.

If the selling price is increased by 50%, the quantity sold each period is expected to reduce by 40% but the variable cost per unit will remain unchanged

Which of the following statements is correct?
A - The total revenue will increase and the total contribution will increase.
B - The total revenue will increase and the total contribution will decrease.
C - The total revenue will decrease and the total contribution will increase.
D - The total will decrease and the total contribution will decrease

Answer 15

C - The total revenue will decrease and the total contribution will increase.

Let the current selling price be £P and the current sales volume be V units.
Since the mark up is 100% of variable costs,
Current contribution per unit = £0.5P
Current revenue = £VP
Current total contribution = £0.5VP
After the change in pricing policy, the sales volume will be 0.6V and the revised selling price will be
£1.5P. The variable cost per unit remains at £0.5P.
Revised revenue = volume sold × revised selling price
= 0.6V × £1.5P
= £0.9VP
Therefore, the revenue will decrease.
Revised total contribution = 0.6V (£1.5P – £0.5P)
= £0.6VP
Therefore, the total contribution will increase.

Question 16

The following information is available for the latest period:

Fixed costs: £160,000
Variable cost per unit: £4
Profit: £10,000

A 2% increase in selling price would not alter the number of units sold each period but the profit would increase by £5,000.

The current selling price per unit is:

A - £0.08
B - £10.00
C - £12.50
D - £12.75

Answer 16

C - £12.50

Profit = contribution – fixed costs
Therefore contribution = £10,000 + £160,000 = £170,000
If a 2% increase in selling price is £5,000 then the sales revenue before the increase was: £5,000/0.02
= £250,000
The variable costs are sales revenue less contribution, ie, £250,000 – £170,000
= £80,000
Number of units sold = £80,000/(variable cost per unit = £4)
= 20,000
Current selling price per unit is therefore:
£250,000/20,000 = £12.50

Question 17

A contract is agreed between a supplier and a buyer. The contract will take four weeks to complete and the price to be charged will be agreed upon at the point of sale as the actual costs incurred plus an agreed percentage mark up on actual costs.

The buyer is to be granted four weeks credit from the
point of sale.

Which of the following best describes how the risk caused by inflation will be allocated between the
supplier and the buyer?

A - The supplier and the buyer will each bear some of the inflation risk but not necessarily equally.
B - The supplier and the buyer will each bear equal amounts of the inflation risk
C - Only the supplier will bear the inflation risk
D - Only the buyer will bear the inflation risk

Answer 17

A - The supplier and the buyer will each bear some of the inflation risk but not necessarily equally.

Question 18

Which of the following statements is correct?

A - A cost-plus pricing method will enable a company to maximise its profits.
B - A selling price in excess of full cost will always ensure that an organisation will cover all its costs
C - The percentage mark up with full cost plus pricing will always be smaller than the percentage mark up with marginal cost-plus pricing
D - Since it necessary to forecast output volume to determine the overhead absorption rate, full cost-plus pricing takes account of the effect of price on quantity demanded.

Answer 18

C - The percentage mark up with full cost plus pricing will always be smaller than the percentage mark up with marginal cost-plus pricing

Question 19

The following data relate to Bailey plc, a manufacturing company with several divisions. Division X produces a single product which it sells to division Y and also to external customers.

Sales to division Y:
At £20 per unit = 100,000
Variable costs at £12 per unit = (60,000)
—
Contribution = 40,000
Fixed costs = (20,000)
—-
Profit = 20,000

External sales
At £25 per unit = 250,000
Variable costs at £12 per unit = (120,000)
—–
Contribution = 130,000
Fixed costs (50,000)
—-
Profit = 80,000

A supplier offers to supply 5,000 units at £18 each to division Y

If division Y buys from the external supplier and division X cannot increase its external sales, the
change in total profit of Bailey plc will be a
A - £10,000 decrease
B - £30,000 decrease
C - £10,000 increase
D - £30,000 increase

Answer 19

B - £30,000 decrease

The company will be buying 5,000 units at £18 each from the external supplier, rather than making
the units for £12 each in division X. Profit will therefore fall by 5,000 × £(18 – 12) = £30,000

Question 20

Which two of the following criteria should be fulfilled by a transfer pricing system?
A - Should encourage dysfunctional decision-making
B - Should encourage output at an organisation-wide profit-maximising level
C - Should encourage divisions to act in their own self interest
D - Should encourage divisions to make entirely autonomous decisions
E - Should enable the realistic measurement of divisional profit

Answer 20

B - Should encourage output at an organisation-wide profit-maximising level
E - Should enable the realistic measurement of divisional profit

An effective transfer pricing system should discourage dysfunctional decision-making and should not encourage divisions to act in their own self-interest. Instead it should encourage goal congruence where divisions do not make entirely autonomous decisions and there is an alignment between divisional goals and corporate goals

Question 21

Which of the following best describes a dual pricing system of transfer pricing?
A- The receiving division is charged with the market value of transfers made and the supplying division is credited with the standard variable cost.
B - The receiving division is credited with the market value of transfers made and the supplying division is charged with the standard variable cost
C - The receiving division is charged with the standard variable cost of transfers made and the supplying division is credited with the market value.
D - The receiving division is credited with the standard variable cost of transfers made and the supplying division is charged with the market value

Answer 21

C - The receiving division is charged with the standard variable cost of transfers made and the supplying division is credited with the market value.

The use of standard cost ensures that efficiencies and inefficiencies are not transferred to the receiving division. The use of variable cost avoids the situation where the receiving division perceives the supplying division’s fixed costs to be variable costs of the organisation as a whole. This could lead to sub-optimal decisions

Question 22

Division P produces plastic mouldings, all of which are used as components by Division Q. The cost schedule for one type of moulding, item 103, is shown below.

Direct material cost per unit £3.00
Direct labour cost per unit £4.00
Variable overhead cost per unit £2.00
Fixed production overhead costs each year £120,000
Annual demand from Division Q is expected to be 20,000 units

Two methods of transfer pricing are being considered:
1) Full production cost plus 40%
2) A two-part tariff with a fixed fee of £200,000 each year

The transfer price per unit of item 103 transferred to Division Q using both of the transfer pricing
methods listed above is:

A - (1): £12.60; (2): £9
B - (1): £12.60; (2): £19
C - (1): £21.00; (2): £9
D - (1): £21.00; (2): £19

Answer 22

C - (1): £21.00; (2): £9

Direct material cost per unit 3.00
Direct labour cost per unit 4.00
Variable overhead cost per unit 2.00
—-
9.00
Fixed production overhead absorbed per unit 6.00
—–
15.00
Add: 40% of full production cost (£15 × 40%) 6.00
Total cost plus 21.00

Fixed fee: Charge without the fixed production overhead absorbed and the 40% mark-up

However, the fixed fee is not unitised in a two-part tariff system. The charge of £200,000 is made
regardless of the number of units actually transferred

Question 23

A and B are two divisions of company C. A manufactures two products, the X and the Y. The X is sold outside the company. The Y is sold only to division B at a unit transfer price of £410. The unit cost of
the Y is £370 (variable cost £300 and absorbed fixed overhead £70). Division B has received an offer
from another company to supply a substitute for product Y at a price of £330 per unit. Assume
Division A and B have spare operating capacity.

Which of the following statements is correct with regard to the offer from the other company?
A - The offer is not acceptable from the point of view of company C and the manager of Division B will make a sub-optimal decision
B - The offer is not acceptable from the point of view of company C and the manager of Division B will not make a sub-optimal decision
C - The offer is acceptable from the point of view of company C and the manager of Division B will make a sub-optimal decision.
D - The offer is acceptable from the point of view of company C and the manager of Division B will not make a sub-optimal decision

Answer 23

A - The offer is not acceptable from the point of view of company C and the manager of Division B will make a sub-optimal decision

The manager of division B accepts the offer, the company as a whole pays £330 per unit but saves only £300 per unit, which are the variable costs of division A. Thus, overall, the company’s costs increase by £30 per unit and the offer is not acceptable.

Division B will pay £330 per unit but saves £410 per unit and so will decide to accept the offer. Thus, the manager of Division B will make a sub-optimal decision from the point of view of the company as a whole.

Question 24

Division J manufactures product K incurring a total cost of £50 per unit. Product K is sold to external customers in a perfectly competitive market at a price of £57, which represents a mark up of 90% on marginal cost.
Division J also transfers product K to division R. If transfers are made internally then division J does
not incur variable selling costs which amount to 5% of the total variable cost.

Assuming that the total demand for product K exceeds the capacity of division J, the optimum
transfer price per unit between division J and division R is
A - £54.50
B - £55.50
C - £56.72
D - £57.00

Answer 24

B - £55.50

The total demand for product K exceeds the capacity of division J therefore internal transfers will
displace external sales.
Optimum transfer price = external market price – cost savings with internal transfer.
Cost savings with internal transfer = 5% × total variable cost
= 5% × (100/190 × £57)
= £1.50
Optimum transfer price per unit = £57 – £1.50
= £55.50

Question 25

In a contract to sell a commodity the selling price is agreed between the supplier and the buyer to be the actual costs incurred by the supplier plus a profit mark-up using a fixed percentage on actual costs. No credit period is offered by the supplier.

Which of the following best describes how the risk caused by inflation will be allocated between the
supplier and the buyer?

A - The supplier and the buyer will each bear some of the inflation risk but not necessarily equally
B - Only the supplier will bear the inflation risk
C - Only the buyer will bear the inflation risk
D - The supplier and the buyer will each bear equal amounts of the inflation risk

Answer 25

C - Only the buyer will bear the inflation risk

Because the selling price is agreed to be the actual costs incurred by the supplier plus a profit mark-
up using a fixed percentage, then any inflation adjustment to costs would also affect the selling price.
The supplier can pass on all inflation increases to the buyer and will also earn a mark-up on the cost increase

Question 26

F and G are two divisions of a company. Division F manufactures one product, Rex. Unit production cost and the market price are as follows:
Variable materials 24
Labour 16
Variable fixed overhead 8
—–
48
Prevailing market price £64

Product Rex is sold outside the company in a perfectly competitive market and also to division G. If sold outside the company, Rex incurs variable selling costs of £8 per unit.

Assuming that the total demand for Rex is more than sufficient for division F to manufacture to capacity, what is the price per unit (in round £s) at which the company would prefer division F to transfer Rex to division G?

A - £64
B - £56
C - £40
D - £48

Answer 26

B - £56

Because the demand for Rex is more than sufficient for division F to manufacture to capacity, the price that the product should be transferred to division G should represent the same profit margin as if the product were sold externally. The external selling price is £64 but if an external sale is made then additional selling overhead of £8 would be incurred. The net transfer price is therefore £56

Question 27

A company estimates indirect costs to be 40% of direct costs and it sets its selling prices to recover the full cost plus 50%

What percentage represents the mark-up on direct costs that would give rise to the same selling price as using the method described above?

A - 90%
B - 110%
C - 190%
D - 210%

Answer 27

B - 110%

If it is assumed that the direct cost of the product is £100, then the indirect costs would be £40 and the total cost £140. The selling price is set to recover the full cost (£140) plus 50%, ie, plus £70. This makes the selling price £210 (£140 + £70).

The mark-up on direct costs is therefore £210 (selling price) less £100 (direct cost) = £110.

The percentage mark-up is therefore £110/£100 = 110%

Question 28

The master budget for Serse Ltd, a single-product firm, for the current year is as follows:

Sales = £480,000

Less:
Variable materials (20,000 tonnes at £10 per tonne) 200,000
Variable labour 96,000
Variable overhead 48,000
Fixed overhead 72,000
—
(416,000)

Budgeted net profit = 480,000 - 416,000 = 64,000

Serse Ltd has substantial excess production capacity. A sales enquiry has been received, late in the year, which will increase sales and production for the year by 25% over budget.

The extra requirement for 5,000 tonnes of material will enable the firm to purchase 7,000 tonnes at a discount of 5% on its normal buying price. The additional 2,000 tonnes will be used to complete the year’s budgeted production

What price should Serse Ltd charge for the special order in order to earn the same budgeted net profit for the year of £64,000?

A - £83,500
B - £100,500
C - £82,500
D - £101,500

Answer 28

C - £82,500

The total sales will use 25,000 tonnes of material, at a cost of: (18,000 × £10) + (7,000 × £10 × 95%)
= (£180,000) + (£70,000 × 95%)
= £246,500

The variable labour and overhead cost for this level of production would increase to:
(£96,000 + £48,000) × 125% = £144,000 × 125% = £180,000

The fixed costs remain at £72,000.
Total costs are therefore (£246,500 + £180,000 + £72,000) = £498,500.

The requirement is to earn the same budget profit of £64,000. This means the total required sales
income will be (£498,500 + £64,000) = £562,500.

The sales revenue without the extra order is £480,000 and therefore the revenue to be generated
from the extra order is (£562,500 – £480,000) = £82,500

Question 29

Gabba sets up in business to clean carpets. She will charge £30 per carpet cleaned and estimates the direct variable and fixed costs per carpet cleaned to be £9 and £6 respectively. She also estimates
her variable and fixed advertising costs per carpet cleaned to be £2 and £3 respectively

What is the contribution per carpet cleaned and the mark up on total costs?
A - Contribution: £21; mark-up 50%
B - Contribution: £19; Mark-up 100%
C - Contribution: £10; Mark-up 100%
D - Contribution £19; Mark-up 50%

Answer 29

D - Contribution £19; Mark-up 50%

The contribution is selling price less variable costs only. The variable costs are £9 + £2 = £11.
The contribution is therefore £30 (selling price) – £11 = £19
.
The percentage mark-up on total cost is the profit as a percentage of total costs. The total costs per unit are £9 + £6 + £2 + £3 = £20. The profit is therefore £30 – £20 = £10 and the mark up % is £10/£20 = 50%