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Chapter 10 - Activity-based costing

MULTIPLE CHOICE

1. Products might consume overhead in different proportions due to

a. differences in product size.
b. differences in setup times.
c. differences in product complexity.
d. all of the above.
ANS: D PTS: 1 REF: 10.3

2. The activity-based resource usage model improves managerial control and decision making such as
a. the best way to use excess activity capacity in the system.
b. maximization of individual unit performance.
c. increasing the allocation of costs.
d. focusing on managing costs rather than activities.
ANS: A PTS: 1 REF: 10.4

Figure 10-1

Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead
costs for each category for next year are as follows:

Maintenance £120,000
Materials handling 18,000
Setups 16,000
Inspection 60,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour
hours. For next year, 20,000 direct labour hours are budgeted.

The company has been asked to submit a bid for a proposed job. The plant manager feels that
obtaining this job would result in new business in future years. Usually bids are based upon full
manufacturing cost plus 15 per cent.

Estimates for the proposed job are as follows:

Direct materials £2,000

Direct labour (600 hours) £6,000
Number of materials moves 4
Number of inspections 6
Number of setups 8
Number of machine hours 80

In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based
cost driver--direct labour hours. The plant manager has heard of a new way of applying overhead that
uses cost pools and cost drivers.

Expected activity for the four activity-based cost drivers that would be used are as follows:

Machine hours 5,000

 Material moves 600
Setups 200
Quality inspections 1,000

3. Refer to Figure 10-1. If Wheat Manufacturing used direct labour hours as the cost driver and the
company's bid is full cost plus 15 per cent, the company's bid would be
a. £17,480.
b. £16,583.
c. £13,110.
d. £12,765.
ANS: B
SUPPORTING CALCULATIONS:

Direct materials £ 2,000

Direct labour 6,000
Overhead (£214,000/20,000)  600 __6,420
Total cost £14,420

Bid price = £14,420  115% = £16,583

PTS: 1 REF: 10.3

4. Refer to Figure 10-1. If Wheat Manufacturing used activity-based cost drivers to assign overhead and
the company's bid is full cost plus 15 per cent, the company's bid would be
a. £12,696.00
b. £13,965.60
c. £10,120.00
d. £9,936.00
ANS: A
SUPPORTING CALCULATIONS:
Maintenance: £120,000/5,000 = £24
Materials handling: £18,000/600 = £30
Setups: £16,000/200 = £80
Inspections: £60,000/1,000 = £60

Direct materials £ 2,000

Direct labour 6,000
Overhead:
Maintenance (£24  80) £1,920
Materials handling (£30  4) 120
Setups (£80  8) 640
Inspections (£60  6) ___360 __3,040
Total cost £11,040

Bid price = £11,040  115% = £12,696.00

PTS: 1 REF: 10.3

Figure 10-2
 Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed
in the sales of a new board game. The game sold only 10,000 units in 2011 when 30,000 were
projected. Sales for 2008 look no better. At £100 per game, it is not a hot seller. Direct costs of the
board game are £56 variable cost and £100,000 fixed. John is considering several options. Option One:
Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material
costs by £10, and cut advertising by £60,000. Anticipated volume for this option is 10,000 units.
Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000
units could be sold and only 30 per cent of the rebate coupons would be redeemed.

5. Refer to Figure 10-2. What is the profit (loss) from Option One?
a. £1,050,000
b. £210,000
c. £950,000
d. £110,000
ANS: D
SUPPORTING CALCULATIONS:

Revenues (£70 ?6? 15,000) £1,050,000

Less: Variable costs £840,000
Fixed costs _100,000 ___940,000
Profit £ 110,000

PTS: 1 REF: 10.3

6. Refer to Figure 10-2. What is the profit (loss) from Option Two?
a. £600,000
b. £100,000
c. £40,000
d. (£100,000)
ANS: B
SUPPORTING CALCULATIONS:

Revenues (£60 ?6? 10,000) £600,000

Less: Variable costs £460,000
Fixed costs __40,000 _500,000
Profit £100,000

PTS: 1 REF: 10.3

7. Refer to Figure 10-2. What is the profit (loss) from Option Three?
a. £215,000
b. £1,200,000
c. £110,000
d. (£60,000)
ANS: A
SUPPORTING CALCULATIONS:

Revenues (£80 ?6? 15,000) £1,200,000

Less: Variable costs £840,000
Rebate costs 45,000
Fixed costs _100,000 ___985,000
 Profit £ 215,000

PTS: 1 REF: 10.3

8. Refer to Figure 10-2. Which option is preferred?

a. Option One
b. Option Two
c. Option Three
d. Options One and Three are equally preferred.
ANS: C
SUPPORTING CALCULATIONS:
Option Three has the highest profit.

PTS: 1 REF: 10.3

9. Which of the following statements is FALSE?

a. The mark up is a percentage applied to base cost.
b. The mark up is an absolute rule.
c. A major advantage of mark up pricing is that standard mark ups are easy to apply.
d. The mark up can be calculated using a variety of bases.
ANS: B PTS: 1 REF: 10.7

Figure 10-3

Farr Company had the following information:

Revenues £400,000
Cost of goods sold:
Direct materials £100,000
Direct labour 50,000
Overhead __50,000 _200,000
Gross profit £200,000
Selling and administrative expenses __75,000
Operating income £125,000

10. Refer to Figure 10-3. What is the mark up based on cost of goods sold?
a. 50.0%
b. 100.0%
c. 37.5%
d. 62.5%
ANS: B
SUPPORTING CALCULATIONS:
(£75,000 + £125,000)/£200,000 = 100%

PTS: 1 REF: 10.7

11. Refer to Figure 10-3. What is the mark up based on prime costs?
a. 300.0%
b. 133.3%
c. 50.0%
d. 166.7%
 ANS: D
SUPPORTING CALCULATIONS:
(£75,000 + £125,000 + £50,000)/£150,000 = 166.7%

PTS: 1 REF: 10.7

Figure 10-4

Jamie Ltd. had the following information:

Revenues £250,000
Cost of goods sold:
Direct materials £50,000
Direct labour 37,500
Overhead _62,500 _150,000
Gross profit £100,000
Selling and administrative expenses __37,500
Operating income £ 62,500

12. Refer to Figure 10-4. What is the mark up based on materials?

a. 400.0%
b. 185.7%
c. 42.9%
d. 71.4%
ANS: A
SUPPORTING CALCULATIONS:
(£62,500 + £37,500 + £62,500 + £37,500)/£50,000 = 400%

PTS: 1 REF: 10.7

13. Refer to Figure 10-4. What would be the price for something that has a cost of £500, assuming that the
mark up is based on cost of goods sold?
a. £833
b. £625
c. £708
d. £2,000
ANS: A
SUPPORTING CALCULATIONS:
£500 + (66.7% ?6? £500) = £833

PTS: 1 REF: 10.3

14. Price skimming occurs in which of the following life-cycle stages?

a. Introduction
b. Growth
c. Maturity
d. Decline
ANS: A PTS: 1 REF: 10.1

15. ____ is the pricing of a new product at a low initial price to build market share quickly.
a. Penetration pricing
b. Predatory pricing
 c. Price skimming
d. Target costing
ANS: A PTS: 1 REF: 10.1

16. ____ is where a higher price is charged at the beginning of a product's life cycle.
a. Penetration pricing
b. Predatory pricing
c. Price skimming
d. Target costing
ANS: C PTS: 1 REF: 10.1

17. Which of the following is a FALSE statement about target costing?

a. Target costing is a method of determining the cost of a product or service based on the
price that customers are willing to pay.
b. The cost is calculated by subtracting the desired profit from the target price.
c. Target costing is an interactive process.
d. Target costing is cost driven.
ANS: D PTS: 1 REF: 10.3

18. Which of the following stages is characterized by rapid increases in sales and production?
a. Introduction
b. Growth
c. Maturity
d. Decline
ANS: B PTS: 1 REF: 10.1

19. Which of the following stages has revenues for the entire industry decreasing?
a. Introduction
b. Growth
c. Maturity
d. Decline
ANS: D PTS: 1 REF: 10.1

Figure 10-5

Ander Company produces precision equipment for major buyers. Of the six customers, one accounts
for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five
smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller
customers are about the same size. Data concerning Ander's customer activity follow:

Large Customer Five Smaller

Customers
Units purchased 400,000 600,000
Orders placed 10 350
Number of sales calls 20 230
Manufacturing cost £1,200,000 £1,800,000

Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000.
20. Refer to Figure 10-5, what amount of order-filling costs would be allocated to the large customer if
these costs are allocated based on sales volume?
a. £144,000
b. £216,000
c. £150,000
d. £225,000
ANS: A
SUPPORTING CALCULATIONS:
£360,000 ?6? .40 = £144,000

PTS: 1 REF: 10.11

21. Refer to Figure 10-5 above, what amount of order-filling costs would be allocated to the large
customer if these costs are allocated using an activity-based costing approach?
a. £10,000
b. £350,000
c. £28,800
d. £331,200
ANS: A
SUPPORTING CALCULATIONS:
£360,000/(10 + 350) = £1,000 per order

£1,000 ?6? 10 = £10,000

PTS: 1 REF: 10.11

22. Refer to Figure 10-5 above, what amount of order-filling costs would be allocated to the five smaller
customers if these costs are allocated using an activity-based costing approach?
a. £10,000
b. £350,000
c. £28,800
d. £331,200
ANS: B
SUPPORTING CALCULATIONS:
£360,000/(10 + 350) = £1,000 per order

£1,000 ?6? 350 = £350,000

PTS: 1 REF: 10.11

23. Refer to Figure 10-5 above, what amount of sales-force costs would be allocated to the five smaller
customers if these costs are allocated based on sales volume?
a. £144,000
b. £216,000
c. £150,000
d. £225,000
ANS: D
SUPPORTING CALCULATIONS:
£375,000 ?6? .60 = £225,000

PTS: 1 REF: 10.11

24. A target cost is computed as
a. the cost to manufacture plus a desired mark up.
b. the cost to manufacture plus the designated selling expenses.
c. the market willingness to pay less the cost to manufacture.
d. the market willingness to pay less the desired profit.
ANS: D PTS: 1 REF: 10.3

25. Setting prices below cost for the purpose of injuring competitors and eliminating competition is
a. predatory pricing.
b. target pricing.
c. price discrimination.
d. price gouging.
ANS: A PTS: 1 REF: 10.3

26. World-class organizations operating in competitive markets are more likely to take which one of the
following approaches toward pricing?
a. Begin with cost data as given and determine price by adding a reasonable mark-up.
b. Determine price based on the amount management believes customers are willing to pay.
c. Employ a cost-based approach to pricing.
d. Determine the price that keeps the facilities fully utilized.
ANS: B PTS: 1 REF: 10.11

27. When cost-based pricing is employed and mark up is based on manufacturing costs, the mark up must
be sufficiently large enough to:
a. cover selling expenses.
b. cover administrative expenses.
c. provide for the desired profit.
d. accomplish all of the above.
ANS: D PTS: 1 REF: 10.3

28. Which of the following statements describes a legitimate disadvantage of cost-based pricing?
a. Marginal costs and revenues are difficult to measure.
b. Determining the amount a customer is willing to pay may require sufficient estimation.
c. Customers may not be willing to pay the price determined by the procedure.
d. all of the above
ANS: C PTS: 1 REF: 10.8

29. Cost-based pricing has traditionally been important because:

a. cost data are available.
b. cost-based prices are defensible.
c. revenues must exceed costs if the firm is to remain in business.
d. of all of the above.
ANS: D PTS: 1 REF: 10.9

Figure 10-6

Multiple Products Co. has predicted the following costs for this year for 100,000 units:

Selling and
 Manufacturing Administrative
Variable £ 400,000 £100,000
Fixed 600,000 300,000
Total £1,000,000 £400,000

30. Refer to Figure 10-6. What is the mark up on variable costs needed to achieve a target profit of
£100,000?
a. 375 per cent
b. 275 per cent
c. 250 per cent
d. 200 per cent
ANS: D PTS: 1 REF: 10.7

31. Refer to Figure 10-6. What is the manufacturing cost mark up needed to obtain a target profit of
£100,000?
a. 100 per cent
b. 67 per cent
c. 50 per cent
d. 25 per cent
ANS: C PTS: 1 REF: 10.7

32. Refer to Figure 10-6. What is the mark up on variable costs needed to break even?
a. 100 per cent
b. 40 per cent
c. 140 per cent
d. 180 per cent
ANS: D PTS: 1 REF: 10.7

33. Which of the following accurately describes the effect target costing has on the manufacturing design
function?
a. Target costing allows the design engineer's job to end once the product is designed.
b. Target costing forces design engineers to explicitly consider the costs of manufacturing
and other aspects of business that traditionally fall outside the engineering department.
c. Target costing defines clear lines of responsibility among departments allowing for design
engineers to be evaluated purely on meeting the customer's functional requirements.
d. Target costing has no implications for design engineering.
ANS: B PTS: 1 REF: 10.3

34. Which of the following statements concerning target costing is NOT true?
a. Implementing target costing requires detailed information on the cost of alternative
activities.
b. Target costing can be applied to components of products as well as the new products as a
whole.
c. A primary advantage of target costing is that it requires little or no coordination among
processes.
d. Short product life cycles increase the importance of target costing.
ANS: C PTS: 1 REF: 10.3

35. If activity-based costing is used, materials handling would be classified as a

a. unit-level activity.
 b. batch-level activity.
c. product-level activity.
d. facility-level activity.
ANS: B PTS: 1 REF: 10.1

36. If activity-based costing is used, modifications made by engineering to the product design of several
products would be classified as a
a. unit-level activity.
b. batch-level activity.
c. product-level activity.
d. facility-level activity.
ANS: C PTS: 1 REF: 10.1

37. Which of the following quantities is an example of an activity cost driver in activity-based costing?
a. number of direct labour hours
b. number of labour transactions
c. number of machine hours
d. all of the above
ANS: D PTS: 1 REF: 10.3

SHORT ANSWER

1. Provide a short critique of cost-based pricing. What are the four major drawbacks to this pricing
approach?

ANS:
Cost-based pricing was the dominant approach to pricing when products were long-lived and
competition was low. However, in today's business environment, few products or services meet either
of these conditions. Cost-based pricing models generally assume all costs are unavoidable and do not
encourage the efficiency in operations that is needed to compete in today's business environment.

The four drawbacks to such an approach are:

1. Managers face limitations of obtaining accurate cost information. Particularly

challenging are the issues of accurately classifying fixed and variable costs and of
determining accurate cost assignments.
2. Unassigned costs can lead to underpricing, and thus to reduced or negative profits.
3. Customers may not be willing to pay the price determined by the model.
4. This approach can slow the time required to new products to market.

PTS: 1 REF: 10.8

PROBLEM

1. Baker Manufacturing has four categories of overhead. The four categories and the expected overhead
costs for each category for next year are as follows:

Maintenance £140,000
Materials handling 60,000
Setups 50,000
Inspection 100,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour
hours. For next year, 50,000 direct labour hours are budgeted.

The company has been asked to submit a bid for a proposed job. The plant manager feels that
obtaining this job would result in new business in future years. Usually bids are based upon full
manufacturing cost plus 30 per cent.

Estimates for the proposed job are as follows:

Direct materials £5,000

Direct labour (750 hours) £7,500
Number of materials moves 8
Number of inspections 5
Number of setups 3
Number of machine hours 300

In the past, full manufacturing cost has been calculated by allocating overhead using a traditional
volume-based cost driver system--direct labour hours. The plant manager has heard of a new way of
applying overhead that uses cost pools and cost drivers.

Expected activity for the four activity-based cost drivers that would be used are as follows:

Machine hours 16,000

Material moves 4,000
Setups 2,000
Quality inspections 8,000

Required:

a. Determine the amount of overhead that would be allocated to the proposed job if direct
labour hours are used as the traditional volume-based cost driver.
Determine the total cost of the proposed job.
Determine the company's bid if the bid is based upon full manufacturing cost plus 30 per
cent.
b. Determine the amount of overhead that would be applied to the proposed job if
activity-based costing is used.
Determine the total cost of the proposed job if activity-based costing is used.
Determine the company's bid if activity-based costing is used and the bid is based upon full
manufacturing cost plus 30 per cent.
c. Which product costing method produces the more competitive bid?

ANS:
a. £5,250 (£140,000 + £60,000 + £50,000 + £100,000)/50,000 = £7 per DLH
£7  750 DLH = £5,250
£17,750 £5,000 + £7,500 + £5,250
£23,075 £17,750  130%
b. £2,882.50
Maintenance: £140,000/16,000 = £8.75 per machine hour
Materials handling: £60,000/4,000 = £15 per move
Setups: £50,000/2,000 = £25 per setup
Inspection: £100,000/8,000 = £12.50 per inspection
 Overhead assigned:
£8.75  300 £2,625.00
£15  8 120.00
£25  3 75.00
£12.50  5 ____62.50
£2,882.50

£15,382.50 £5,000 + £7,500 + £2,882.50

£19,997.25 £15,382.50  130%

c. Activity-based costing produces more accurate cost information and a more competitive bid.

PTS: 1 REF: 10.3

2. Nordholm Construction Company builds houses. Each job requires a bid. Nordholm's bidding policy is
to estimate the costs of materials, direct labour, and subcontractor's costs. These are totaled and a mark
up is applied to cover overhead and profit. In the coming year, Nordholm believes it will be the
successful bidder on ten jobs with the following total revenues and costs:

Revenues £648,000
Materials £200,000
Direct labour 250,000
Subcontractors _150,000 _600,000
Residual £ 48,000

The residual will cover overhead and profits.

Required:

a. What is the mark up percentage on total direct costs?

b. Suppose Nordholm is asked to bid on a job with estimated direct costs of £55,000. What is the
bid? If the customer complains that the profit seems pretty high, how might Nordholm counter
that?

ANS:
a. Mark up percentage = £48,000/£600,000 = 8%

b. Bid = £55,000 ?6? 1.08 = £59,400

Nordholm should remind the customer that the 8 per cent mark up on direct costs is not pure
profit. It includes overhead as well as profit. In construction, an 8 per cent overhead plus profit
rate may be a little low.

PTS: 1 REF: 10.7

3. Many products have a predictable profit or product life cycle. Describe the product life cycle from the
marketing perspective. In addition, graph profit versus the different phases. Finally, discuss the impact
of the product life cycle on products, learning effects, setups, purchasing, and marketing expenses.

ANS:
The product life cycle describes the profit history of the product according to four stages; introduction,
growth, maturity, and decline. The graph would look like the following:
The impact of the product life cycle on cost management would be as follows:

Introduction Growth Maturity Decline

Product: Basic design, Some Proliferation Minimal

changes,
few models improvements, of product reduced number
of
expanding lines, extensive product lines
product line differentiation

Learning High costs, Still strong, Stable No learning,

Effects: much learning, learning production, labour as
but little begins to little to no efficient as
payoff reduce costs learning it can be

Setups: Few, but More, as new Many, Fewer, as

new and models are as product only best
unfamiliar introduced differentiation selling lines
occurs are produced

Purchasing: May be high Lower, reliable May be high, Fewer suppliers

as new suppliers found, depending on and orders
materials and few materials line changes as existing
suppliers changes inventories are
are sought liquidated

Marketing Low selling Increased Supportive Minimal

Expense: and distribution advertising and advertising, advertising,
cost to small distribution increased trade distribution,
number of discounts, high and promotion
target markets distribution costs

PTS: 1 REF: 10.1

4. Bay Company produces boats for 11 major buyers. Of the 11 customers, one accounts for 45 per cent
of the sales, with the remaining ten accounting for the rest of the sales. The ten smaller customers
purchase boats in roughly equal quantities. Orders placed by the smaller customers are about the same
size. Data concerning Bay's customer activity follow:

Large Customer Ten Smaller Customers

Units purchased 4,500 5,500
Orders placed 5 545
Number of sales calls 15 245
Manufacturing cost £800,000 £980,000

Order-filling costs for Bay Company total £401,500, and sales-force costs are £260,000.

Required:

a. Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the
large customer and (2) the ten smaller customers if these costs are allocated based on sales
volume.
b. Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the
large customer and (2) the ten smaller customers if these costs are assigned using
activity-based costing.
c. Comment on the differences in amounts attributed to the smaller customers in requirements a
and b.

ANS:
a. Order-filling costs:
Large customer: £401,500 ?6? .45 = £180,675

Smaller customers: £401,500 ?6? .55 = £220,825

Sales-force costs:
Large customer: £260,000 ?6? .45 = £117,000

Smaller customers: £260,000 ?6? .55 = £143,000

b. Order-filling costs: £401,500/(5 + 545) = £730 per order

Large customer: £730 ?6? 5 = £3,650

Smaller customers: £730 ?6? 545 = £397,850

Sales-force costs: £260,000/(15 + 245) = £1,000 per sales call

Large customer: £1,000 ?6? 15 = £15,000

Smaller customers: £1,000 ?6? 245 = £245,000

c. The smaller customers are shown to be more expensive when activity-based costing is used.
The smaller customers cost more due to smaller, more frequent orders and the need for more
contact with the sales force. The order-filling costs for smaller customers increase from
£220,825 to £397,850 (the increase is £177,025), and the sales-force costs increase from
£143,000 to £245,000 (the increase is £102,000).

PTS: 1 REF: 10.11

5. Johnson Company produces office equipment for 16 major buyers. Of the 16 customers, one accounts
for 50 per cent of the sales, with the remaining 15 accounting for the rest of the sales. The 15 smaller
customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are
about the same size. Data concerning Johnson's customer activity follow:

Large Customer 15 Smaller Customers

Units purchased 50,000 50,000
Orders placed 6 294
Number of sales calls 26 224
Manufacturing cost £750,000 £750,000

Order-filling costs for Johnson Company total £270,000, and sales-force costs are £300,000.

Required:

a. Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1)
the large customer and (2) the 15 smaller customers if these costs are allocated based on
sales volume.
b. Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1)
the large customer and (2) the 15 smaller customers if these costs are assigned using
activity-based costing.
c. Comment on the differences in amounts attributed to the smaller customers in
requirements a and b.

ANS:
a. Order-filling costs:
Large customer: £270,000 ?6? .50 = £135,000

Large Smaller customers: £270,000 ?6? .50 = £135,000

Sales-force costs:
Large customer: £300,000 ?6? .50 = £150,000

Large Smaller customers: £300,000 ?6? .50 = £150,000

b. Order-filling costs: £270,000/(6 + 294) = £900 per order

Large Large customer: £900 ?6? 6 = £5,400

Large Smaller customers: £900 ?6? 294 = £264,600

Sales-force costs: £300,000/(26 + 224) = £1,200 per sales call

Large Large customer: £1,200 ?6? 26 = £31,200

Large Smaller customers: £1,200 ?6? 224 = £268,800

c. The smaller customers are shown to be more expensive when activity-based costing is used.
The smaller customers cost more due to smaller, more frequent orders and the need for more
contact with the sales force. The order-filling costs for smaller customers increase from
£135,000 to £264,600 (the increase is £129,600), and the sales-force costs increase from
£150,000 to £268,800 (the increase is £118,800).

PTS: 1 REF: 10.11

6. Etro Company sells a product used in many manufacturing processes. The sales activity involves three
activity areas:

Activity Area Cost Driver and Rate

Order taking £100 per purchase order
Sales visits £50 per visit
Delivery vehicles £1 per delivery mile
Product handling £0.05 a unit
Special runs £300 per run

The following customer information is given:

A B D
Units sold 100,000 80,000 60,000
List price £50 £50 £50
Actual sales price £45 £48 £50
Number of purchase orders 30 20 10
Number of sales visits 6 5 3
Number of deliveries 10 8 6
Miles traveled per delivery 40 5 20
Number of special runs 1 0 2

Required:

What is the profitability of customer B?

ANS:
B = (80,000 ?6? £48) - (20 ?6? £100) - (5 ?6? £50) - (8 ?6? 5 ?6? £1) - 0 = £3,837,710

PTS: 1 REF: 10.11

7. Todd Ltd. sells a product for £400 per unit. Its market share is 22 per cent of the units sold. The
marketing manager feels that the market share can be increased to 28 per cent of the units sold with a
reduction in price to £340. The product is currently earning a profit of £64 per unit. The president of
Todd Ltd. feels that his company needs to maintain the same profit level per unit. The market share
consists of £4,000,000 (10,000 units).

Required:

a. How many units does Todd Ltd. currently sell of the product?
b. What is the target price per unit?
c. What is the original cost per unit?
d. What is the target cost per unit?

ANS:
a. 10,000 ?6? 0.22 = 2,200
b. £340
c. £400 - £64 = £336
d. £340 - £64 = £276

PTS: 1 REF: 10.3

8. Spencer Manufacturing Company sells a product for £200 per unit. Its market share is 18 per cent of
the units sold. The marketing manager feels that the market share can be increased to 25 per cent of the
units sold with a reduction in price to £170. The product is currently earning a profit of £32 per unit.
The president of Spencer Manufacturing Company feels that his company needs to maintain the same
profit level per unit. The market share consists of £2,000,000 (10,000 units).

Required:

a. How many pounds does Spencer Manufacturing Company currently sell of the product?
b. What is the target price per unit?
c. What is the original cost per unit?
d. What is the target cost per unit?

ANS:
a. £2,000,000 ?6? 0.18 = £360,000
b. £170
c. £200 - £32 = £168
d. £170 - £32 = £138

PTS: 1 REF: 10.3

9. Foley Ltd. has predicted the following costs for this year for 100,000 units:

Selling and
Manufacturing Administrative
Variable £800,000 £200,000
Fixed 1,200,000 600,000
Total £2,000,000 £800,000

Required:

a. What is the mark up on variable costs needed to achieve a target profit of £200,000?
b. What is the initial unit selling price needed to obtain a target profit of £200,000 using the
variable cost mark up method?
c. What is the manufacturing cost mark up needed to obtain a target profit of £200,000?
d. What is the initial unit selling price needed to obtain a target profit of £200,000 using the
manufacturing cost mark up method?

ANS:
a. (£1,200,000 + £600,000 + £200,000)/(£800,000 + £200,000) = 200 per cent

b. (£800,000 + £200,000)/100,000 units = £10 per unit + (£1?8? ?6? 200 per cent) = £30

c. (£800,000 + £200,000)/£2,000,000 = 50 per cent

d. £2,000,000/100,000 units = £20 per unit + (£20 ?6? 50 per cent) = £30

PTS: 1 REF: 10.3

10. Wurster Company sells a product for £400 per unit. Its market share is 20 percent of the units sold.
The marketing manager believes that the market share can be increased to 28 percent of the units sold
with a reduction in price to £360. The product is currently earning a profit of £62 per unit. The
president of Wurster Company believes that his company needs to maintain the same profit level per
unit. The total market for the product has annual sales of 5,000 units.

Required:

a. How many units does Wurster Company currently sell of the product?
b. What is the target price per unit?
c. What is the target cost per unit?

ANS:
a. 5,000 ?6? .20 = 1,000 units

b. £360

c. £360 - £62 = £298

PTS: 1 REF: 10.3

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