Problem 1 - Nancy Company has budgeted sales of $750,000 with the subsequent budgeted costs:
Direct materials $210,000
Direct manufacturing labor 110,000
Factory overhead
Variable 70,000
Fixed 100,000
Selling and administrative expenses
Variable 50,000
Fixed 60,000
Question 1: Evaluate the average markup percentage for setting prices as a percentage of the complete cost of the product.
Question 2: Compute the average markup percentage for setting prices as a percentage of the variable cost.
Question 3: Calculate the average markup percentage for setting prices as a percentage of the variable manufacturing cost.
Problem 2 - Better Food Company currently acquired an olive oil processing company that has an annual capacity of 3,000,000 liters and that processed and sold 2,300,000 liters previous year at a market price of $4.60 per liter. The intention of the acquisition was to furnish oil for the cooking division. The cooking division requires 1,100,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as given:
Direct materials per liter $1.25
Direct processing labor 0.60
Variable processing overhead 0.36
Fixed processing overhead 0.54
Total $2.75
Management is trying to decide what transfer price to use for sales from the recently acquired company to the cooking division. The manager of the olive oil division argues that $4.60, the market price, is appropriate. The manager of the cooking division argues that the cost of $2.75 should be used, or perhaps a lower price, since fixed overhead cost could be reevaluated with the larger volume. Any output of the olive oil division not sold to the cooking division can be sold to outsiders for $4.60 per liter.
Question 1: Calculate the operating income for the olive oil division using a transfer price of $4.60.
Question 2: Calculate the operating income for the olive oil division using a transfer price of $2.75.
Question 3: What transfer prices do you recommend?
Evaluate the operating income for the olive oil division using your recommendation.