PRICING (QUICK EASY QUESTION)
1(a) Chester Corporation is launching a new product that is expected to cost $75 in direct materials, $50 in direct labor, and $100 in variable overhead per unit.
Fixed costs associated with the product are expected to be $500,000 each
year the product is sold, and development and setup costs are expected to be $3,000,000. Chester expects to sell an average of 15,ooo units a year over the product’s seven-year life. Chester hopes to earn a profit of 10% of full costs.
What price should be set for the product?
1(b) Barry Manufacturing produces goods costing $25 per unit in variable costs and
$40 per unit in fixed costs that sell for $100 each. Silman Enterprises has
requested that Barry manufacture 5,000 units for them in a one-time-only special order. Barry has the manufacturing capacity to fill the special order without giving up any regular sales.
Calculate the minimum price per unit the company should accept.
1(c) Montevallo Manufacturing operates a division in Brazil that manufactures goods for $30 in variable costs per unit. All 20,000 units manufactured each year are transferred to the Chicago division, where they are packaged for an additional $10 per unit and sold on the market for $75 each. There is no market for the product when it is unpackaged. The fixed costs of the Brazil division are $200,000 per year, and the fixed costs of the Chicago division are $250,000 per year. The tax rate in Brazil is 20%, while in Chicago the company pays 30% in taxes.
Calculate the transfer price if it is based on:
a) Variable cost with a 10% markup
b) Full cost with a 10% markup
c) Which of the prices calculated above would the company as a whole most prefer?
d) Given that there is no intermediate market for the transferred product, what difficulties would arise if the two divisions were to attempt to negotiate a transfer price?