Nancy Company and Better Food Company_Costing questions

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Problem 1 – Nancy Company has budgeted sales of $300,000
with the following budgeted costs:

Direct
materials
$60,000

Direct manufacturing labor
40,000

Factory overhead

Variable
30,000

Fixed

50,000

Selling and
administrative expenses

Variable
20,000

Fixed

30,000

Question 1: Compute the average markup percentage for setting
prices as a percentage of the full cost of the product. (five points)

Question 2: Compute the average markup percentage for setting
prices as a percentage of the variable cost of the product. (five points)

Question 3: Compute the average markup percentage for setting
prices as a percentage of the variable manufacturing costs. (five points)

Problem 2 – Better Food Company recently acquired an olive
oil processing company that has an annual capacity of 2,000,000 liters and that
processed and sold 1,400,000 liters last year at a market price of $4 per
liter. The purpose of the acquisition was to furnish oil for the cooking
division. The cooking division needs 800,000 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 follows:

Direct materials per liter

$1.00

Direct processing labor

0.50

Variable processing overhead

0.24

Fixed processing overhead

0.40

Total

$2.14

Management is trying to decide what transfer price to use for
sales from the newly acquired company to the cooking division. The
manager of the olive oil division argues that $4, the market price, is
appropriate. The manager of the cooking division argues that the cost of
$2.14 should be used, or perhaps a lower price, since fixed overhead cost
should be recomputed with the larger volume. Any output of the olive oil
division not sold to the cooking division can be sold to outsiders for $4 per
liter.

Question 1: Compute the operating income for the olive oil
division using a transfer price of $4. (five points)

Question 2: Compute the operating income for the olive oil
division using a transfer price of $2.14. (five points)

Question 3: What transfer price(s) do you recommend? Compute
the operating income for the olive oil division using your recommendation.
(five points)

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