Question:

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

Problem 2: Evaluate the average markup percentage for setting prices as a percentage of the full cost of the product.

Problem 3: Evaluate the average markup percentage for setting prices as a percentage of the variable cost.

Problem 4: Determine the average markup percentage for setting prices as a percentage of the variable manufacturing cost.

Problem 5  - Better Food Company recently 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 last year at a market price of $4.60 per liter. The purpose of the acquisition was to furnish oil for the cooking division. The cooking division needs 1,100,000 liters of oil per year. It must be 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

$1.25

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 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 could be used, or perhaps a lower price, since fixed overhead cost could be recomputed with the larger volume. Any output of the olive oil division not sold to the cooking division will be sold to outsiders for $4.60 per liter.