Question 1 — full-cost + 10% markup

Per-unit costs: DM $8 + DL $2 + VOH $3 + FOH $2 = $15.
Price = $15 × 1.10 = $16.50.

• ❌ $15

• ❌ $11

• ✅ $16.50

• ❌ $14.30

Explanation: Full cost per unit = $15; 10% markup on full cost gives $16.50.

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Question 2 — market price $25, costs = DM10 + DL3 + VOH4 + FOH4 = $21; target profit margin = 20%

We interpret target margin as 20% of selling price (common). Required cost to achieve 20% margin at market price $25: profit = 0.20×25 = $5 → allowable cost = 25 − 5 = $20. Current cost = $21.

• ❌ Target costing is not useful in this scenario, as BeBops must adhere to the market price.

• ✅ Managers will likely look for ways to cut costs before selling this product.

• ❌ Costs must be decreased by $3 to reach the desired profit.

• ❌ The current market price, cost estimates, and desired profit margin suggest that this product is feasible.

Explanation: At $25 market price, to get 20% margin cost must be $20, but current cost is $21, so managers will need to cut costs ($1 reduction required). Target costing is useful when market price constrains margin. The “decrease by $3” and “feasible as-is” statements are false.

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Question 3 — Standard (capacity 10,000; normal price $10; var cost $6; fixed $1 allocated). Bubble needs 2,000 and can buy outside at $9. Standard currently has orders for 10,000 (i.e., no excess capacity).

Calculate Standard’s external contribution = $10 − $6 = $4 per unit. Bubble’s outside price = $9.

• ❌ The internal transfer will take place at a price of $9.

• ✅ The internal transfer will not take place, as Bubble will not cover Standard’s opportunity cost to sell internally.

• ❌ The internal transfer will take place at a price of $10.

• ❌ The internal transfer will take place, and save Bubble $1 per component.

• ✅ If Standard can save $2 in costs per unit as a result of selling internally (vs. externally), the internal transfer will take place.

Explanation: With no excess capacity Standard’s lost contribution from selling internally equals $4/unit (or equivalently Standard’s external price of $10). Bubble’s outside cost is $9 so there is no price between 9 and 10 that satisfies both. Hence, no transfer will occur under current facts. However, if Standard could save $2/unit by selling internally (reducing its opportunity cost), the minimum acceptable transfer price would drop to about $8, which leaves room for a price ≤ $9 that both sides could accept — so the conditional statement is true.

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Question 4 — Super (capacity 1,000 kg; normal price $5; var cost $2; fixed $1 allocated). Byer needs 300 kg and can buy outside at $4. Super currently has orders for 700 kg (so 300 kg excess capacity available).

• ✅ The minimum price the internal transfer will take place at is $2 per kilogram.

• ✅ The internal transfer will take place at a price of no more than $4 per kilogram.

• ❌ The internal transfer will take place at a price of at least $5 per kilogram.

• ❌ The minimum price the internal transfer will take place at is $3 per kilogram.

Explanation: Super has 300 kg of excess capacity, so the minimum acceptable transfer price equals variable cost = $2/kg (no opportunity cost). Byer’s outside purchase price is $4, so any transfer price between $2 and $4 makes both divisions better off (so it will be no more than $4). $3 is not the minimum (the minimum is $2). $5 (Super’s normal selling price) is above Byer’s outside price, so requiring $5 would prevent transfer.

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🧾 Summary Table

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