Question2 Canopy Company produces and sells backpacks. The company expects 8% return from its investment of $15,000,000.For next year, it expects to sell 720,000 backpacks. Expected costs for next y

Question2

Canopy Company produces and sells backpacks. The company expects 8% return from its investment of $15,000,000.For next year, it expects to sell 720,000 backpacks. Expected costs for next year are as follows:

Variable production costs $5 per unit

Fixed production costs $850,000

Variable selling and admin costs $2.50 per unit

Fixed selling and admin costs $350,000

Other fixed costs $200,000

The company prices the backs at full cost plus markup to generate profits equal to the target return on investment.

(a) Apply the target costing approach to compute the unit selling price of the backpacks in order to earn the target operating income.

(b) Apply the target costing approach to compute the markup percentage on full cost.

(c) Management is planning to increase the unit selling price to $15.Assuming sales (units) decrease by 10 %, what will be the operating income (loss)? Is the increase in selling price a good idea? Discuss.

(d) Briefly describe the organisation that you work for or one which you are familiar with. Describe one of its main products or services offered.

Propose a change in that organisation that will increase fixed cost but reduce variable costs in relation to that product or service.

Do you think such an idea is a good one? Discuss why you think so.

Question 4

Estellebelle Company has two divisions: IT Services and business consulting services. While their key focus is on the external customers, each division also performs work for the other division.

IN 2011,it generated $3000,000 of external fees while the business consulting generated $600,000 of external fees. The costs of providing the external services were $150,000 by IT services and $300,000 by business consulting services.

In the same year, IT services performed 500 hours for business consulting services while business consulting services performed 900 hours for IT Services.

Currently, the transfer price between the two divisions is $80 per hour, arrived at by negotiations among the division managers.

This is above the market rate of about $70 per hour. Thus, the division head of one division proposed that the two divisions net the hours worked for each other and charge $70 per hour for the one with the excess hours.

(a) Apply the current transfer pricing rule and determine the operating income for each division and for the company for the year 2011.

(b) (b) Apply the transfer price based on the proposal9i.e the two divisions net the hours worked for each other and charge $70 per hour for the one with the excess hours)Determine the operating income for each division and the company as a whole.

(c) Explain and discuss problems that may arise in the current system/How would you improve it?

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