Question

1. Kite.co makes kites.  Its standards are 5.2 hours of work at $46 per hour per kite. In March, employees worked 5,000 hours, made 850 kites and earned $272,300 in wages. Calculate the labor rate and efficiency variances.  Create a STORYthat could be the cause of these variances.

2. Unicycle.co has two divisions:  wheels and unicycles.  Each unicycle needs one wheel.  Fixed costs = 0.

	Wheels	Unicycles
Sales/Market Price	$15 per wheel	$350 per unicycle
VC	$6.25  per wheel	$65.50 per unicycle, not including the cost of wheels (one wheel per unicycle)
Items sold to outside market	915 wheels per month	420 per month
Capacity	1200 wheels per month	per month

1.If there were no tax implications, what range of transfer prices would instill goal congruence?

2. If the Unicycle division is in Canada, where the marginal tax rate is 23.6%, and the Wheel division is in the U.S., where the marginal tax rate is 35.8%, what transfer price (within the range you  identified in #1) will the company prefer?  

3. Calculate the tax savings to the company if it uses the transfer price you calculated in #2 instead of the transfer price at the opposite end of the range you calculated in #1.

3. Icecream.co sells ice cream cones and ice cream sundaes. The only constraint is that employees can only work 400 hours per week.  Hungryco would like to order 1020 ice cream sundaes and pay $7.25 each for them. Should Icecreamco take Hungryco’s order? (It’s all or nothing:  Icecream.co will not accept a partial order.)  Show your work.

	Ice Cream Cones	Ice Cream Sundaes
Price	$4.25	$9
VC	$2.19	$2.85
Time required to make	3 minutes	5 minutes
Current sales volume	5890 cones per week	360 sundaes per week

Answer 1

Kite. co

Given information

Particulars	standards for 850 kites	Actual for 850 kites
Hours	= 5.2*850= 4420 hrs	=5000( given)
Rate	= 46 per hour *4420 hrs=$203320	= 272300 (given)

Finding actual hrs rate paid= total expenditure incurred÷ total actual hrs

= $272300÷5000 hrs

=54.46 per hour

labour rate variance: labour rate variance is calculated as difference between standard rate per hour and actual rate per hour which is then multiplied by actual hours

=Actual Hours( standards rate per hour - actual rate per hour)

=5000(46-54.46) = 42300 Adverse

Labour efficiency variance: Labour efficiency variance is calculated as difference between standard hours and actual hours worked which is then multiplied by standard rate per hour

= Standard rate per hour ( standard hours- actual hours)

=46 (4420-5000) = 26680 Adverse

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Unicycle. Co

For finding Range of transfer pricing, first find marginal cost per month

Particulars	wheels division	unicycle division
Sales price	$15.00	$350.00
Variable cost	$6.25	$65.50
Variable cost of wheel		$6.25
Contribution per unit	$8.75	$278.25

Wheel division is having a capacity of 1200 wheels per month and having external demand of 915 wheels per month, so the remaining capacity of 285 i wheels per month is vacant. For transfer the 420 units to unicycles division wheels division have to forgive it's 135 wheels contribution

So the transfer price range will be as follows

Upper cap is the maximum sale price i.e 15

Lower cap is calculated as follows

= Variable cost of 420 units and contribution last in 135 units÷420 units

=(420*6.25)+(135*8.75)÷420

=9.0625

So, the range is between $9.0625 - $15.00

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Ice-cream.co

Particulars	cones	sundaes external demand	sundaes hungry co.s
a.Sales price	4.25	9.00	7.25
b. Variable cost	2.19	2.85	2.85
c..Contribution per unit( a-b)	2.06	6.15	4.4
d. Time required for each unit	3 minutes	5 minutes	5 minutes
e. Contribution per minute ( c÷ d)	0.6866	1.23	0.88
f. Ranking as per contribution	III	I	II
g. Demand	5890 units	360 units	1020 units
h.hours required for production( g*e÷ 60 minutes)	294.5 hrs	30 hrs	85hrs

Total hrs requires for complete demand= hrs required for all three activities

=294.5+30+85

=409.5hrs

Available hrs of only 400

So we will first allocate hrs to sundaes external market and then hungrys order

The left hrs are 285 hrs( 400hrs- 30 hrs - 85hrs)

So we will ristric the production of Cones to 285 hrs , which we can produce 5700 units ( =285 hrs* 60 minutes÷ 3 minutes per unit)

So, we can completely accept the hungrys order