Question

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Williams Inc. produces a single product, a part used in the manufacture of automobile transmissions. Known for its quality and performance, the part is sold to luxury auto manufacturers around the world. Because this is a quality product, Williams has some flexibility in pricing the part. The firm calculates the price using a variety of pricing methods and then chooses the final price based on that information and other strategic information. A summary of the key cost information follows. Williams expects to manufacture and sell 59,500 parts in the coming year. While the demand for Williams's part has been growing in the past 2 years, management is not only aware of the cyclical nature of the automobile industry, but also concerned about market share and profits during the industry's current downturn. Variable manufacturing Variable selling and administrative Facility-level fixed overhead Fixed selling and administrative Batch-level fixed overhead Total investment in product line Expected sales (units) Total Costs $ 4,661,000 836,650 2,326,875 656,495 341,000 22,331,000 59,500 Required: Determine the price for the part using a markup of 35% of full manufacturing cost. 2. Determine the price for the part using a markup of 23% of full life-cycle cost. 3. Determine the price for the part using a desired gross margin percentage to sales of 40%, . Determine the price for the part using a desired life-cycle cost mare - Determine the price for the part using a desired before-tax return on investment of 11%.

Answer 1

ANSWER 01 PRICE OF THE PART USING A MARK UP OF 35% ON FULL MANUFACTURING COST.

VARIABLE MANUFACTURING COST 4661000/-

VARIABLE SELLING AND ADMINISTRATIVE 836650/-

FACILITY LEVEL FIXED OVERHEAD 00/-

FIXED SELLING AND ADMINISTRATIVE 00/-

BATCH LEVEL FIXED OVERHEAD 00/-

TOTAL  MANUFACTURING COST 5497650/-

ADD 35% MARK UP 1924177/-

TOTAL 7421827/-

SALES UNIT 59500/-

PRICE OF THE PART (7421827/59500) 124.74/-

ANSWER 02 PRICE OF THE PART USING A MARK UP OF 23% ON FULL LIFE CYCLE COST.

VARIABLE MANUFACTURING COST 4661000/-

VARIABLE SELLING AND ADMINISTRATIVE 836650/-

FACILITY LEVEL FIXED OVERHEAD 2326875/-

FIXED SELLING AND ADMINISTRATIVE 656495/-

BATCH LEVEL FIXED OVERHEAD 341000/-

TOTAL  LIFE CYCLE COST 8822020/-

ADD 23% MARK UP 2029064/-

TOTAL 10851084/-

SALES UNIT 59500/-

PRICE OF THE PART (10851084/59500) 182.37/-

ANSWER 03 PRICE OF THE PART USING DESIRED GROSS MARGIN PERCENTAGE TO SALES OF 40%.

VARIABLE MANUFACTURING COST 4661000/-

VARIABLE SELLING AND ADMINISTRATIVE 836650/-

FACILITY LEVEL FIXED OVERHEAD 00/-

FIXED SELLING AND ADMINISTRATIVE 00/-

BATCH LEVEL FIXED OVERHEAD 00/-

TOTAL  MANUFACTURING COST 5497650/-

ADD DESIRED GROSS MARGIN % TO SALES OF 40%   3665100/-

((5497650/60%)-5497650)

TOTAL 9162750/-

SALES UNIT 59500/-

PRICE OF THE PART (9162750/59500) 153.99/-

ANSWER 04 PRICE OF THE PART USING DESIRED LIFE CYCLE COST MARGIN PERCENTAGE TO SALES OF 30%.

VARIABLE MANUFACTURING COST 4661000/-

VARIABLE SELLING AND ADMINISTRATIVE 836650/-

FACILITY LEVEL FIXED OVERHEAD 2326875/-

FIXED SELLING AND ADMINISTRATIVE 656495/-

BATCH LEVEL FIXED OVERHEAD 341000/-

TOTAL  LIFE CYCLE COST 8822020/-

ADD LIFE CYCLE COST MARGIN % TO SALES OF 30% 3780865/-

((8822020/70%)-8822020)

TOTAL 12602885/-

SALES UNIT 59500/-

PRICE OF THE PART (12602885/59500) 211.81/-

ANSWER 05 PRICE OF THE PART USING DESIRED BEFORE TAX RETURN ON INVESTMENT OF 11%.

VARIABLE MANUFACTURING COST 4661000/-

VARIABLE SELLING AND ADMINISTRATIVE 836650/-

FACILITY LEVEL FIXED OVERHEAD 2326875/-

FIXED SELLING AND ADMINISTRATIVE 656495/-

BATCH LEVEL FIXED OVERHEAD 341000/-

TOTAL  LIFE CYCLE COST 8822020/-

ADD 11% RETURN ON INVESTMENT (22331000 X 11%) 2456410/-

TOTAL 11278430/-

SALES UNIT 59500/-

PRICE OF THE PART (11278430/59500)    189.55/-

ANSWER 06

METHOD CONTRIBUTION MARGIN OPERATING PROFIT

MARK UP ON FULL MANUFACTURING COST 1924177/- (1400193/-)

MARK UP ON LIFE CYCLE COSTS 5353424/- 2029064/-

PRICE TO ACHIEVE DESIRED GM % 3665100/- 340730/-

PRICE TO ACHIEVE DESIRED LCC % 7105235/- 3780865/-

PRICE TO ACHIEVE DESIRED ROA OF 11 % 5780780/- 2456410/-