Question

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 55,000 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.

	Total Costs
Variable manufacturing	$	4,670,000
Variable selling and administrative		845,650
Facility-level fixed overhead		2,335,875
Fixed selling and administrative		665,495
Batch-level fixed overhead		350,000
Total investment in product line		22,340,000
Expected sales (units)		55,000

Required:

1. Determine the price for the part using a markup of 41% of full manufacturing cost.

2. Determine the price for the part using a markup of 21% of full life-cycle cost.

3. Determine the price for the part using a desired gross margin percentage to sales of 41%.

4. Determine the price for the part using a desired life-cycle cost margin percentage to sales of 26%.

5. Determine the price for the part using a desired before-tax return on investment of 15%.

6. Determine the total contribution margin and total operating profit for each of the methods in requirements 1 through 5.

Answer 1

Working Note
Particular	Amount	Per Unit Cost
No. of Unit		55000
Variable Manufacturing Cost (A)	$4,670,000.00	$84.91
		(4670000/55000)
Fixed Manufacturing Cost
Facility Level	$2,335,875.00
Batch Level	$350,000.00
Total Fixed Manufacturing Overhead (B)	$2,685,875.00	$48.83
		(2685875/55000)
Total Manufacturing Cost (A+B)	$7,355,875.00	$133.74
Selling & Admin Cost
Variable selling & Admin Cost	$845,650.00
Fixed Selling & Admin Cost	$665,495.00
Total Selling & Admin Cost (c )	$1,511,145.00	$27.48
		(1511145/55000)
Life Cycle Cost ( A+B+C)	$8,867,020.00	$161.22

Part-1 Computation of Price at 35% mark up of Manufacturing Cost
Total Manufacturing Cost per Unit	$133.74
Add; Mark Up @ 41%	$54.83
Total Price per part	$188.58
Part-2 Computation of Price at 23% mark up of full life cycle Cost
Full life cycle cost	$161.22
Add; Mark Up @ 21%	$33.86
Total Price per part	$195.07
Part-3 Computation of Price using desired Gross margin % to sales
Let Selling price	X
Less: Desired Gross Margin (X x 41%)	0.41X
Cost	0.59x
Total Manaufacturing cost per Unit as calculated	$133.74
cost= 0.59X
$133.74=0.59X
X=$226.68
Hence Price per part will be $226.68
Part-4 Computation of Price using desired Gross margin % to sales
Let Selling price	X
Less: Desired Margin (X x 26%)	0.26X
Life Cycle cos	0.74X
Total Life Cycle cost	$161.22
Life Cycle cost = 0.74X
$161.22=0.74X
X=$217.86
Hence Price per part will be $217.86

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