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 52,000 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	$	4,676,000
Variable selling and administrative		851,650
Facility-level fixed overhead		2,341,875
Fixed selling and administrative		671,495
Batch-level fixed overhead		356,000
Total investment in product line		22,346,000
Expected sales (units)		52,000

Required:

1. Determine the price for the part using a markup of 37% 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 36%.

4. Determine the price for the part using a desired life-cycle cost margin percentage to sales of 21%.

5. Determine the price for the part using a desired before-tax return on investment of 11%.

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

ROUND ALL ANSWERS TO 3 DECIMAL PLACES.

Answer 1

Part 1
Variable manufacturing cost	$       4,676,000
Fixed plant level overhead	$       2,341,875
Batch level fixed overhead	$           356,000
Full manufacturing cost	$       7,373,875
Selling and administrative cost:
Variable selling and administrative	$           851,650
Fixed selling and administrative	$           671,495
Total selling and administrative cost	$       1,523,145
Full cost	$       8,897,020
Add: margin [full manufacturing cost * 37%]	$       2,728,334
Sales revenue	$     11,625,354
Divided by: units sold	52,000
Selling price per unit	$           223.564
Part 2
Variable manufacturing cost	$       4,676,000
Fixed plant level overhead	$       2,341,875
Batch level fixed overhead	$           356,000
Full manufacturing cost	$       7,373,875
Selling and administrative cost:
Variable selling and administrative	$           851,650
Fixed selling and administrative	$           671,495
Total selling and administrative cost	$       1,523,145
Full cost	$       8,897,020
Add: margin [full cost * 21%]	$       1,868,374
Sales revenue	$     10,765,394
Divided by: units sold	52,000
Selling price per unit	$           207.027
Part 3
Variable manufacturing cost	$       4,676,000
Fixed plant level overhead	$       2,341,875
Batch level fixed overhead	$           356,000
Full manufacturing cost or cost of goods sold	$       7,373,875
Desired gross percentage	36%
Cost of goods sold to sales	64%
Cost of goods sold	$       7,373,875
Divided by: cost of goods sold to sales	64%
Sales revenue	$     11,521,680
Divided by: units sold	52,000
Selling price per unit	$           221.571
Part 4
Variable manufacturing cost	$       4,676,000
Fixed plant level overhead	$       2,341,875
Batch level fixed overhead	$           356,000
Full manufacturing cost	$       7,373,875
Selling and administrative cost:
Variable selling and administrative	$           851,650
Fixed selling and administrative	$           671,495
Total selling and administrative cost	$       1,523,145
Full cost	$       8,897,020
Desired net margin	21%
Full cost to sales	79%
Full cost	$       8,897,020
Divided by: cost of goods sold to sales	79%
Sales revenue	$     11,262,051
Divided by: units sold	52,000
Selling price per unit	$           216.578
Part 5
Variable manufacturing cost	$       4,676,000
Fixed plant level overhead	$       2,341,875
Batch level fixed overhead	$           356,000
Full manufacturing cost	$       7,373,875
Selling and administrative cost:
Variable selling and administrative	$           851,650
Fixed selling and administrative	$           671,495
Total selling and administrative cost	$       1,523,145
Full cost	$       8,897,020
Add: margin (22346000*11%)	$       2,458,060
Sales revenue	$     11,355,080
Divided by: units sold	52,000
Selling price per unit	$           218.367

Statement of profitability
	Part 1	Part 2	Part 3	Part 4	Part 5
Sales revenue	$     11,625,354	$ 10,765,394	$ 11,521,680	$ 11,262,051	$ 11,355,080
Less: variable cost
Variable manufacturing cost	$       4,676,000	$   4,676,000	$     4,676,000	$    4,676,000	$   4,676,000
Variable selling and administrative	$           851,650	$       851,650	$        851,650	$        851,650	$       851,650
Total variable cost	$       5,527,650	$   5,527,650	$     5,527,650	$    5,527,650	$   5,527,650
Contribution margin	$       6,097,704	$   5,237,744	$     5,994,030	$    5,734,401	$   5,827,430
Fixed cost
Fixed plant level overhead	$       2,341,875	$   2,341,875	$     2,341,875	$    2,341,875	$   2,341,875
Batch level fixed overhead	$           356,000	$       356,000	$        356,000	$        356,000	$       356,000
Fixed selling and administrative	$           671,495	$       671,495	$        671,495	$        671,495	$       671,495
Total fixed cost	$       3,369,370	$   3,369,370	$     3,369,370	$    3,369,370	$   3,369,370
Net operating profit	$       2,728,334	$   1,868,374	$     2,624,660	$    2,365,031	$   2,458,060