Question

Gerber Clothing Inc. has designed a rain suit for outdoor enthusiasts that is about to be introduced on the market. A standard cost card has been prepared for the new suit, as follows: Gerber Clothing Inc. has designed a rain suit for outdoor enthusiasts that is about to be introduced on the market. A standard cost card has been prepared for the new suit, as follows: Direct materials Direct labour Manufacturing overhead (1/6 variable) Standard Quantity or hours 2.4 metres 1.0 hours 1.0 hours Standard price or Rate $ 15 per metre 40 per hour 33 per hour Standard Cost $36.00 40.00 33.00 Total standard cost per suit $109.00 a. The only variable selling and administrative costs will be $10 per suit for shipping. Fixed selling and administrative costs will be as follows (per year): Salaries Advertising and other $ 95,755 425,000 Total $520,755 b. Since the company manufactures many products, it is felt that no more than 10,300 hours of labour time per year can be devoted to production of the new suits. c. An investment of $530,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment. The company wants a 20% ROI in new product lines. d. Manufacturing overhead costs are allocated to products on the basis of direct labour-hours.

Answer 1

1.

a.

Total time available for the production of the new suit = 10,300 hours

Labour hour required per suit = 1 hour

Total number of suits could be manufactured = 10,300 / 1 = 10,300

Direct Materials ( 36 * 10,300) Direct Labour (40 * 10,300) Prime cost Add: Manufacturing Overhead ( 33 * 10,300) Manufacturing cost 370,800 412,000 782,800 339,900 1,122,700 Shipping Cost (10,300 * 10) Salaries Advertisement & others Sales & Administration expenses 103,000 95,755 425,000 623,755 Investment ROI Required return on investment 530,000 20% 106,000

Markup Percentage = (Required return + Sales & Administration) / Manufacturing Cost

= ( 106,000 + 623,755 ) / 1,122,700

= 65%

.

Note:

Under absorption costing system, the cost base for markup should be the manufacturing cost.

b.

Direct Materials Direct Labour Add: Manufacturing Overhead Cost of production/ per unit Add: Profit/Mark up Target Sales/ Selling Price Total 370,800 412,000 339,900 1,122,700 729,755 1,852,455 Per Unit 36 40 33 109 70.85 179.85

Target selling price = 179.85

c1.

Income statement Sales Less : Cost of goods sold Gross Margin Less : Selling, General & Administrative expenses 1,852,455 1,122,700 729,755 Shipping Salaries Advertsing & other Total selling, general & administrative expenses Operating Income 103,000 95,755 425,000 623,755 106,000

c2.

Company's ROI = 106,000 / 530,000 = 20%

.

2.

Mark up percentage for the total variable costing Sales units 10,300 Direct Materials 370,800 Direct Labor 412,000 Variable Manufacturing overhead 56,650 variable selling expenses 103,000 Total variable cost/per unit 942,450 Mark Up 910,005 Selling price 1,852,455 36 40 5.5 10 91.5 88.35 It includes profit+all fixed cost 179.85 Mark Up percentage II 910,005/ 942,450 % 96.56% II Target selling price 179.85