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 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. Total Costs Variable manufacturing Variable selling and administrative Facility-level fixed overhead Fixed selling and administrative Batch-level fixed overhead $4,661,000 836,650 2,326,875 656,495 341,000 22,331,000 59,500 Total investment in product line Expected sales (units) Required: 1. 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%. 4. Determine the price for the part using a desired life-cycle cost margin percentage to sales of 30% 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.

Answer 1

SOLUTION:

1.

Particulars	Amount	Remarks
Variable Manufacturing Cost	$4,661,000.00	Given
Facility Level fixed Overhead	$2,326,875.00	Given
Batch Level Fixed Overhead	$341,000.00	Given
Full Manufacturing Cost	$7,328,875.00
Selling And Administrative Cost:
Variable selling and administrative	$836,650.00	Given
Fixed selling and administrative	$656,495.00	Given
Total Selling And Administrative Cost	$1,493,145.00
Full Cost	$8,822,020.00
Add: Margin @35% on $ 7,385,875	$2,565,106.25	As per requirement of question
Total Sale	$11,387,126.25
No of units	59,500.00
Price per unit (Total Sale/ no of units)	$191.38

2.

Particulars	Amount	Remarks
Variable Manufacturing Cost	$4,661,000.00	Given
Facility Level fixed Overhead	$2,326,875.00	Given
Batch Level Fixed Overhead	$341,000.00	Given
Full Manufacturing Cost	$7,328,875.00
Selling And Administrative Cost:
Variable selling and administrative	$836,650.00	Given
Fixed selling and administrative	$656,495.00	Given
Total Selling And Administrative Cost	$1,493,145.00
Full Cost	$8,822,020.00
Add: Margin @23% on $ $8,822020	$2,029,064.60	As per requirement of question
Total Sale	$10,851,084.60
No of units	59,500.00
Price per unit (Total Sale/ no of units)	$182.37

3.

Particulars	Amount	Remarks
Variable Manufacturing Cost	$4,661,000.00	Given
Facility Level fixed Overhead	$2,326,875.00	Given
Batch Level Fixed Overhead	$341,000.00	Given
Full Manufacturing Cost	$7,328,875.00
Selling And Administrative Cost:
Variable selling and administrative	$836,650.00	Given
Fixed selling and administrative	$656,495.00	Given
Total Selling And Administrative Cost	$1,493,145.00
Full Cost	$8,822,020.00
Add: Margin	$3,393,015.96	As per note below
Total Sale	$12,215,035.96
No of units	59,500.00
Price per unit (Total Sale/ no of units)	$205.29

Note:
Gross Margin on sales	40%
Cost of sales (100-40)	60%
% of Margin of Cost (40/60 x 100)	66.67%
Gross Profit (7,328,875 x 66.67)	$4,886,160.96
Less: Selling and Admin Cost	$1,493,145.00
Net Margin	$3,393,015.96

4.

Particulars	Amount	Remarks
Variable Manufacturing Cost	$4,661,000.00	Given
Facility Level fixed Overhead	$2,326,875.00	Given
Batch Level Fixed Overhead	$341,000.00	Given
Full Manufacturing Cost	$7,328,875.00
Selling And Administrative Cost:
Variable selling and administrative	$836,650.00	Given
Fixed selling and administrative	$656,495.00	Given
Total Selling And Administrative Cost	$1,493,145.00
Full Cost	$8,822,020.00
Add: Margin @42.85% on $ $8,822020	$3,780,235.57	As per requirement of question
Total Sale	$12,602,255.57
No of units	59,500.00
Price per unit (Total Sale/ no of units)	$211.80

Gross Margin on sales	30%
Cost of sales (100-30)	70%
% of Margin of Cost (30/70 x 100)	42.85%

5.

Particulars	Amount	Remarks
Variable Manufacturing Cost	$4,661,000.00	Given
Facility Level fixed Overhead	$2,326,875.00	Given
Batch Level Fixed Overhead	$341,000.00	Given
Full Manufacturing Cost	$7,328,875.00
Selling And Administrative Cost:
Variable selling and administrative	$836,650.00	Given
Fixed selling and administrative	$656,495.00	Given
Total Selling And Administrative Cost	$1,493,145.00
Full Cost	$8,822,020.00
Add: Margin @11% on $ $22331000	$2,456,410.00	As per requirement of question
Total Sale	$11,278,430.00
No of units	59,500.00
Price per unit (Total Sale/ no of units)	$189.55

6.

Statement of profitability:
	Method-1	Method-2	Method-3	Method-4	Method-5
Sales	$11,387,126.25	$10,851,084.60	$12,215,036	$12,602,255.57	$11,278,430.00
Variable Cost:
Variable Manufacturing Cost	$4,661,000.00	$4,661,000.00	$4,661,000.00	$4,661,000.00	$4,661,000.00
Variable selling and administrative	$836,650.00	$836,650.00	$836,650.00	$836,650.00	$836,650.00
Total Variable Cost	$5,497,650.00	$5,497,650.00	$5,497,650.00	$5,497,650.00	$5,497,650.00
Contribution (Sale - Variable cost)	$5,889,476.25	$5,353,434.60	$6,717,385.96	$7,104,605.57	$5,780,780.00
Fixed Cost:
Facility Level fixed Overhead	$2,326,875.00	$2,326,875.00	$2,326,875.00	$2,326,875.00	$2,326,875.00
Batch Level Fixed Overhead	$341,000.00	$341,000.00	$341,000.00	$341,000.00	$341,000.00
Fixed selling and administrative	$656,495.00	$656,495.00	$656,495.00	$656,495.00	$656,495.00
Total Fixed Cost	$3,324,370.00	$3,324,370.00	$3,324,370.00	$3,324,370.00	$3,324,370.00
Profit (Contribution - Fixed Cost)	$2,565,106.25	$2,029,064.60	$3,393,015.96	$3,780,235.57	$2,456,410.00
Investment	$22,331,000.00	$22,331,000.00	$22,331,000.00	$22,331,000.00	$22,331,000.00
ROI	11.49%	9.09%	15.19%	16.93%	11.00%
Best Choice will be Method 5. It is because the pricing is based on the return on Investment. This method will give required return on investment.