Question

price setting: wire solution

manufacturing cost for shoe rack:

black: $2.80

chrome: $3.60

selling retail in the $9.95-$19.95 range

administrative overhead cost: $95,000 per year

sales value per year $3.6 million

Pricing setting Wire Solutions case in text Manufacturing cost $3.60 chrome shoe rack $2.80 black shoe rack Selling retail in the $9.95-$19.95 range Administrative overhead $95,000 per yearl Sales value per year $3.6 million (show all your work) 1. If wire solution took a 30 % markup on the manufacturing costs for the black shoe rack and a 35% markup on manufacturing cost for the chrome shoe rack what would the selling prices be for each? 2. Given the selling prices shown above. In this scenario, Wal-Mart elected to purchase the shoe racks and they took a 40 % markup on each shoe rack what would the final customers (Wal-Mart consumers) pay for each shoe rack? 3. Since they are just starting the consumer division, Wire Solutions may decide to focus on just the chrome shoe rack because it appears to be a better quality product Let's assume a variable cost of $2.20 per chrome rack, and taking the current 359% markup on manufacturing costs to calculate selling price outlined in question # 1, how many chrome shoe racks would they need to sell to break even? 4. If wire solution sold directly to retailer and they wanted the chrome shoe rack to sell for $9.99 in retail stores, what should they sell it to a retailer for assuming the retailers will take 45 % markup? Calculate wire Solution markup percentage based this selling price.

Answer 1

1. If wire solutions took a 30% mark-up on manufacturing cost of black shoe rack, then its selling price would be -

a. Manufacturing cost of Black shoe rack - $2.8/ rack (Given)

Add: 30% markup i.e. 30/100*2.8 = $0.84/rack

Hence, selling price will be $3.64/rack

b. Manufacturing cost of chrome shoe rack - $3.6/ rack (Given)

Add: 35% markup i.e. 35/100*3.6 = $1.26/rack

Hence, selling price will be $4.86/rack

2. Wire solution will sell Black shoe rack and chrome shoe rack for $3.64 and $4.86 each respectively. Hence, for Wal-mart, Cost of purchase of black shoe rack will be $3.64 and chrome Shoe rack will be $4.86 each respectively. Now, if Wal-mart takes 40% mark up on each rack, then selling price would be-

a. Purchase cost of Black shoe rack - $3.64/rack (As arrived above)

Add: 40% markup i.e. 40/100*3.64 = $1.456/rack

Hence, selling price will be $5.096/rack

b. Purchase cost of chrome shoe rack - $4.86/rack (As arrived above)

Add: 40% markup i.e. 40/100*4.86 = $1.944/rack

Hence, selling price will be $6.804/rack

3. Let say variable cost of chrome shoe rack is $2.2 / rack - (Given in question)

It will take 35% markup on manufacturing cost as arrived in point number 1 above i.e selling price will be 4.86/rack

Therefore, contribution per rack can be calculated as below:

Selling price of rack = $4.86

Variable cost of rack = $2.2

Therefore, Contribution / rack = $4.86-$2.2 = $2.66

Now, Administrative overhead cost given is $95000/year

therefore, to achieve break even point company will need to sell $95000/$2.66 =  35715 (rounded off) units per year of chrome shoe rack.

4. Here, question does not clarify whether the mark up of retailers is on purchase cost or selling price. hence, answer for both the scenarios is given below:

If Mark up is on Purchase cost of retailers:

Wire solution wants this rack to be sold at $9.99 to consumers. Now, let us say, purchase cost of chrome rack to retailers is A. Therefore, mark up for retailers will be 45/100*A = 0.45A

We know that, Cost + Mark up = Selling price.

therefore, A+0.45A = $9.99

i.e. 1.45A = $9.99

I.e. A = 6.89(rounded off)

Hence, purchase cost for retailers can be $6.89 which means Wire solutions can sell it for $6.89/rack

In such a case, mark up percentage for wire solution will be-

Mark up = $6.89-$3.6 = $3.29/rack i.e.

Mark up on manufacturing cost = $3.29/$3.6*100 = 91.39% or

Mark up selling price will be = $3.29/$6.89*100 = 47.75

b. If Mark up is on selling price:

Wire solution wants this rack to be sold at $9.99 to consumers. Therefore, mark up for retailers will be 45/100*$9.99=$4.49

We know that, Cost = Selling price - mark up

therefore, Cost = $9.99 - $4.49 = $5.5

Hence, purchase cost for retailers can be $5.5 which means Wire solutions can sell it for $5.5/rack

In such a case, mark up percentage of wire solutions will be-

Mark up = $5.5-$3.6 = $1.9/rack i.e.

Mark up on manufacturing cost = $1.9/$3.6*100 = 52.77% or

Mark up selling price will be = $1.9/$5.5*100 = 34.54%