Question

Williams Inc. produces a single product, a part used in the manufacture of automobile transmissions.

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 58.500 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. Variable manufacturing Variable selling and administrative Facility-level fixed overhead Fixed selling and administrative Batch-level fixed overhead Total investment in product line Expected sales (units) Total Costs $ 4,663, eee 838,650 2,328,875 658,495 343,000 22,333,000 58,500 Required: 1. Determine the price for the part using a markup of 39% of full manufacturing cost. 2. Determine the price for the part using a markup of 20% 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 28%, 5. Determine the price for the part using a desired before tax return on investment of 13%. 6. Determine the total contribution margin and total operating profit for each of the methods in requirements 1 through 5.

Answer 1

A B с D E F G 1 2. a. C. 3 4663000 2328875 343000 4663000 838650 343000 5844650 4 5 7334875 Variable Manufacturing Plant Level Fixed Overhead Batch Level Fixed Overhead Total Manufacturing Cost Add: Mark up @ 39% Total Price Quantity to be sold Selling Price per unit Variable Manufacturing Variable Selling & And. Exp. Batch Level Fixed Overhead Total Manufacturing Cost Add: Gross margin -41% on Sales Total Price Quantity to be sold Selling Price per unit 6 7 2860601.25 10195476.25 58500 174.28 2396307 8240957 58500 140.87 8 9 10 11 b. 4663000 d. 4663000 12 838650 2328875 13 14 838650 2328875 658495 343000 8832020 658495 Variable Manufacturing Variable Selling & And. Exp. Plant Level Fixed Overhead Fixed Selling & And. Exp. Batch Level Fixed Overhead Total Cost Add: Mark up @ 20% Total Price Quantity to be sold Selling Price per unit 15 Variable Manufacturing Variable Selling & And. Exp. Plant Level Fixed Overhead Fixed Selling & And. Exp. Batch Level Fixed Overhead Total Cost Add: Gross margin -28% on Sales Total Price Quantity to be sold Selling Price per unit 16 17 1766404 343000 8832020 2472966 11304986 58500 193.25 18 105984241 19 58500 20 181.17 21

For calculation ref:

A B C D E F G 1 2. a. C. 3 4 un Variable Manufacturing Plant Level Fixed Overhead Batch Level Fixed Overhead Total Manufacturing Cost Add: Mark up @ 39% Total Price Quantity to be sold Selling Price per unit |4663000 2328875 343000 =SUM(C2:04) =C5*39% 1=C5+C6 58500 =C7/08 =B11 1=C11 =B12 =C12 Batch Level Fixed Overhead =C15 Total Manufacturing Cost =SUM(G2:G4) Add: Gross margin -41% on Sales =G5*41% Total Price =SUM(G5:46) Quantity to be sold 58500 Selling Price per unit =G7/G8 6 7 8 9 10 11 b. =C2 d. 12 838650 13 =C3 14 15 Variable Manufacturing Variable Selling & And. Exp. Plant Level Fixed Overhead Fixed Selling & And. Exp. Batch Level Fixed Overhead Total Cost Add: Mark up @ 20% Total Price Quantity to be sold Selling Price per unit Variable Manufacturing =G2 Variable Selling & And. Exp. =G3 Plant Level Fixed Overhead 2328875 Fixed Selling & And. Exp. =C14 Batch Level Fixed Overhead =G4 Total Cost =SUM(G11:G15) Add: Gross margin -28% on Sales =G16*28% Total Price =G17+G16 Quantity to be sold 58500 Selling Price per unit =G18/19 16 658495 =C4 =SUM(C11:015) =C16*20% =SUM(C16:C17) 58500 =C18/019 17 18 19 20 21 22