Question

Lawson Manufacturing Company paid production workers wages of $100,000. It incurred material costs of $120,000 and manufacturing overhead costs of $160,000. Selling and general administrative salaries were $80,000. Lawson started and completed 1000 units of product and sold 800 of these units. The Company sets sales price at $220 above the average per-unit production cost. Based on the information alone, determine the amount of gross margin and net income? What is Lawson’s pricing strategy called? (6 points)

Answer 1

Calculate average production cost per unit :

Direct material	120000
Direct labour	100000
Manufacturing overhead	160000
Total production cost	380000
Units	1000
Production cost per unit	380

Sale price per unit = 380+220 = $600 per unit

Calculate amount of gross margin and net income :

Sales (600*800)	480000
Less: Cost of goods sold (380*800)	-304000
Gross margin	176000
Less: Selling and administrative expense	-80000
Net operating income	96000

Lawson's pricing strategy called Cost plus pricing method.