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 50,000 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 $ 4,680,000
Variable selling and administrative 855,650
Facility-level fixed overhead 2,345,875
Fixed selling and administrative 675,495
Batch-level fixed overhead 360,000
Total investment in product line 22,350,000
Expected sales (units) 50,000
Required:
1. Determine the price for the part using a markup of 45% of full manufacturing cost.
2. Determine the price for the part using a markup of 25% 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 25%.
5. Determine the price for the part using a desired before-tax return on investment of 15%.
6. Determine the total contribution margin and total operating profit for each of the methods in requirements 1 through 5.
Determine the price for the part using a markup of 45% of full manufacturing cost. (Do not round intermediate calculations. Round your answer to 4 decimal places.)
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Determine the price for the part using a markup of 25% of full life-cycle cost. (Do not round intermediate calculations. Round your answer to 4 decimal places.)
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Determine the price for the part using a desired gross margin percentage to sales of 40%. (Round your intermediate calculations and answer to 4 decimal places.)
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Determine the price for the part using a desired life-cycle cost margin percentage to sales of 25%. (Round your intermediate calculations and answer to 4 decimal places.)
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Determine the price for the part using a desired before-tax return on investment of 15%. (Round your intermediate calculations and answer to 4 decimal places.)
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Determine the total contribution margin and total operating profit for each of the methods in requirements 1 through 5. (Round your intermediate calculations to 4 decimal places.)
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( SEE WORKING below)
(1) The price for the part using a markup of 45% of full manufacturing cost = 147.7175 * 145% = 214.1904 per unit
(2) The price for the part using a markup of 25% of full life-cycle cost = 178.3404 * 125% = 222.9255 per unit
(3) The price for the part using a desired gross margin percentage to sales of 40% = 246.1960 per unit
X - 0.4 X = 147.7175
X = 246.1960
(4) The price for the part using a desired life-cycle cost margin percentage to sales of 25% = 237.7870 per unit
X - 0.25X = 178.3404
X = 237.7870
(5) The price for the part using a desired before-tax return on investment of 15% = 245.3958 per unit
Calculation : ( 22,350,000 * 15% ) / ( 50000 * 178.3404 )= 37.5966%
= 178.3404 ( 100 + 37.5966 )% = 245.3958
(6)
| Situation | Sellin price | Variable cost | Contribution | Contribution | Fixed cost | Operating |
| (a) | (b) | ( c = a - b) | Margin (c*50000) | (2705875+675495) | profit | |
| 1 | 214.1904 | 110.713 | 103.4774 | 51,73,850 | 3381370 | 1792480 |
| 2 | 222.9255 | 110.713 | 112.2125 | 56,10,600 | 3381370 | 2229230 |
| 3 | 246.196 | 110.713 | 135.483 | 67,74,150 | 3381370 | 3392780 |
| 4 | 237.787 | 110.713 | 127.074 | 63,53,700 | 3381370 | 2972330 |
| 5 | 245.3958 | 110.713 | 134.6828 | 67,34,140 | 3381370 | 3352770 |
Operating profit = Contribution margin - fixed costs
Working :
| Total variable cost | 5535650 |
| (4680000+855650) | |
| Variable cost per unit | 110.713 |
| (5535650/50000) | |
| Total variable manufacturing cost | 4680000 |
| Tota fixed manufacturing cost | 2705875 |
| (2,345,875 +360,000) | |
| Total Manufacturing cost (A) | 7385875 |
| Total selling and administrative cost (B) | 1531145 |
| (855,650 +675,495) | |
| Total life cycle cost ( c = a+ b) | 8917020 |
| Number of units (D) | 50000 |
| Manufacturing cost per unit ( a / d) | 147.7175 |
| Life cycle cost per unit ( c / d) | 178.3404 |
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