ACCY 307 Chapter Notes - Chapter 14: Target Costing, Price Fixing, Profit Margin
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Williams Inc. produces a single product, a part used in themanufacture of automobile transmissions. Known for its quality andperformance, the part is sold to luxury auto manufacturers aroundthe world. Because this is a quality product, Williams has someflexibility in pricing the part. The firm calculates the priceusing a variety of pricing methods and then chooses the final pricebased on that information and other strategic information. Asummary of the key cost information follows. Williams expects tomanufacture and sell 50,000 parts in the coming year. While thedemand for Williams's part has been growing in the past two years,management is not only aware of the cyclical nature of theautomobile industry but also concerned about market share andprofits during the industry’s next downturn.
Variable manufacturing | $4,680,000 | ||||
Variable selling and administrative | $855,650 | ||||
Plant-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 | ||||
Markup %s for product pricing: | |||||
a) fullmanufacturing cost | 55% | ||||
b) fulllife-cycle cost | 30% | ||||
c)desired gross margin percentage | 40% | ||||
d)desired life-cycle cost to sales percentage | 25% | ||||
e) before-taxROI | 15% | ||||
Required | |||||
1. Determine the price for the part usinga markup of 45 percent of full manufacturing cost. | |||||
2. Determine the price for the part usinga markup of 25 percent of full life-cycle cost. | |||||
3. Determine the price for thepart using a desired gross margin percentage to sales of 40percent. | |||||
4. Determine the price for the part usinga desired life-cycle cost percentage to sales of 25 percent. | |||||
5. Determine the price for the part usinga desired before-tax return on investment of 15 percent. | |||||
6. Determine thecontribution margin and operating profit for each of the methods inrequirements 1 through 5. Which price would you choose, andwhy? |
GIVEN: Kann Corporation produces industrial robots forhigh-precision manufacturing. The following information isavailable:
Per Unit Total
Direct materials $25.00
Direct labor $10.00
Variable manufacturing overhead $6.00
Fixed manufacturing overhead $36,000
Variable selling and administrative costs $4.00
Fixed selling and administrative costs $15,000
The company has a desired ROI of 20%. It has invested assets of$420,000. It anticipates making and selling 3,000 units peryear.
REQUIRED:
Part 1: Using the total (full) cost concept, determine the (a)unit cost amount; (b) markup percentage; and (c) unit targetselling price.
Part 2: Using the product (absorption) cost concept, determinethe (a) unit cost amount; and (b) markup percentage.
Part 3: Using the variable cost concept, determine the (a) unitcost amount; and (b) markup percentage.
Part 4: What is the target unit selling price under the threecost assumptions?
Part 5: What else should be considered when setting theproduct's selling price?
Part 6: Which of the three costing concepts would be mostappropriate in each of the following situations? 1. Externalreporting for GAAP 2. Normal (long-run) pricing 3. Evaluatingspecial orders
Part 7: Kann Corporation received a special order for 500 robotsat $50 each from a foreign customer. Acceptance of the order wouldincrease variable selling costs by $1.70 per unit because ofshipping costs, but would not increase fixed costs or interferewith any current orders. Prepare a differential analysis todetermine whether the special order should be accepted or not.
My school has no tutors for this; I will post what little Ihave, and attempt more myself, but I really do not know what I'mdoing. I do not know how these figures that I have weredetermined:
Full cost for 3000 units | Absorption cost for 3000units | Variable costs for 3000units | |||||||||
Direct materials | $75,000 | $75,000 | $75,000 | ||||||||
Direct labor | 30,000 | 30,000 | 30,000 | ||||||||
Variable manufacturingoverhead | 18,000 | 18,000 | 18,000 | ||||||||
Fixed manufacturingoverhead | 36,000 | 36,000 | |||||||||
Variable selling overhead | 12,000 | 12,000 | |||||||||
Fixed selling overhead | 15,000 | ||||||||||
Total cost | 186,000 | 159,000 | 135,000 | ||||||||
Cost per unit | 62 | 53 | 45 | ||||||||
Desired profit = 42,000 *20% | 84,000 | 84,000 | 84,000 | ||||||||
Sales value | 270,000 | 243,000 | 219,000 | ||||||||
Sales price per unit | 90 | 81 | 73 |