Williams Inc. produces a single product, a part used in the manufacture of automobile transmissions. Known for
Question:
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 48,500 parts in the coming year. While the demand for Williams’ part has been growing in the past two 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
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) .............. 48,500
Required
1. Determine the price for the part using a markup of 45 percent of full manufacturing cost.
2. Determine the price for the part using a markup of 25 percent of full life-cycle cost.
3. Determine the price for the part using a desired gross margin percentage to sales of 40 percent.
4. Determine the price for the part using a desired life-cycle cost percentage to sales of 25 percent.
5. Determine the price for the part using a desired before-tax return on investment of 15 percent.
6. Determine the contribution margin and operating profit for each of the methods in requirements 1 through 5. Which price would you choose, and why?
Contribution MarginContribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Step by Step Answer:
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins