Question

Gerber Clothing Inc. has designed a rain suit for outdoor enthusiasts that is about to be introduced on the market.

A standard cost card has been prepared for the new suit, as follows:

	Standard Quantity or hours		Standard price or Rate			Standard Cost
Direct materials	2.0	metres	$	15	per metre	$	30.00
Direct labour	1.0	hours		35	per hour		35.00
Manufacturing overhead (1/6 variable)	1.0	hours		15	per hour		15.00
Total standard cost per suit						$	80.00

a.	The only variable selling and administrative costs will be $5 per suit for shipping. Fixed selling and administrative costs will be as follows (per year):

Salaries	$	55,300
Advertising and other		248,000
Total	$	303,300

b.	Since the company manufactures many products, it is felt that no more than 10,700 hours of labour time per year can be devoted to production of the new suits.
c.	An investment of $570,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment. The company wants a 20% ROI in new product lines.
d.	Manufacturing overhead costs are allocated to products on the basis of direct labour-hours.

Required:
1.	Assume that the company uses the absorption approach to cost-plus pricing.

a.	Compute the markup that the company needs on the rain suits to achieve a 20% ROI if it sells all of the suits it can produce using 10,700 hours of labour time.

             

b.	Using the markup you have computed, prepare a price quote sheet for a single rain suit. (Round your answers to 2 decimal places.)

           

c-1.	Assume that the company is able to sell all of the rain suits that it can produce. Prepare an income statement for the first year of activity.

          

c-2.	Compute the company’s ROI for the year on the suits, using the ROI formula. (Do not round intermediate calculations.)

        

2.	Repeat requirements 1a and 1b above, assuming that the company uses the total variable costing approach to cost-plus pricing. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

          

Answer 1

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Part 1 a
No of Rain Suits Produced	10700 Hour/1 Hour	10,700	Rain Suits
Markup Percentage
Required ROI	570000*20%		$        114,000
Add: Selling and Admin Expense
Variable	10700*5		$          53,500
Fixed			$        303,300
Total A			$        470,800
Unit Product Cost			$            80.00
Units Sale			10,700
Total Product Cost B	10700*80		$        856,000
Markup Percentage	A/B		55.00%
Working:
Unit product cost:
Direct Material			$            30.00
Direct Labor			$            35.00
Variable Overhead	15/6		$              2.50
Fixed Overhead			$            12.50
			$            80.00
Part 1 b
Product cost per unit			$            80.00
Mark up	55%		$            44.00
Selling Price			$          124.00
Part 1 c
Sale	10700*124		$     1,326,800
Less: Cost of Goods Sold	10700*80		$        856,000
Gross Maring			$        470,800
Less: Selling and Admin Expense			$        356,800
Net Operating Income			$        114,000
ROI	114000/570000		20%
Part 2
Markup Percentage
Required ROI	570000*20%		$        114,000
Add: Selling and Admin Expense
Variable	10700*5		$          53,500
Fixed			$        303,300
Total A			$        470,800
Unit Product Cost			$            67.50
Units Sale			10,700
Total Product Cost B	10700*80		$        722,250
Markup Percentage	A/B		65.19%
Working:
Unit product cost:
Direct Material			$            30.00
Direct Labor			$            35.00
Variable Overhead	15/6		$              2.50
			$            67.50
Part 1 b
Product cost per unit			$            67.50
Mark up	65.19%		$            44.00
Selling Price			$          111.50