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

Requirement 1
a		Mark Up Percentage		=	425880/946400%
				=	45.00
b		Target selling price		=	131.95
					Total	Per unit
		Direct material			239200	23.00
		Direct Labor			332800	32.00
		Manufacturing overhead			374400	36.00
		cost of production/per unit			946400	91.00
		Add : profit/Mark up			425880	40.95	It Includes profit + all selling, general & administrative expenses
		Target Sales/selling price			1372280	131.95
c-1		Income statement
		Sales					1372280
		Less : Cost of goods sold					946400
		Gross Margin					425880
		Less : Selling, General & Administrative expenses
			Shipping			104000
			Salaries			38880
			Advertsing & other			175000
		Total selling, general & administrative expenses					317880
		Operating Income					108000
c-2		Company's ROI		=	108000/540000%
				=	20
Requirement 2
a	Mark up percentage for the total variable costing
		Sales units			10400
		Direct Materials			239200	23
		Direct Labor			332800	32
		Variable Manufacturing overhead			62400	6
		variable selling expenses			104000	10
		Total variable cost/per unit			738400	71
		Mark Up			633880	60.95	It includes profit+all fixed cost
		Selling price			1372280	131.95
		Mark Up percentage		=	633880/738400%
				=	85.85
		Target selling price		=	131.95