Question

Wilderness Products, Inc., has designed a self-inflating sleeping pad for use by backpackers and campers.

The following information is available about the new product:

a. An investment of $1,500,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment needed in the manufacturing process.

The company’s required rate of return is 10% on all investments.

b. A standard cost card has been prepared for the sleeping pad, as shown below: Standard Quantity or Hours Standard Price or Rate Standard Cost Direct materials 6 yards $ 3.00 per yard $ 18.00 Direct labor 3.6 hours $ 6.00 per hour 21.60 Manufacturing overhead (20% variable) 3.6 hours $ 10.00 per hour 36.00 Total standard cost per pad $ 75.60

c. The only variable selling and administrative expense will be a sales commission of $6 per pad. The fixed selling and administrative expenses will be $2,749,800 per year.

d. Because the company manufactures many products, no more than 97,200 direct labor-hours per year can be devoted to production of the new sleeping pads. e. Manufacturing overhead costs are allocated to products on the basis of direct labor-hours.

Required: 1. Assume that the company uses the absorption approach to cost-plus pricing. a. Compute the markup percentage that the company needs on the pads to achieve a 10% return on investment (ROI) if it sells all of the pads it can produce. b. What selling price per sleeping pad will the company establish if it uses a markup percentage on absorption cost? (Round intermediate calculations and final answer to 2 decimal places.) c. Assume that the company is able to sell all of the pads that it can produce. Prepare an income statement for the first year of activity. Compute the company’s ROI based on the first year of activity. 2. After marketing the sleeping pads for several years, the company is experiencing a falloff in demand due to an economic recession. A large retail outlet will make a bulk purchase of pads if its label is sewn in and if an acceptable price can be worked out. What is the minimum acceptable price for this special order? (Round your answer to 2 decimal places.)

Answer 1

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Part 1 a
No of Pads Produced	97200 Hours/3.6 Hour per pad	27,000	pads
Markup Percentage
Required ROI	1500000*10%		$       150,000
Add: Selling and Admin Expense
Variable	27000*6		$       162,000
Fixed			$   2,749,800
Total A			$   3,061,800
Unit Product Cost			$            75.60
Units Sale			27,000
Total Product Cost B	75.6*27000		$   2,041,200
Markup Percentage	A/B		150%
Working:
Unit product cost:
Direct Material			$            18.00
Direct Labor			$            21.60
Variable Overhead	36*20%		$              7.20
Fixed Overhead			$            28.80
			$            75.60
Part 1 b
Product cost per unit			$            75.60
Mark up	150%		$         113.40
Selling Price			$               189
Part 1 c
Sale	27000*$ 189		$   5,103,000
Less: Cost of Goods Sold	27000*$ 75.6		$   2,041,200
Gross Maring			$   3,061,800
Less: Selling and Admin Expense			$   2,911,800
Net Operating Income			$       150,000
Part 2
Variable Costs:
Direct Material			$                  18
Direct Labor			$                  22
Variable Overhead			$                    7
Variable Selling and Admin			$                    6
Minimum Acceptable price			$                  53