Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 59

Pricing 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.

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2. Determine the price for the part using a markup of 25 percent of full life-cycle cost.

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3. Determine the price for the part using a desired gross margin percentage to sales of 40 percent.

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4. Determine the price for the part using a desired life-cycle cost percentage to sales of 25 percent.

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5. Determine the price for the part using a desired before-tax return on investment of 15 percent.

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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?

Step 1 of 6

   The price, contribution, and profit information is as follows. 

1.?$220.815 = $152.286  X 1.45 / 48,500