Exercise 13.20 Wagon Wheels manufactures personalized wagons for toddlers. Each

Question

Exercise 13.20 Wagon Wheels manufactures personalized wagons for toddlers. Each wagon goes through a woodworking process, painting, and assembly. Wagon Wheels produces and sells 6,900 wagons per year. Wagon Wheels' owners have invested $59,400 in the business and desire a return of 15%. Wagon Wheels costs include Variable Fixed Direct labour services Office staff Materials Supplies Marketing Overhead 240,120 per year $29,670 per year 5 47 per wagon s 3.70 per wagon S1.10 per wan 4,416 per year 2.277 per year $897 per year Determine the mark-up percentage using (Round all entries to 2 decimal places, e.g. 15.25%.) Mark-up percentage 1. Absorption cast-based pricing 2. Variable cost based pricing 3. Total cost-based pricing 130

Explanation / Answer

Solution 1:

Absorption cost = Material Cost + Direct labor cost + Overhead cost

= (6900 * $47) + $240,120 + (6900*$1.10 + $897) = $572,907

Required return = $59,400 * 15% = $8,910

Required margin to cover other cost and desired return = $29,670 + $4,416 + (6900*$3.70) + $2,277 + $8,910

= $70,803

Markup on absorption cost based pricing = $70,803 / $572,907 = 12.36%

Solution 2:

Variable cost = Material cost + Variable overhead + Variable marketing cost

= 6900 * $47 + 600*$1.10 + 6900*$3.70 = $357,420

Total fixed cost = $240,120 + $29,670 + $4,416 + $2,277 + $897 = $277,380

Required markup to cover fixed cost and desired return = $277,380 + $8,910 = $286,290

Markup percentage based on variable costing = $286,290 / $357,420 = 80.10%

Solution 3:

Total cost = Variable cost + Fixed cost = $357,420 + $277,380 = $634,800

Desired return = $8,910

Markup percentage based on total cost = $8,910 / $634,800 = 1.40%

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