Gerber Clothing Inc. has designed a rain suit for outdoor enthusiasts that is ab

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 Standard price Standard Cost 10 per metre $23.00 32.00 36.00 or Rate 32 per hour 36 per hour Quantity or hours Direct materials Direct labour Manufacturing overhead (1/6 variable) 2.3 metres 1.0 hours 1.0 hours Total standard cost per suit $91.00 a The only variable selling and administrative costs will be $10 per suit for shipping. Fixed seling and administrative costs will be as follows (per year) Salaries Advertising and other 38,880 175,000 Total $213,880 b. Since the company manufactures many products, it is felt that no more than 10,400 hours of labour time per year can be devoted to production of the new suits. c. An investment of $540,000 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. 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 10,400 hours of labour time a. Markup percentage

Explanation / Answer

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

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