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:

a. The only variable selling and administrative costs will be $4 per suit for shipping. Fixed selling and administrative costs will be as follows (per year):
Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,000
Advertising and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $245,000
b. Since the company manufactures many products, it is felt that no more than 10,000 hours of labour time per year can be devoted to production of the new suits.
c. An investment of $500,000 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 10,000 hours of labour time.
b. Using the markup you have computed, prepare a price quote sheet for a single rain suit.
c. 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, and compute the company€™s ROI for the year on the suits, using the ROI formula from Chapter 11.
2. Repeat 1(a) and 1(b) above, assuming that the company uses the total variable costing approach to cost-plus pricing.
3. After marketing the rain suits for several years, the company is experiencing a decrease in demand due to an economic recession. A large retail outlet will make a bulk purchase of suits if its company logo is affixed to each suit and if an acceptable price can be worked out. What is the minimum acceptable price per rain suit for this order?

Transcribed Image Text:

Standard Price Standard Cost Standard Quantity or Hours or Rate Direct materials.. Direct labour.... Manufacturing overhead (s variable). Total standard cost per suit .. 25 metres 10 hours 1.0 hours $10.00 per metre 2800 per hour 24.00 per hour $25.00 28.00 24.00 $ TI00 ......... ..........