Montana Fishing Equipment Company (MFEC) manufactures a variety of fly-fishing equipment, including fly-fishing rods and reels. The company would like to develop a unified approach to pricing its product line for next year using cost-plus pricing but does not know what cost base should be used.
Last year, MFEC earned $140,000 of profit from sales of its products and would like to earn $200,000 next year. Last year, the company incurred the following costs:
Manufacturing Costs
Variable ........ $250,000
Fixed ......... 150,000
Selling and Administrative Costs
Variable ........ $100,000
Fixed .......... 200,000

Required
A. Calculate the markup percentage for each of the following cost bases:
a. Full costs, including all manufacturing and selling and administrative costs
b. Cost of goods sold
c. Total variable costs
d. Variable manufacturing costs
B. Explain why the markup percentage calculated in question A is lower when using full costs as the base than when using variable manufacturing costs as the base.
C. MFEC’s best fly rod (the Trout Catcher model) costs $150 to manufacture and includes $90 of variable manufacturing costs and $60 of fixed overhead costs. Assuming the company uses a markup on variable manufacturing costs, what is the recommended sales price of the rod?
D. Competitors sell comparable fly rods for $299. Based on this information, should MFEC price the Trout Catcher model by using a cost-plus approach or a different approach?