Pipestem Golf produces a wide variety of golfing equipment. In the past, product managers set prices using their professional judgment. Samuel Snead, the new controller, believes this practice has led to the significant underpricing of some products (with lost profits) and the significant overpricing of other products (with lost sales volume). You have been asked to assist Snead in developing a corporate approach to pricing. The output of your work should be a cost-based formula that can be used to develop initial selling prices for each product. Although product managers are allowed to adjust these prices to meet competition and to take advantage of market opportunities, they must explain such deviations in writing. The following 2017 cost information from the accounting records is available:

In 2017, Pipestem Golf reported earnings of \($175,000\). However, the controller believes that proper pricing should produce earnings of at least \($225,000\) on the same sales mix and unit volume. Accordingly, you are to use the preceding cost information and a target profit of \($225,000\) in developing a cost-based pricing formula. Selling and administrative expenses are not currently associated with individual products.
However, you have obtained the following unit production cost information for the TW Irons:

Required

a. Determine the standard markup percentage for each of the following cost bases. Round answers to two decimal places.
1. Full costs, including fixed and variable manufacturing costs, and fixed and variable selling and administrative costs.
Manufacturing costs plus variable selling and administrative costs.
Manufacturing costs.
Variable costs.
5. Variable manufacturing costs.

b. Explain why the markup percentages become progressively larger from requirement (a), parts (1)
through (5).

c. Determine the initial price of a set of TW Irons using the manufacturing cost markup and the variable manufacturing cost markup.

d. Do you believe the controller’s approach to product pricing is reasonable? Why or why not?

Transcribed Image Text:

Variable.. Fixed... Manufacturing Costs Selling and Administrative Costs $412,500 150,000 $125,000 250,000