Exercise 13-35 Pricing [LO 13-4]

Williams Inc. produces a single product, a part used in the manufacture of automobile transmissions. Known for its quality and performance, the part is sold to luxury auto manufacturers around the world. Because this is a quality product, Williams has some flexibility in pricing the part. The firm calculates the price using a variety of pricing methods and then chooses the final price based on that information and other strategic information. A summary of the key cost information follows. Williams expects to manufacture and sell 50,000 parts in the coming year. While the demand for Williamss part has been growing in the past 2 years, management is not only aware of the cyclical nature of the automobile industry, but also concerned about market share and profits during the industrys current downturn.

	Total Costs
Variable manufacturing	$	4,680,000
Variable selling and administrative		855,650
Facility-level fixed overhead		2,345,875
Fixed selling and administrative		675,495
Batch-level fixed overhead		360,000
Total investment in product line		22,350,000
Expected sales (units)		50,000

Required:

1. Determine the price for the part using a markup of 45% of full manufacturing cost.

2. Determine the price for the part using a markup of 25% of full life-cycle cost.

3. Determine the price for the part using a desired gross margin percentage to sales of 40%.

4. Determine the price for the part using a desired life-cycle cost margin percentage to sales of 25%.

5. Determine the price for the part using a desired before-tax return on investment of 15%.

6. Determine the total contribution margin and total operating profit for each of the methods in requirements 1 through 5.

Determine the total contribution margin and total operating profit for each of the methods in requirements 1 through 5. (Round your intermediate calculations to 4 decimal places.) Contribution Margin Operating Profit Method Markup on full manufacturing cost Markup on life cycle costs Price to achieve desired GM % Price to achieve desired LCC % Price to achieve desired ROA of 15%