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
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 Quantity or hours | Standard price or Rate | Standard Cost | ||||||
Direct materials | 2.2 | metres | $ | 15 | per metre | $ | 33.00 | |
Direct labour | 1.0 | hours | 26 | per hour | 26.00 | |||
Manufacturing overhead (1/6 variable) | 1.0 | hours | 21 | per hour | 21.00 | |||
Total standard cost per suit | $ | 80.00 | ||||||
a. | The only variable selling and administrative costs will be $5 per suit for shipping. Fixed selling and administrative costs will be as follows (per year): |
Salaries | $ | 57,700 | |
Advertising and other | 257,000 | ||
Total | $ | 314,700 | |
b. | Since the company manufactures many products, it is felt that no more than 11,300 hours of labour time per year can be devoted to production of the new suits. |
c. | An investment of $630,000 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 11,300 hours of labour time.
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b. | Using the markup you have computed, prepare a price quote sheet for a single rain suit. (Round your answers to 2 decimal places.)
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c-1. | 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.
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c-2. | Compute the companys ROI for the year on the suits, using the ROI formula. (Do not round intermediate calculations.)
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2. | Repeat requirements 1a and 1b above, assuming that the company uses the total variable costing approach to cost-plus
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