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	2.5	metres	$	10.00	per metre	$	25.00
Direct labour	1.0	hours		28.00	per hour		28.00
Manufacturing overhead (1/6 variable)	1.0	hours		24.00	per hour		24.00
Total standard cost per suit						$	77.00

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

2. 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.
3. 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.
4. 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.

Markup percentage

50

%

b. Using the markup you have computed, prepare a price quote sheet for a single rain suit. (Round your answers to 2 decimal places.)

Direct materials
Direct labour
Manufacturing overhead
Unit product cost
Add markup of unit product cost
Target selling price

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.

Sales
Less cost of goods sold
Gross margin
Less selling, general, and administrative expenses:
Shipping
Salaries
Advertising and other
Total selling, general, and administrative expense
Operating income

c-2. Compute the companys ROI for the year on the suits, using the ROI formula. (Do not round intermediate calculations.)

2. Repeat requirements 1a and 1b above, assuming that the company uses the total variable costing approach to cost-plus pricing. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Markup percentage for the total variable costing		%
Target selling price