P9.4 (LO 1, 2, 3, 4), AP Belinda, sales manager at Salem Products, helped set the companys pricing strategy. Salem had well-established relationships with suppliers and purchased its three products at very affordable amounts, as follows.

Hat Jacket Shoes Purchase price/unit $3.40 $8.90 $12.50 Quantity purchased/sold 15,000 12,000 20,000 The companys selling price policy was to add a markup of 160% of product costs to each product. That practice had served the company well in the past, allowing it to sell large volumes of each product while earning solid profitability for the company.

However, company profits were down considerably this past year, despite strong sales volumes for all three products. Belinda and all managers were concerned and confused. Product costs hadnt changed, so selling prices hadnt changed, either. Something must be going on with the other operating expenses. Belinda called the accounting supervisor for information on operating expenses and a best estimate on cost drivers for each. She wanted to see if the selling price for each product was even covering each items full cost. Here is the resulting information.

Quantity of Cost Driver Used Operating Expenses Total Cost Cost Driver Hat Jacket Shoes Ordering $ 50,000 Orders 250 250 500 Receiving 70,000 Receiving hours 500 800 700 Shipping 80,000 Shipments sent 1,000 1,000 2,000 General administrative 120,000 Employees 5 7 8 Required 1. Calculate the selling price for each product, as well as the gross margin amount and percentage for each product. 2. Calculate an activity rate for each type of operating expense using the cost driver information provided. Allocate activity costs to each product line to determine the full cost per unit for each product. 3. Is the selling price from part (a) enough to cover the full cost of each product? What might this new information suggest to Belinda in regard to the existing selling price strategy? 4. What other recommendations, outside of adjusting the selling price, might managers of this company consider to boost profits? Explain.