Price Setting: Multiple Products

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 cost information from the current year accounting records is available:

Manufacturing Costs Selling and Administrative Costs

Variable $$435,500$ $$77,000$

Fixed $318,500511,000$

During the year, Pipestem Golf reported earnings of $$280,000.$ However, the controller believes that proper pricing should produce earnings of at least $$350,000$ on the same sales mix and unit volume. Accordingly, you are to use the preceding cost information and a target profit of $$350,000$ 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:

Variable manufacturing costs $$145$

Fixed manufacturing costs $105$

Total $$250$

Required

a$.$ Determine the standard markup for each of the following cost bases.

Note: Round each of your answers below to two decimal places $($for example, enter $2\mathrm{.}34$ for $2\mathrm{.}3555).$

Note: Answers should be entered in decimal form, do not convert to a percentage.

$1.$ Full costs, including fixed and variable manufacturing costs, and fixed and variable selling and administrative costs. Answer

$1\mathrm{.}26$

$2.$ Manufacturing costs plus variable selling and administrative costs. Answer

$1\mathrm{.}42$

$3.$ Manufacturing costs. Answer

$1\mathrm{.}46$

$4.$ Variable costs. Answer

$1\mathrm{.}68$

$5.$ Variable manufacturing costs. Answer

$1\mathrm{.}8$

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

Note: Use the rounded answer from part $($a$)$ in your calculations.

Note: Round your answer to the nearest whole dollar.

$1.$ Initial price using the manufacturing cost markup: $Answer

$365$

$2.$ Initial price using the variable manufacturing cost markup: $Answer

$261$