Wilderness Products, Inc., has designed a self-inflating sleeping pad for use by
ID: 2453240 • Letter: W
Question
Wilderness Products, Inc., has designed a self-inflating sleeping pad for use by backpackers and campers. The following information is available about the new product:
An investment of $1,350,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment needed in the manufacturing process. The company’s required rate of return is 24% on all investments.
The only variable selling and administrative expense will be a sales commission of $9 per pad. Fixed selling and administrative expenses will be (per year):
Because the company manufactures many products, no more than 38,400 direct labor-hours per year can be devoted to production of the new sleeping pads.
Manufacturing overhead costs are allocated to products on the basis of direct labor-hours.
rev: 01_06_2015_QC_CS-3366
1.
value:
5.00 points
Required information
Compute the selling and administrative expenses.
Compute the markup that the company needs on the pads to achieve a 24% ROI if it sells all of the pads it can produce using 38,400 hours of labor time.
Using the markup you have computed, prepare a price quotation sheet for a single sleeping pad.(Round your answers to 2 decimal places.)
Garrison 15e Recheck 2015-01-19, 02_04_2015_QC_CS-6665
References
eBook & Resources
Expanded tableDifficulty: 2 MediumLearning Objective: A-02 Compute the selling price of a product using the absorption costing approach.
Check my work
2.
value:
5.00 points
Required information
After marketing the sleeping pads for several years, the company is experiencing a falloff in demand due to an economic recession. A large retail outlet will make a bulk purchase of pads if its label is sewn in and if an acceptable price can be worked out. What is the minimum acceptable price for this special order? (Round your answers to 2 decimal places.)
Wilderness Products, Inc., has designed a self-inflating sleeping pad for use by backpackers and campers. The following information is available about the new product:
Explanation / Answer
This problem is related to bottle neck approach of costing. In this method, one of the variables of production (in this case labor-hours per year) is limited in supply and the units of product to be produced depend on this variable only.
Total units of product that can be produced using limited quantity of labor-hours
= Labor-hours available/hours required per unit of product
= 38,400/2.4
= 16,000 units
So, the organization can produce maximum 16,000 units of the product.
Part a-1
Selling and Administration expenses is sum total of Fixed and variable selling expenses.
= Fixed Expenses + Variable expenses
Variable expenses
= Total Units produced X Selling expenses per unit of product sold
= 16,000 X $ 9
= $ 144,000
So, total selling and administration expenses
= $ (732,000 + 144,000)
= $ 876,000 per year
Part a-2
Fixed manufacturing overheads is calculated as follows:
1/5 of manufacturing overhead is variable. So, fixed manufacturing overhead is 4/5 of manufacturing overhead per unit
= $ 30 X 4/5
= $ 24 per unit
Total 16,000 units can be produced. So, total Fixed manufacturing overhead
= Overhead per unit X Total units
= $ 24 X 16,000
= $ 384,000
Variable manufacturing overhead
= $ 30 X 1/5
= $ 6 per unit
The markup required is calculated as below:
= Investment X required rate of return
= $ 1,350,000 X 24%
= $ 324,000
Markup per unit
= Markup required/Number of units
= $ 324,000/16,000
= $ 20.25 per unit
The cost sheet and required markup is computed as below:
So, markup required is $ 20.25 per unit.
Part b
Price Quotation sheet
Part c-1
Income Statement
Particulars StandardQuantity or Hours Standard
Price or Rate($) Standard
Cost per unit($) Total Cost($) Direct materials 4.0 2.7 10.8 172,800 Direct labor 2.4 8 19.2 307,200 Variable Manufacturing overhead 2.4 2.5 6.0 96,000 Variable Selling overhead 9.0 144,000 Standard variable cost 45.0 720,000 Fixed Manufacturing overhead 24.0 384,000 Fixed Selling overhead 45.75 732,000 Total Cost 114.75 1,836,000 Markup 20.25 324,000 Selling Price 135.0 2,160,000
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