Williams Inc. produces a single product, a part used in the manufacture of automobile transmissions. Known for its quality and performance, the part is sold to luxury auto manufacturers around the world. Because this is a quality product, Williams has some flexibility in pricing the part. The firm calculates the price using a variety of pricing methods and then chooses the final price based on that information and other strategic information. A summary of the key cost information follows. Williams expects to manufacture and sell 50,000 parts in the coming year. While the demand for Williams’s part has been growing in the past 2 years, management is not only aware of the cyclical nature of the automobile industry, but also concerned about market share and profits during the industry’s current downturn. Total Costs Variable manufacturing $ 4,680,000 Variable selling and administrative 855,650 Facility-level fixed overhead 2,345,875 Fixed selling and administrative 675,495 Batch-level fixed overhead 360,000 Total investment in product line 22,350,000 Expected sales (units) 50,000 Required: 4. Determine the price for the part using a desired life-cycle cost margin percentage to sales of 25%. 5. Determine the price for the part using a desired before-tax return on investment of 15%. 6. Determine the total contribution margin and total operating profit for each of the methods in requirements 1 through 5.
Williams Inc. produces a single product, a part used in the manufacture of automobile transmissions. Known for its quality and performance, the part is sold to luxury auto manufacturers around the world. Because this is a quality product, Williams has some flexibility in pricing the part. The firm calculates the price using a variety of pricing methods and then chooses the final price based on that information and other strategic information. A summary of the key cost information follows. Williams expects to manufacture and sell 50,000 parts in the coming year. While the demand for Williams’s part has been growing in the past 2 years, management is not only aware of the cyclical nature of the automobile industry, but also concerned about market share and profits during the industry’s current downturn.
| Total Costs | |||
| Variable manufacturing | $ | 4,680,000 | |
| Variable selling and administrative | 855,650 | ||
| Facility-level fixed overhead | 2,345,875 | ||
| Fixed selling and administrative | 675,495 | ||
| Batch-level fixed overhead | 360,000 | ||
| Total investment in product line | 22,350,000 | ||
| Expected sales (units) | 50,000 | ||
Required:
4. Determine the price for the part using a desired life-cycle cost margin percentage to sales of 25%.
5. Determine the price for the part using a desired before-tax return on investment of 15%.
6. Determine the total contribution margin and total operating profit for each of the methods in requirements 1 through 5.
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