Chapter 8, Problem 8.8AP

Anderson Windows Inc. is in the process of setting a target price on its newly designed tinted window. Cost data relating to the window at a budgeted volume of 4,000 units are as follows.

	Per Unit	Total
Direct materials	$100
Direct labor	$ 70
Variable manufacturing overhead	$ 20
Fixed manufacturing overhead		$120,000
Variable selling and administrative expenses	$ 10
Fixed selling and administrative expenses		$102,000

Anderson Windows uses cost-plus pricing methods that are designed to provide the company with a 25% ROI on its tinted window line. A total of $1,016,000 in assets is committed to production of the new tinted window.

Instructions

(a) Compute the markup percentage under absorption-cost pricing that will allow Anderson Windows to realize its desired ROI.

(b) Compute the target price of the window under absorption-cost pricing, and show proof that the desired ROI is realized.

(c) Compute the markup percentage under variable-cost pricing that will allow Anderson Windows to realize its desired ROI. (Round to three decimal places.)

(d) Compute the target price of the window under variable-cost pricing, and show proof that the desired ROI is realized.

(e)  Since both absorption-cost pricing and variable-cost pricing produce the same target price and provide the same desired ROI, why do both methods exist? Isn’t one method clearly superior to the other?

Compute various amounts using absorption-cost pricing and variable pricing.

(LO 5), AP

(a) 45%