Question

Exercise 14.20 Wagon Wheels manufactures personalized wagons for toddlers. Each wagon goes through a woodworking process, painting, and assembly. Wagon Wheels produces and sells 7,200 wagons per year. Wagon Wheels' owners have invested $55,000 in the business and desire a return of 15%. Wagon Wheels costs include Variable Fixed $ 240,000 per year $ 30,000 per year $ 45 per wagon Direct labour services Office staff Materials Supplies Marketing Overhead $ 3.5 per wagon $ 1.5 per wagon $ $ $ 4,000 per year 2,400 per year 850 per year The selling and administrative costs should include supplies. Determine the mark-up percentage using (Round all entries to 2 decimal places, e.g. 15.25%.) Mark-up percentage 1. Absorption cost-based pricing 2. Variable cost-based pricing 3. Total cost-based pricing

Answer 1

Absorption cost-based pricing ($69,850/$575,650*100)	12.13%
Variable cost-based pricing ($285,500/$360,000*100)	79.31%
Total cost-based pricing ($8,250/$645,500*100)	1.28%

Working notes:

1) Absorption cost-based pricing:
Materials (7,200 * $45)	$324,000
Add: Direct labor services	$240,000
Add: Overheads:
Variable (7,200 * $1.50)	$10,800
Fixed	$850
Total Absorption Cost	$575,650
Office staff	$30,000
Add: Supplies	$4,000
Add: Marketing:
Variable (7,200 * $3.50)	$25,200
Fixed	$2,400
Add: Required return ($55,000*15/100)	$8,250
Other costs and required return	$69,850
Absorption cost-based pricing ($69,850/$575,650*100)	12.13%
2) Variable cost-based pricing:
Materials (7,200 * $45)	$324,000
Add: Variable Marketing (7,200 * $3.50)	$25,200
Add: Variable Overheads (7,200 * $1.50)	$10,800
Total variable costs	$360,000
Direct labor services	$240,000
Add: Office staff	$30,000
Add: Fixed Overheads	$850
Add: Supplies	$4,000
Add: Fixed Marketing	$2,400
Total fixed costs	$277,250
Add: Required return ($55,000*15/100)	$8,250
Markup percentage depending on variable costing	$285,500
Variable cost-based pricing ($285,500/$360,000*100)	79.31%
3) Total cost-based pricing:
Total variable costs	$360,000
Add: Total fixed costs	$285,500
Total Cost	$645,500
Required return as calculated above	$8,250
Total cost-based pricing ($8,250/$645,500*100)	1.28%