Question

Williams Inc. produces a single product, a part used in themanufacture of automobile transmissions. Known for its quality andperformance, the part is sold to luxury auto manufacturers aroundthe world. Because this is a quality product, Williams has someflexibility in pricing the part. The firm calculates the priceusing a variety of pricing methods and then chooses the final pricebased on that information and other strategic information. Asummary of the key cost information follows. Williams expects tomanufacture and sell 50,000 parts in the coming year. While thedemand for Williams's part has been growing in the past two years,management is not only aware of the cyclical nature of theautomobile industry but also concerned about market share andprofits during the industry’s next downturn.

	Variable manufacturing	$4,680,000
	Variable selling and administrative	$855,650
	Plant-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
Markup %s for product pricing:
a) fullmanufacturing cost		55%
b) fulllife-cycle cost		30%
c)desired gross margin percentage		40%
d)desired life-cycle cost to sales percentage		25%
e) before-taxROI		15%
Required
1. Determine the price for the part usinga markup of 45 percent of full manufacturing cost.
2. Determine the price for the part usinga markup of 25 percent of full life-cycle cost.
3. Determine the price for thepart using a desired gross margin percentage to sales of 40percent.
4. Determine the price for the part usinga desired life-cycle cost percentage to sales of 25 percent.
5. Determine the price for the part usinga desired before-tax return on investment of 15 percent.
6. Determine thecontribution margin and operating profit for each of the methods inrequirements 1 through 5. Which price would you choose, andwhy?