2 1000 points Gerber Clothing Inc has designed a rain suit f

2. 10.00 points Gerber Clothing Inc. has designed a rain suit for outdoor enthusiasts that is about to be introduced on the market A standard cost card has been prepared for the new suit, as follows Deect maternals Direct labour Manufacturing overhead (1A6 variable)1.0 hours 24.00 per hour24 00 2 5 metres $10.00 per metre 1.0 hours 25.00 28.00 2B.00 per hour Total standard cost per sut s 77.00 a The only variable selling and administrative costs will be S4 per suait for shipping Fixed selling and administrative costs will be as folows (per year) Salarios Advertising and other Total 5 45,000 200,000 $245.000 b Since the company manufactures many products, it is foilt that no moro than 10,000 hours of labour time per year can be devoted to production of the new suits c.An investment of $500 000 will be necessary to cany inventories and accounts receivable and to purchase some new eqpment The conpany wants a 20% R0in new product ines d Manufacturing overhead costs are allocated to products on the basis of drect labour-hours Required: 1. Assume that the company uses the absorption approach to cost-plus pricing Compute the markup ha\' the company needs on te ran saas to achieve a 20% ROI if a seh al of the suts it can produce using 10.000 hours of labour tme a R216034

Solution

C. INCOME STATEMENT FOR FIRST YEAR OF ACTIVITY

If Company Uses Variable Costing -

Mark Up % will be :

17.5%

Target Sellng Pric e 670000/10000 - $ 67

Absorption Rate for Fixed OH		Estimated OH		20
				Budgetted quantity
				245000/20	12250
Number of suits it can produce in 10000 LH are 10000 For 10000 Suits For One rain suit Direct Material 10000*25 250000 25 Direct labour 10000*28 280000 28 Variable Overheads 10000*4 40000 4 Fixed Overheads absorbed 245000/12500*10000 196000 19.6 766000 76.6 Return on Investment 500000*20% 100000 10 Selling value 866000 86.6 Mark Up percentage 13.05%