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PROBLEM A-4 Standard Costs: Absorption Costing Approach to Setting Prices Lo2] Wilderness Products, Inc., has designed a self-inflating sleeping pad for use by backpackers and campers. The following information is available about the new product: a. An investment of $1,350,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment needed in the manufacturing process. The company's required rate of return is 24% on all investments. A standard cost card has been prepared for the sleeping pad, as shown below: b. StandardStandard Price Standard Quantity or Hours or Rate Cost Direct materials Direct labor . .. . Manufacturing overhead $2.70 per yard $10.80 $8.00 per hour 19.20 $12.50 per hour 30.00 $60.00 4.0 yards 2.4 hours (Vs variable) Total standard cost per pad............. 2.4 hours c. The only variable selling and administrative expense will be a sales commission of $9 per pad. Fixed selling and administrative expenses will be (per year): Salaries. Warehouse rent :.... Advertising and other Total $ 82,000 50,000 . 600,000 $732,000 d. Because the company manufactures many products, no more than 38,400 direct labor-hours per year can be devoted to production of the new sleeping pads. e. Manufacturing overhead costs are allocated to products on the basis of direct labor-hours. Required: I. Assume that the company uses the absorption approach to cost-plus pricing. Compute the markup that the company needs on the pads to achieve a 24% return on in- vestment (ROI) if it sells all of the pads it can produce. Using the markup you have computed, prepare a price quotation sheet for a single sleep- ing pad. Assume that the company is able to sell all of the pads that it can produce. Prepare an income statement for the first year of activity and compute the company's ROl for the year on the pads. a. b. c. After marketing the sleeping pads for several demand due to an economic recession. A large retail outlet will make a bulk purchase of pads if its label is sewn in and if an acceptable price can be worked out. What is the minimum ac- ceptable price for this special order? 2. years, the company is experiencing a falloff in

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