Problem 1

Nancy Company has budgeted sales of $300,000 with the following budgeted costs:
Direct materials $60,000
Direct manufacturing labor 40,000
Factory overhead
Variable 30,000
Fixed 50,000
Selling and administrative expenses
Variable 20,000
Fixed 30,000

(a) Compute the average markup percentage for setting prices as a percentage of the full cost of
the product
Full cost = 60000+40000+30000+50000+20000+30000 = 230,000
Sales budgeted = $ 300,000
Profit envisaged = 70,000
So mark-up on full cost = 70,000/230,000 = 30.43%
(b) Compute the average markup percentage for setting prices as a percentage of the variable cost
of the product
Profit envisaged = 70,000
So mark-up on the variable costs = 70,000/(60000+40000+30000+20000)=70000/150000 = 46.6

(c) Compute the average markup percentage for setting prices as a percentage
of the variable manufacturing costs
Profit envisaged = 70,000
So mark-up on the variable manufacturing costs = 70,000/(60000+40000+30000)=70000/130000
s:

ntage of the full cost of

ntage of the variable cost

0)=70000/150000 = 46.67%

ntage

+30000)=70000/130000 = 53.85%
Problem 2
The Home Office Company makes all types of office desks. The Computer Desk Division is
currently producing 10,000 desks per year with a capacity of 15,000. The variable costs assigned
to each desk are $300 and annual fixed costs of the division are $900,000. The computer desk
sells for $400. The Executive Division wants to buy 5,000 desks at $280 for its custom office
design business. The Computer Desk manager refused the order because the price is below
variable cost. The executive manager argues that the order should be accepted because it will
lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby
causing operations to be at their most efficient level.
(a) Should the order from the Executive Division be accepted by the Computer Desk
Division? Why?
It should not be accepted.
Fixed expenses are irrespective of number of units produced. $20 reduction in variable
cost would result in cash loss of 500*$20 = $10,000 to Computer desk division.
market for $420 after incurring additional costs of $100 per desk?
The variable cost of manufacturing and selling the additional desk would be 300
+100=$400, resulting in a contribution of $ 20 per desk for fixed charges on selling at
$420.
Hence it should be accepted from the perspective of the company.

(c) What action should the company president take? Explain.

The company president should treat this as a special order based on mark-up over
average variable costs since there is spare capacity available in the division. Thus this
order can be insulated from division’s profit calculation. The company stands to benefit
by recovery of fixed charges up to 5000*20 = $100,000 out of $900,000 incurred
irrespective of units produced so far.