CMA Study Group

  • 1.  PART 2 - Pricing

    Posted 19 days ago
    Fact Pattern:  
    Framar, Inc., manufactures machinery to customer specifications. It operated at about 75% of practical capacity during the year. The operating results for the most recent fiscal year are presented below.
    Framar, Inc.
    Income Statement
    For the Year Ended September 30
    (000 omitted)
    Sales
    $25,000
    Minus: Sales commissions
    (2,500)
    Net sales
    $22,500
    Expenses
    Direct materials
    $  6,000
    Direct labor
    7,500
    Manufacturing O/H-variable
    Supplies
    $   625
    Indirect labor
    1,500
    Power
    125
    2,250
    Manufacturing O/H-fixed
    Supervision
    $   500
    Depreciation
    1,000
    1,500
    Corporate administration
    750
    Total expenses
    $18,000
    Net income before taxes
    $  4,500
    Income taxes (40%)
    (1,800)
    Net income
    $  2,700
    Top management has developed the pricing formula presented below. It is based upon the operating results achieved during the most recent fiscal year. The relationships used in the formula are expected to continue during the next fiscal year. The company expects to operate at 75% of practical capacity during the next fiscal year.
    APA, Inc., has asked Framar to bid on some custom-designed machinery. Framar used the formula to develop a price and submitted a bid of $165,000. The calculations are given next to the pricing formula shown below.
    Details of Formula
    APA Bid Calculations
    Estimated direct materials cost
    $XXX
    $  29,200
    Estimated direct labor cost
    XXX
    56,000
    Estimated manufacturing O/H calculated at 50% of DL
    XXX
    28,000
    Estimated corporate O/H calculated at 10% of DL
    XXX
    5,600
    Estimated total costs excluding sales commissions
    $XXX
    $118,800
    Add 25% for profits and taxes
    XXX
    29,700
    Suggested price (with profits) before sales commissions
    $XXX
    $148,500
    Suggested total price equal to suggested price divided by .9 to adjust for 10% sales commissions
    $XXX
    $165,000
     
    Question: 10 What is the contribution margin if the bid is accepted?

    Question: 11 Should Framar manufacture the machinery for a counteroffer of $127,000?
    Need help with above questions


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    Shilpa Sinha
    Analyst
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