# CMA Study Group

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## PART 2 - Pricing

• #### 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
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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