Question

Variable Cost Method of Product Pricing

Smart Stream Inc. uses the variable cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cell phones are as follows:

Variable costs per unit:						Fixed costs:
	Direct materials		$150				Factory overhead	$350,000
	Direct labor		25				Selling and admin. exp.	140,000
	Factory overhead		40
	Selling and administrative expenses		25
		Total variable cost per unit	$240

Smart Stream desires a profit equal to a 30% return on invested assets of $1,200,000.

a. Determine the variable costs and the variable cost amount per unit for the production and sale of 10,000 cellular phones.

Total variable costs	$
Variable cost amount per unit	$

b. Determine the variable cost markup percentage for cellular phones. Round to two decimal places.
%

c. Determine the selling price of cellular phones. If required, round to the nearest dollar.
$ per cellular phone

Answer 1

• Requirements

a	Total Variable costs [10000 units x 240]	$2,400,000
	Variable cost amount per unit	$240
b	Markup percentage	35.42%
c	Selling price per phone	$325.01 or $ 325

• Workings

Total Variable costs [10000 units x 240]	$2,400,000
Variable cost amount per unit	$240

	Fixed Cost [350000+140000]	$490,000
	Desired amount of profits [1200000 x 30%]	$360,000
A	Total markup	$850,000
B	Total Variable costs [10000 units x 240]	$2,400,000
C = (A/B) x 100	Markup percentage	35.42%

A	Variable cost amount per unit	$240.000
B	Markup percentage	35.42%
C = A x B	Markup amount per unit	$85.01
D = A+C	Selling price per phone	$325.01