Question

Variable Cost Concept of Product Pricing

Voice Com, Inc., produces and sells cellular phones. The costs of producing and selling 5,000 units of cellular phones are as follows:

Variable costs:			Fixed costs:
Direct materials	$ 95	per unit	Factory overhead	$235,500
Direct labor	44		Selling and admin. exp.	82,750
Factory overhead	29
Selling and admin. exp.	22
Total	$190	per unit

Voice Com desires a profit equal to a 15% rate of return on invested assets of $665,000.

Assume that Voice Com, Inc., uses the variable cost concept of applying the cost-plus approach to product pricing.

a. Determine the variable costs and the variable cost amount per unit for the production and sale of 5,000 units of cellular phones.

Total variable costs	$
Variable cost amount per unit	$

b. Determine the variable cost markup percentage for cellular phones.
%

c. Determine the selling price of cellular phones. Round to the nearest cent.
$ per phone

Answer 1

Answer of Part a:

Total Variable cost = Variable cost per unit * no. of units
Total Variable cost = $190 * 5,000
Total Variable cost = $950,000

Answer of Part b:

Desired Profit = Invested Assets * Desired profit percentage
Desired Profit = $665,000 * 15%
Desired Profit = $99,750

Markup Percentage = (Desired Profit + Fixed Factory Overhead + Fixed Selling and Adm. Expenses) / Total Variable Cost
Markup Percentage = ($99,750 + $235,500 + $82,750) / $950,000
Markup Percentage = $418,000 / $950,000
Markup Percentage = 0.44 or 44%

Answer of Part c:

Markup Price =Variable cost per unit * Markup Percentage
Markup Price = $190 * 44%
Markup Price = $83.6

Selling Price = Cost per unit + Markup Price
Selling Price = $190 + $83.6
Selling Price = $273.6