Question

Product Pricing: Two Products
Quality Data manufactures two products, CDs and DVDs, both on the same assembly lines and packaged 10 disks per pack. The predicted sales are 400,000 packs of CDs and 500,000 packs of DVDs. The predicted costs for the year 2009 are as follows:

	Variable Costs	Fixed Costs
Materials	$200,000	$600,000
Other	150,000	700,000

Each product uses 50 percent of the materials costs. Based on manufacturing time, 40 percent of the other costs are assigned to the CDs, and 60 percent of the other costs are assigned to the DVDs. The management of Quality Data desires an annual profit of $50,000.

(a) What price should Quality Data charge for each disk pack if management believes the DVDs sell for 20 percent more than the CDs? Rounds answers to the nearest cent.
CDs ___
DVDs ___

(b) What is the total profit per product using the selling prices determined in part (a)? Use negative signs with answers, if appropriate.
CDs ___
DVDs ___

Answer 1

Let S be the selling price per unit of CD.

Selling price per unit of DVD = S + 20% = 1.2S

(400,000 X S) + (500,000 X 1.2S) - $200,000 - $600,000 - $150,000 - $700,0000 = $50,000

S = $1.70

(a)

Selling price per CD = $1.70

Selling price per DVD = $1.64 + 20% = $2.04

(b)

Profit or (Loss):

CD = (400,000 X $1.70) - [($200,000 + $600,000) X 50%] - [($150,000 + $700,000) X 40%]

= ($60,000) Loss

DVD = (500,000 X $2.04) - [($200,000 + $600,000) X 50%] - [($150,000 + $700,000) X 60%]

= $110,000 Profit