Product Cost Concept of Product Pricing
Willis Products Inc. uses the product cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 3,000 units of medical tablets are as follows:
Variable costs per unit: | Fixed costs: | ||||||
Direct materials | $114 | Factory overhead | $120,000 | ||||
Direct labor | 42 | Selling and admin. exp. | 39,000 | ||||
Factory overhead | 35 | ||||||
Selling and admin. exp. | 29 | ||||||
Total | $220 |
Willis Products desires a profit equal to a 20% rate of return on invested assets of $252,000.
a. Determine the total manufacturing costs for the production and sale of 3,000 units.
Total Manufacturing Costs | |
Variable | $ |
Fixed factory overhead | |
Total | $ |
Determine the cost amount per unit for the production and sale
of 3,000 units.
$ per unit
b. Determine the product cost markup percentage
per unit. Round your percentage answer to one decimal place.
%
c. Determine the selling price per unit. Use
the rounded product cost markup percentage in your calculations,
and round the amount of the markup to the nearest whole
dollar.
$ per unit
Answer a | ||||||
Determination of the total manufacturing costs for the production and sale of 3,000 units. | ||||||
Total Manufacturing Costs | ||||||
Variable [3000 units * $191] | $573,000.00 | |||||
Fixed Factory Overheads | $120,000.00 | |||||
Total Manufacturing Costs | $693,000.00 | |||||
Product cost per unit = Total Manufacturing costs / No.of units produced | ||||||
Product cost per unit = $693000 / 3000 units = $231 per unit | ||||||
Answer b | ||||||
Desired profit per unit = [20% of invested assets i.e. $252000]/3000 units = $16.80 per unit | ||||||
The product cost markup percentage per unit = Desired profit per unit / Product cost per unit = $16.80 / $231 = 7.3% | ||||||
Answer c | ||||||
Determination of selling price per unit | ||||||
Product cost per unit | $231 | |||||
Selling and admin cost per unit | $42 | |||||
[$29 + ($39000 / 3000 units)] | ||||||
Markup | $17 | |||||
Selling price per unit | $290 | |||||
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