Question

The total cost concept is the most convenient method for determining a product’s selling price if...

The total cost concept is the most convenient method for determining a product’s selling price if a company includes all manufacturing, selling, and administrative costs associated with the product in its reported cost. A markup is then added to achieve the firm’s desired profit.

For example, assume that the following costs are incurred to make 10,000 units of a product:

Variable manufacturing costs $5 per unit

Variable selling and administrative costs $2 per unit

Fixed factory overhead costs $80,000

Fixed selling and administrative expenses $30,000

Instructions

Calculate the total cost to make 10,000 units and the cost to make one unit?

Next, this company wishes to price the product so that a profit of $27,000 will be made if all 10,000 units are sold?

Calculate the selling price of the product if it is marked up 15 percent above the total cost.

Homework Answers

Answer #1

Total Cost to make 10,000 units is:

Variale Manufacturing cost for 10,000 units: 10,000* $2 = $20,000

Variable Selling overhead cost for 10,000 units: 10,000* $5= $50,000

Fixed factory Overhead : $80,000

Fixed Selling and administrative Expenses: $30,000

Total Cost for 10,000 Units= $1,80,000 ($20,000+ $50,000+ $80,000 + $30,000)

Cost to make one unit= $18 ($1,80,000/10,000 units)

For the company to ear a profit of $27,000 on selling 10,000 units, the company needs to sell the same at Total cost + $27,000 = $1,80,000+ $27,000 = $2,07,000

Price of the product when $27,000 profit is to be made= $2,07,000/10,000 units = $20.7 per unit

Selling price of the product when marakup is 15% above cost:

Cost per unit of product + 15%= $18+15% = $18+ $2.7 = $20.7

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