Question

Exercise 23-15 Product pricing using variable costs LO P1

Rios Co. makes drones and uses the variable cost approach in setting product prices. Its costs for producing 26,000 units follow. The company targets a profit of $306,000 on this product.

Variable Costs per Unit				Fixed Costs
Direct materials	$	76		Overhead	$	676,000
Direct labor		46		Selling		311,000
Overhead		31		Administrative		291,000
Selling		21

1. Compute the variable cost per unit.
2. Compute the markup percentage on variable cost. (Round percentage answer to 2 decimal places.)
3. Compute the product’s selling price using the variable cost method.

1.	Variable cost per unit
2.	Markup percentage		%
3.	Selling price

Answer 1

1.

Direct material	$    76
Direct labor	$    46
Overhead	$    31
Selling	$    21
Variable cost per unit	$ 174

2.

Total variable cost ($174*26,000)	$   4,524,000
Add: Total fixed costs ($676,000+$311,000+$291,000)	$   1,278,000
Total costs	$   5,802,000
Add: Target profit	$      306,000
Total revenue	$   6,108,000
Price per unit ($6,108,000/26,000)	$         234.92
Markup percentage ($234.92 - $174)/$174)	35.01%

3.

Total variable cost ($174*26,000)	$   4,524,000
Add: Total fixed costs ($676,000+$311,000+$291,000)	$   1,278,000
Total costs	$   5,802,000
Add: Target profit	$      306,000
Total revenue	$   6,108,000
Price per unit ($6,108,000/26,000)	$         234.92