Question

Henderson Inc. plans to introduce a new product next year. This product has a two-year life and an estimated demand of 20,000 units annually. The product will be produced 50 weeks each year. Henderson, Inc. estimates the following costs:

• Direct materials will be $15 per unit.
• Setup costs will be $200 per set up, ten setups will be required per week.
• Specialized equipment must be rented for $15,000 per week.
• Design costs are estimated to be $40,000
• Research and development costs are estimated at $500,000
• Labor will be paid at $20 per hour.

Five employees will be assigned to this product and each employee will work 35 hours per week on the product. They will work at this rate during the entire two year production life of the product. Disregard the taxes that are due. Instead use the gross payroll for this line.
Henderson Inc. uses cost-plus pricing whereby the selling price of each of its products is 150 percent of the life-cycle costs. Determine the selling price of the product.

Answer 1

Lets try to compute total costs first to come up with a price.

Material cost = 15/unit

Setup cost = number of setups per week X number of weeks X cost per set up

=10X 50 X 200 = $100,000 per year

Setup cost for 2 years = $200,000

Similarly, Specialized equipment cost = 15,000 X 50 = 750,000

Specialized equipment cost for 2 years = 1,500,000

Design cost = 40,000

R&D cost = 500,000

Total Labour hours required = 5 X35 X 100 weeks( in 2 years)

= 17,500

Total labour cost = 20 X 17,500 = 350,000

Total costs of 40,000 units in 2 year life cycle = 40,000X15 + 200,000 + 1,500,000 + 40,000 + 500,000 + 350,000

= 3,190,000

Cost per unit = 3,190,000/ 40000

= 79.75

Selling price = 150% x cost price

=1.5 X 79.75

= $119.63