Product Pricing: Two Products Quality Data manufactures two products, CDs and DV

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 $200,000 $500,000 50,000 600,000 Materials Other 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? Round answers to the nearest cent. hagement believes the DVDs sell for 20 percent 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 $ Check

Explanation / Answer

A) material cost = variable cost + fixed cost = $200,000 + $500,000=$700,000
   Other cost = variable cost + fixed cost = $150,000+ $600,000 = $750,000

material cost for CDs = .50 * 700,000 = $350,000
other cost for CDs = .40 * 750,000 = $300,000
total cost for CDs = $350,000 + $300,000 = $650,000

material cost for DVDs = .50 * 700,000 = $350,000
Other cost for DVDs = .60 * 750,000 = $450,000
total cost for DVDs = $350,000 + $450,000= $800,000

Total cost for CDs and DVDs = $650,000 + $800,000 = $1,450,000
Annual profit $50,000
Total sales revenue = $1,450,000+$50,000= $1,500,000

Let price for the CDs = X so the price for DVDs = X + .20 * X = 1.2 X
So 400,000 * X + 500,000 * 1.2 X = $1,500,000
1,000,000 X = $1,500,000 , X = $1.5
Sale price of CDs = $1.5
Sale price of DVDs = $1.5 + 1.5 * .20 = $1.8

b) Sale revenue for CDs = $1.5 * 400,000 = $600,000
   Sale revenue for DVDs = $1.8 * 500,000 = $900,000

particulars CDs DVDs
sales revenue $600,000 $900,000
less Total cost $650,000 $800,000

Total Profit/ Loss -$50,000 $100,000

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