Smart Stream Inc. uses the product cost method of applying the cost-plus approac

Question

Smart Stream Inc. uses the product cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cell phones are as follows:

Smart Stream desires a profit equal to a 30% return on invested assets of $1,200,000.

a. Determine the amount of desired profit from the production and sale of 10,000 cell phones.
$

b. Determine the product cost per unit for the production of 10,000 units of cell phones.
$per unit

c. Determine the product cost markup percentage for cell phones.
%

d. Determine the selling price of cell phones. Round to the nearest dollar.

Variable costs per unit: Fixed costs: Direct materials $150 Factory overhead $350,000 Direct labor 25 Selling and administrative expenses 140,000 Factory overhead 40 Selling and administrative expenses 25 Total variable cost per unit $240

Explanation / Answer

a.

Desired profit = Invested assets * Desired return

= 1,200,000 * 30%

= 360,000

b.

Total cost = (Total variable cost per unit * number of units) + Total fixed costs

= (240 * 10,000) + (350,000 + 140,000)

= 2,400,000 + 490,000

= 2,890,000

Product cost per unit = Total cost / Number of units

= 2,890,000 / 10,000

= 289

c.

Product cost markup percentage = Desired profit / Total cost

= 360,000 / 2,890,000

= 12.46%

d.

Total cost 289 Markup (289*12.46%) 36 Selling price 325

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