uses the product cost concept of applying the cost-plus approach to product pric

Question

uses the product cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 5,000 units of cellular phones are as follows:                           (7 points)

Variable costs                                                  Fixed Costs:

Direct materials    $625,000                    Factory overhead                     $215,000

Direct labor                     225,000                    Selling & Admin. expenses          75,000

Factory Overhead           200,000

Selling & admin. Exp.    150,000

                                    $1,200,000

RooPhone desires a profit equal to a 25% rate of return on invested assets of $500,000.

Required:

a.) Determine the amount of desired profit.

b.) Determine the product cost per unit for the production of 5,000 phones.

c.) Determine the total cost markup percentage (e.g. 20%) using the product cost concept.

d.) Determine the selling price of each cellular phone. Round to nearest dollar.

Explanation / Answer

a)Amount of desired profit = 500,000 * .25 = $ 125,000

b) Product cost per unit = [Direct material +direct lavor +factory overhead] /Number of units

                        = [625000+225000+200000+215000] / 5000

                       = 1265000/ 5000

                        = $ 253 per unit

c)Total cost = 1490000

Mark up % = 125000 / 1490000 = 8.39%

d) Selling price per unit = (1490000+125000)/5000 = $ 323 per unit

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