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ID: 2469488 • Letter: L

Question

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Dewitt Corporation needs to set a target price for its newly designed product M14–M16. The following data relate to this new product.
Per Unit Total Direct materials $21 Direct labor $39 Variable manufacturing overhead $9 Fixed manufacturing overhead $1,230,800 Variable selling and administrative expenses $5 Fixed selling and administrative expenses $868,800
These costs are based on a budgeted volume of 72,400 units produced and sold each year. Dewitt uses cost-plus pricing methods to set its target selling price. The markup percentage on total unit cost is 30%.

Explanation / Answer

Solution:

Calculation of Total Variable Cost Per Unit and Total Fixed Cost Per Unit

Total Variable Cost per Unit (note 1) = $74 per Unit

Total Fixed Cost per unit (note 2) = $29 per unit

Total Cost ($74 + $29) = $103 per Unit

Note 1: Calculation of Total Variable Cost Per Unit

$ per Unit

Direct Material

$21

Direct Labor

$39

Variable Manufacturing Overhead

Variable Selling and administrative expenses

Total Variable Cost Per Unit

$74

Note 2: Calculation of Total Fixed Cost Per Unit

Total Fixed manufacturing overhead

$1,230,800

Total Fixed selling and administrative expenses

$868,800

Total Fixed Expenses

$2,099,600

Total Fixed Expenses per Unit ($2,099,600 / 72,400)

$29.00

Calculation of Desired ROI per unit for M14-M16

Total Cost per unit (As calculated above) = $103

Desired Return (ROI) on Total Cost (30%) = $103 x 30% = $30.90 per unit

Calculation of Target Selling Price

Target Selling Price = Total Cost Per Unit + Desired ROI per Unit = $103 + $30.90 = $133.90 Per Unit

Calculation of variable cost per unit, fixed cost per unit, and total cost per unit assuming that 57,920 M14–M16s are sold during the year

To calculate this, we need to know first the nature of variable cost and fixed cost.

Variable Cost

Variable Cost is the cost which varies with the output of production in totality. Variable Cost per unit will remain unchanged irrespective of output.

Variable Cost Per Unit (as calculated above will remain same) = $74 per unit

Fixed Cost

Fixed Cost is the cost which remains unchanged in totality. The Fixed Cost per unit varies with the output. As the production increases Fixed Cost per unit decreases and as the production decreases fixed cost per unit increases.

Hence, for output level 57,920 Unit the Fixed Cost Per Unit as follows:

Total Fixed Cost (as calculated above) = $2,099,600

Total Fixed Cost Per Unit ($2,099,600 / 57,920) = $36.25 Per Unit

Hence, for 57,920 Units, the cost per unit is as follows:

Variable Cost Per Unit = $74 Per Unit

Fixed Cost per Unit = $36.25 Per Unit

Total Cost Per Unit ($74 + $36.25) = $110.25 Per Unit