The total cost concept is the most convenient method for determining a product’s

Question

The total cost concept is the most convenient method for determining a product’s selling price if a company includes all manufacturing, selling, and administrative costs associated with the product in its reported cost. A markup is then added to achieve the firm’s desired profit.

For example, assume that the following costs are incurred to make 10,000 units of a product:

Variable manufacturing costs $5 per unit

Variable selling and administrative costs $2 per unit

Fixed factory overhead costs $80,000

Fixed selling and administrative expenses $30,000

Instructions

Calculate the total cost to make 10,000 units and the cost to make one unit?

Next, this company wishes to price the product so that a profit of $27,000 will be made if all 10,000 units are sold?

Calculate the selling price of the product if it is marked up 15 percent above the total cost.

Explanation / Answer

Total Cost to make 10,000 units is:

Variale Manufacturing cost for 10,000 units: 10,000* $2 = $20,000

Variable Selling overhead cost for 10,000 units: 10,000* $5= $50,000

Fixed factory Overhead : $80,000

Fixed Selling and administrative Expenses: $30,000

Total Cost for 10,000 Units= $1,80,000 ($20,000+ $50,000+ $80,000 + $30,000)

Cost to make one unit= $18 ($1,80,000/10,000 units)

For the company to ear a profit of $27,000 on selling 10,000 units, the company needs to sell the same at Total cost + $27,000 = $1,80,000+ $27,000 = $2,07,000

Price of the product when $27,000 profit is to be made= $2,07,000/10,000 units = $20.7 per unit

Selling price of the product when marakup is 15% above cost:

Cost per unit of product + 15%= $18+15% = $18+ $2.7 = $20.7

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