Question

Chapter 15 Target Costing and Cost Analysis for Pricing Decisions Predicted Costs of 10,000 Starter Sets Direct material per set ................. Direct labor per set, 2 hours at $10.00 per hr ......... Variable selling cost per set..... Total - Variable-overhead rate .............. Fixed-overhead rate ........ .. $ 8.00 per direct-labor hour $12.00 per direct-labor hour In addition, the controller indicated that the Accounting Department would allocate $20,000 of fixed administrative expenses to the Starter Set product line. Required: 1. Compute the cost of a Starter Set using each of the four cost definitions commonly used in cost- plus pricing formulas. 2. Determine the markup percentage required for the Starter Set product line to earn a target operating income of $317,500 before taxes during the next year. Use the total cost as the cost definition in the cost-plus formula.

Answer 1

Ans.

1.

Direct Material	$     60.00
Direct Labor	$     20.00
Variable Overhead (2* $8 per hour)	$     16.00
Total Variable Manufacturing Cost	$     96.00

Applied Fixed Overhead Cost (2* $12 per hour)	$      24.00
Allocated Fixed Administrative Cost ($20,000 / 10,000 sets)	$        2.00

Variable Manufacturing Cost	$      96.00	1
Applied Fixed Overhead Cost	$      24.00
Absorption Manufacturing Cost	$    120.00	2
Variable Selling Cost	$        5.00
Allocated Fixed Administrative Cost	$        2.00
Total Cost	$    127.00	3
Variable Manufacturing Cost	$      96.00
Variable Selling Cost	$        5.00
Total Variable Cost	$    101.00	4

2.

Markup Percentage on total Cost