Question

National 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		$30
Direct labor		$44
Variable manufacturing overhead		$11
Fixed manufacturing overhead					$1,264,000
Variable selling and administrative expenses		$ 5
Fixed selling and administrative expenses					$ 1,106,000

These costs are based on a budgeted volume of 79,000 units produced and sold each year. National uses cost-plus pricing methods to set its target selling price. The markup percentage on total unit cost is 40%.

Compute the total variable cost per unit, total fixed cost per unit, and total cost per unit for M14–M16.

Variable cost per unit		$enter a dollar amount
Fixed cost per unit		enter a dollar amount
Total cost per unit		$enter a total of the two previous amounts

eTextbook and Media

Compute the desired ROI per unit for M14–M16.

Desired ROI

$enter the desired ROI per unit in dollars

per unit

eTextbook and Media

Compute the target selling price for M14–M16.

Target selling price per unit

$enter the target selling price per unit in dollars

eTextbook and Media

Compute variable cost per unit, fixed cost per unit, and total cost per unit assuming that 59,250 M14–M16s are produced and sold during the year.

Variable cost per unit		$enter a dollar amount
Fixed cost per unit		enter a dollar amount
Total cost per unit		$enter a total of the two previous amounts

Answer 1

1) Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. $90 Variable cost per unit Fixed cost per unit Total cost per unit $30 $120 [$90 + $30] Workings: $30 $44 Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Variable cost per unit $11 $5 $90

Fixed manufacturing overhead Fixed selling and administrative expenses Total fixed costs Number of units produced Fixed cost per unit $1,264,000 $1,106,000 $2,370,000 79,000 $30 ($2370000 / 79000 units] 2) $90 $30 Variable cost per unit Fixed cost per unit Total cost per unit Markup % on total cost per unit Desired ROI per unit for M14-M16 $120 40% $48 ($120 x 40%] 3) Total cost per unit Desired ROI per unit for M14-M16 Target selling price for M14-M16 $120 $48 $168 ($120 + $48]

Variable cost per unit will remain constant irrespective volume of production. However, fixed cost per unit will vary when number of units produced increases or decreases because it will remain constant in total. Total fixed costs Number of units produced-Revised Fixed cost per unit $2,370,000 [As calculated in Part-(1)] 59,250 $40 ($2370000 / 59250 units] Therefore, Variable cost per unit Fixed cost per unit Total cost per unit $90 $40 $130 [As calculated in Part-(1)] [As calculated above] ($90 + $40]