Question

USE THE FOLLOWING COST AND REVENUE DATA FOR THE NEXT TWO QUESTIONS Assume a clinical laboratory is considering a new test.

Here are the key assumptions: Annual fixed direct costs = $20,000. Annual overhead allocation = $10,000. Variable cost per test = $5. Expected volume = 5,000 tests.

1. What price should be set under full cost pricing? a. $ 5 b. $ 7 c. $ 9 d. $11 e. $13

2. What price should be set under marginal cost pricing? a. $ 5 b. $ 7 c. $ 9 d. $11 e. $13

Answer 1

Solution :

1.Calculation of price under full cost pricing:

As per the information given in the question we have

Variable cost per test = $ 5 Expected volume = 5,000 tests.

Annual fixed direct costs = $ 20,000

Thus Fixed Direct costs per test = Annual fixed direct costs / Expected volume

= $ 20,000 / 5,000 = $ 4

Fixed Direct costs per test = $ 4

Annual overhead allocation = $10,000.

Thus overhead cost per test = Annual overhead allocation / Expected volume

= $ 10,000 / 5,000 = $ 2

Overhead cost per test = $ 2

Under Full cost pricing all costs incurred in production of a product are taken into consideration in order to set a full cost price.

Thus the Price under full cost pricing = Variable cost per test + Fixed Direct costs per test + Overhead cost per test

= $ 5 + $ 4 + $ 2

= $ 11

Thus the price that should be set under full cost pricing = $ 11

The solution is Option d. $ 11

2.Calculation of price under marginal cost pricing:

As per the information given in the question we have

Variable cost per test = $5 ; Expected volume = 5,000 tests.

Annual fixed direct costs = $20,000

Under the marginal cost method of pricing only the variable costs are taken into consideration in the setting of product price. The costs other than variable costs are not considered.

Thus the Marginal cost per test = Variable cost per Test = $ 5

Thus the price that should be set under marginal cost pricing = $ 5

The solution is Option a. $ 5