Total Cost Concept of Product Pricing
Voice Com, Inc., produces and sells cellular phones. The costs of producing and selling 5,000 units of cellular phones are as follows:
Variable costs: | Fixed costs: | |||
Direct materials | $ 94 | per unit | Factory overhead | $236,800 |
Direct labor | 43 | Selling and admin. exp. | 83,200 | |
Factory overhead | 28 | |||
Selling and admin. exp. | 23 | |||
Total | $188 | per unit |
Voice Com desires a profit equal to a 15% rate of return on invested assets of $638,400.
Assume that Voice Com, Inc., uses the total cost concept of applying the cost-plus approach to product pricing.
a. Determine the total costs and the total cost amount per unit for the production and sale of 5,000 units of cellular phones. Round the cost per unit to two decimal places.
Total cost | $ |
Cost amount per unit | $ |
b. Determine the total cost markup percentage
(rounded to two decimal places) for cellular phones.
%
c. Determine the selling price of cellular
phones. Round to the nearest cent.
$per phone
Table showing the computation of total costs, profits and sales.
Particulars | Amount ($) |
Variable Costs (5,000 units x $188 per unit) | 940,000 |
Factory overhead | 236,800 |
Selling and admin. exp. | 83,200 |
A) Total Costs | 1,260,000 |
Total Costs per cellular phone (1,260,000/5,000) | 252 |
B) Markup on Total Costs | 95,760 |
C) Total Sales Value | 1,355,760 |
Ans a) The total costs of production and sale of 5,000 units of cellular phones = $1,260,000
The total cost amount per unit = $252
Ans b) The total cost markup percentage (rounded to two decimal places) for cellular phones:-
Markup as a % on Total Costs = $95,760/$1,260,000 = 0.076 = 7.60%
Ans c) The selling price of cellular phone = Total Sales Value/Total production and sales volume = $1,355,760/5,000 = $271.152
Working Note: Desired profit = $638,400 x 15/100 = $95,760
This amount is also the markup on total costs.
Total Cost Concept of Product Pricing Voice Com, Inc., produces and sells cellular phones. The costs...
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