Good Inc. recently began production of a new product, a digital watch, which required the investment...
| Good Inc. recently began production of a new product, a digital watch, which required the investment of $1,800,000 in assets. The costs of producing and selling 80,000 units of the digital watch are estimated as follows: | ||||||
| Variable Costs: | Per Unit | |||||
| Direct Materials | $ 10.00 | |||||
| Direct Labor | $ 6.00 | |||||
| Factory Overhead | $ 4.00 | |||||
| Selling and Admin Expenses | $ 5.00 | |||||
| Total | $ 25.00 | |||||
| Fixed Costs: | ||||||
| Factory Overhead | $ 800,000 | |||||
| Selling and Admin Expenses | $ 400,000 | |||||
| Good Inc. is currently considering establishing a selling price for the digital watch. The president of Good Inc. has decided to use the cost-plus approach to product pricing and has indicated that the digital watch must earn a 10% rate of return on invested assets. | ||||||
| Determine the measures assuming that the product cost concept is used: | ||||||
| The amount of desired profit from the production and sale of the digital watch. | ||||||
| The cost amount per unit | ||||||
| The markup percentage | ||||||
| The selling price of the digital watch. | ||||||
Homework Answers
| Per Unit $ | |
| Costs: | |
| Direct materials | 10.00 |
| Direct labor | 6.00 |
| Variable factory overhead | 4.00 |
| Fixed factory overhead ($800000/80000) | 10.00 |
| Cost per unit $ | 30.00 |
| The amount of desired profit from the production and sale of the digital watch (10% x $1800000) | $ 1,80,000 |
| The cost amount per unit | $ 30.00 |
| The markup percentage* | 7.50% |
| The selling price of the digital watch** | $ 32.25 |
*Markup required per unit to earn the desired profit of $180000 = $180000/80000 units = $2.25
Markup percentage of cost = $2.25/$30 = 7.50%
**Selling price = Cost + Markup = $30 + (7.50% x $30) = $30 + $2.25 = $32.25
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