Question

Smart Stream Inc. uses the variable cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cellular phones are as follows: Variable costs per unit: Fixed costs: Direct materials $150 Factory overhead $350,000 140,000 Direct labor 25 Selling and admin. exp. Factory overhead 40 Selling and administrative expenses 25 Total $240 Smart Stream desires a profit equal to a 30% rate of return on invested assets of $1,200,000. a. Determine the variable costs and the variable cost amount per unit for the production and sale of 10,000 cellular phones. Total variable costs 0 Variable cost amount per unit 0 b. Determine the variable cost markup percentage for cellular phones. Round to two decimal places. % c. Determine the selling price of cellular phones. If required round to the nearest dollar. $ per phone

Answer 1

a. Determination of variable cost and variable cost per unit for the production and selling of 10000 cellular phones

Total variable cost =240*10000= $2400000

Variable cost per unit =(150+25+40+25)=$240 per unit

b. Determination of variable cost markup percentage for cellular phones

Total variable cost = $2400000 (As calculated above)

Profit= 1200000*30/100= $360000(@30%of invested assets)

Sales = 2400000+360000= $2760000

Variable cost markup percentage =

(sales-variable cost)*100/variable cost

=(2760000-2400000)*100/2400000= 15%determination

c.Determination of selling price of cellular phones

Total sales =$2760000 (As calculated above)

Selling price =Total sales/No.of units

=2760000/10000=$276 per unit

Note:- Since Smart Stream uses variable cost concept by applying cost plus approach then only variable cost has been used while calculating markup percentage and selling price.If total cost is used, in that case answer would be different.