The Toowoomba Produce Suppliers packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are: Product Material cost Estimated sales Super Premium $16 1000 tonnes Premium $12 1500 tonnes Economy $10 2500 tonnes The indirect cost of operating the machinery used to package all three products is $20 000 per year. In the past, prices have been set by allocating the indirect costs to products on the basis of estimated sales in tonnes. The resulting total costs (material costs plus allocated fixed overhead) are then marked up by 100 per cent. a. allocate total indirect cost to each product. b. Determine the total cost for each product. c. Calculate the selling price per unit for each product, using the method described for setting prices. d. Does the price in part C, take into account how much customers are willing to pay for the product? explain
The Toowoomba Produce Suppliers packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are:
Product Material cost Estimated sales
Super Premium $16 1000 tonnes
Premium $12 1500 tonnes
Economy $10 2500 tonnes
The indirect cost of operating the machinery used to package all three products is $20 000 per year. In the past, prices have been set by allocating the indirect costs to products on the basis of estimated sales in tonnes. The resulting total costs (material costs plus allocated fixed
a. allocate total indirect cost to each product.
b. Determine the total cost for each product.
c. Calculate the selling price per unit for each product, using the method described for setting prices.
d. Does the price in part C, take into account how much customers are willing to pay for the product? explain.
Cost: Cost is the summation of all expenditures which is related to the conversion of raw material into the finished goods. It includes actual expenditure on inputs (explicit cost) and the imputed value of the input supplied by the owner.
Explicit cost: It is the actual money expenditure on inputs or payments made to outside for hiring their services.
For example Insurance premium paid, Rent paid for hired land, purchase of raw material.
Implicit cost: It is the estimated value of the inputs supplied by the owner including normal profit or cost of supplies factor. Interest on capital, Rent of own land, etc.
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