Total Cost Concept of Product Pricing Smart Stream Inc. uses the total cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 8,500 units of cellular phones are as follows: Variable costs: Fixed costs: Direct materials $ 73 per unit Factory overhead $314,500 Direct labor 34 Selling and admin. exp. 110,500 Factory overhead 22 Selling and admin. exp. 17 Total $146 per unit Smart Stream wants a profit equal to a 15% rate of return on invested assets of $932,960. a. Determine the total costs and the total cost amount per unit for the production and sale of 8,500 units of cellular phones. Round the cost per unit to two decimal places. Total costs 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
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Total Cost Concept of Product Pricing
Smart Stream Inc. uses the total cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 8,500 units of cellular phones are as follows:
| Variable costs: | Fixed costs: | |||
| Direct materials | $ 73 | per unit | Factory overhead | $314,500 |
| Direct labor | 34 | Selling and admin. exp. | 110,500 | |
| Factory overhead | 22 | |||
| Selling and admin. exp. | 17 | |||
| Total | $146 | per unit |
Smart Stream wants a profit equal to a 15% rate of
a. Determine the total costs and the total cost amount per unit for the production and sale of 8,500 units of cellular phones. Round the cost per unit to two decimal places.
| Total costs | |
| 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
Selling and administrative expenses are referred to as operating expenses. These are not included in the computation of total manufacturing cost of the product as these are not directly linked with the production process. These expenses include sales commissions, postage, utilities, travelling and advertisement.
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