There are many ways to decide the price of the product. One of them is – Variable cost method Under variable cost method, the selling price of the product is decided by using the target profit, fixed overhead costs, fixed selling and administrative costs and total variable costs. First we calculate the mark-up percentage – M a r k u p p e r c e n t a g e = T a r g e t p r o f i t + F i x e d o v e r h e a d c o s t s + F i x e d s e l l i n g a n d a d m i n i s t r a t i v e c o s t s T o t a l v a r i a b l e c o s t s This is how we obtain the mark up percentage. Then the mark up percentage is added to total variable costs per unit to know the selling price per unit. Now, the selling price is decided as under – S e l l i n g p r i c e p e r u n i t = T o t a l v a r i a b l e c o s t + ( T o t a l v a r i a b l e c o s t X M a r k u p p e r c e n t a g e ) S e l l i n g p r i c e p e r u n i t = T o t a l v a r i a b l e c o s t + T o t a l M a r k u p This is how, we calculate the selling price per unit in case of variable costs method. To compute: Selling price using the variable costs method.

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Chapter 25, Problem 32QS

To determine

Concept Introduction:

There are many ways to decide the price of the product. One of them is –

Variable cost method

Under variable cost method, the selling price of the product is decided by using the target profit, fixed overhead costs, fixed selling and administrative costs and total variable costs.

First we calculate the mark-up percentage –

$M a r k u p p e r c e n t a g e = \frac{T a r g e t p r o f i t + F i x e d o v e r h e a d c o s t s + F i x e d s e l l i n g a n d a d m i n i s t r a t i v e c o s t s}{T o t a l v a r i a b l e c o s t s}$

This is how we obtain the mark up percentage. Then the mark up percentage is added to total variable costs per unit to know the selling price per unit.

Now, the selling price is decided as under –

$\begin{array}{l} S e l l i n g p r i c e p e r u n i t = T o t a l v a r i a b l e c o s t + (T o t a l v a r i a b l e c o s t X M a r k u p p e r c e n t a g e) \\ S e l l i n g p r i c e p e r u n i t = T o t a l v a r i a b l e c o s t + T o t a l M a r k u p \end{array}$

This is how, we calculate the selling price per unit in case of variable costs method.

To compute:

Selling price using the variable costs method.

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