Chapter 6A, Problem 6A.12P

1.

To determine

Introduction: The incremental profit earned on sales of each unit as a result of all associated variable cost being deducted from the price of the product is termed as the contribution margin.

To calculate: The unit product cost for remodeled product.

Answer to Problem 6A.12P

Total unit production cost $28

Explanation of Solution

Fixed manufacturing:

  $\begin{array}{l}Fixedmanufacturing=\frac{Fixedmanufactringoverhead}{Unitssold}\\ =\frac{66,000}{12,000}\\ 5.5\end{array}$

Particular
Direct material cost	12
Direct labor	8
Variable manufacturing OH	3
Fixed manufacturing OH	5
Total Unit product cost	28

Total unit production cost $28

2.

To determine

Introduction: The incremental profit earned on sales of each unit as a result of all associated variable cost being deducted from the price of the product is termed as the contribution margin.

To calculate: The markup percentage on absorption cost for the remodeled

Answer to Problem 6A.12P

Mark up percentage is 37.5%

Explanation of Solution

Required rate of return:

  $\begin{array}{l}\mathrm{Re}quired\text{}rateofreturn=650000\times 20\%\\ =130,000\end{array}$

Product margin:

  $\begin{array}{l}productm\arg in=Netincome+selling\exp ense\\ =130000+60000+20000\\ =\$210,000\end{array}$

Product margin per unit:

  $\begin{array}{l}productm\arg inperunit=\frac{210000}{20000}\\ =\$10.5\end{array}$

Markup percentage:

  $\begin{array}{l}Markuppercentage=\frac{10.5}{28}\\ =37.5\%\end{array}$

Mark up percentage is 37.5%

3.

To determine

Introduction: The incremental profit earned on sales of each unit as a result of all associated variable cost being deducted from the price of the product is termed as the contribution margin.

The Selling price company should establish mark up percentage on absorption cost.

Answer to Problem 6A.12P

Thus required selling price is 38.5

Explanation of Solution

Required selling price:

  $\begin{array}{l}requiredsellingprice=10.5+28\\ =38.5\end{array}$

Thus required selling price is 38.5

4.

To determine

Introduction: The incremental profit earned on sales of each unit as a result of all associated variable cost being deducted from the price of the product is termed as the contribution margin.

The return on Investment Company would earn at the lower sales volume.

Answer to Problem 6A.12P

Return on investment is 18.45 %

Explanation of Solution

  $\begin{array}{l}sales=19000\times 38.5\\ =731,500\end{array}$

  $\begin{array}{l}Costofgoodssold=19000\times 28\\ =532,000\end{array}$

Particular	Amount
Sales	731500
Less: COGS	532000
Gross margin	199500
Less: Selling expense	79000
Income	120500

  $\begin{array}{l}ROI=\frac{120500}{650000}\times 100\\ =18.54\%\end{array}$

Return on investment is 18.45 %

5.

To determine

Introduction: The incremental profit earned on sales of each unit as a result of all associated variable cost being deducted from the price of the product is termed as the contribution margin.

The revised selling price at lower sales level.

Answer to Problem 6A.12P

new price is 40.5

Explanation of Solution

Required rate of return:

  $\begin{array}{l}\mathrm{Re}quired\text{}rateofreturn=650000\times 20\%\\ =130,000\end{array}$

Product margin:

  $\begin{array}{l}productm\arg in=Netincome+selling\exp ense\\ =130000+60000+19000\\ =\$209,000\end{array}$

Product margin per unit:

  $\begin{array}{l}productm\arg inperunit=\frac{209000}{19000}\\ =\$10.45\end{array}$

Markup percentage:

  $\begin{array}{l}Markuppercentage=\frac{10.45}{28}\\ =39.3\%\end{array}$

Particular	Amount
Net earning	120500
Target net earning	130000
Differential earning	9500
Number of units	19000
Price to be increased by:	2
Old price	38.5
New price	40.5

Thus new price is 40.5

6.

To determine

Introduction: The incremental profit earned on sales of each unit as a result of all associated variable cost being deducted from the price of the product is termed as the contribution margin.

The revised selling price and profit at lower sales level

Answer to Problem 6A.12P

Optimal selling price is $41.58, profit on optimal selling price is $179020. The increase in the price of the product will be recommended as the company is earning more profit even if the sales is decreasing

Explanation of Solution

1. Optimal selling price:

  $\begin{array}{l}Sellingprice=38.5+38.5\times 8\%\\ =\$41.58\end{array}$

2. Profit on optimal selling price:

  $\begin{array}{l}totalsales=41.58\times 19000\\ =790,020\end{array}$

Particular	Amount
Sales	790020
Less: COGS	532000
Gross margin	285020
Less: Selling expense	79000
Income	179020

The increase in the price of the product will be recommended as the company is earning more profit even if the sales is decreasing