Westfield Graziers packages and distributes three grades of animal feed. The material cost per tonne and...

Westfield Graziers packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are as follows.

Product	Material cost	Estimated sales
Super Premium	$16.00	2,000 tonnes
Premium	$12.00	3,000 tonnes
Economy	$10.00	5,000 tonnes

The indirect cost of operating the machinery used to package all three products is $40 000 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.

Required

Calculate the price per tonne for each grade of feed using the method described for setting prices.

Does the price in part (a) take into account how much customers are willing to pay for the product?

Solutions

Expert Solution

Answer 1:

Particulars	Super premium	Premium	Economy
Material cost	$ 16	$ 12	$ 10
Indirect cost (40000/10000)	$ 4	$ 4	$ 4
Total cost	$ 20	$ 16	$ 14
Profit (100% of total cost)	$ 20	$ 16	$ 14
Selling price	$ 40	$ 32	$ 28

Answer 2:

Yes, the price calculated in part A takes into account what customers are willing to pay. This can be said because the company has the policy of adding 100% to the total cost. Thsi means that the company knows that customers will be willing to pay that much amount.

In case of any doubt or clarification, feel free to come back via comments.

ekkarill92 answered 1 year ago

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