In: Accounting
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
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.
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