Question

Best Ride Pty Ltd. produces electric scooters. Best Ride scooters are considered the most reliable in the marketplace. The firm is planning to launch a new electric scooter model featured with the new long-lasting battery generation and the lightest weight.

The following data relating to this model are based on production of 70,000 units per year.

	Total
Direct materials	$1,800,000
Direct labor	$2,400,000
Variable manufacturing overhead	$600,000
Fixed manufacturing overhead	$1,800,000
Variable selling and administrative expenses	$360,000
Fixed selling and administrative expenses	$1,440,000

Daniel, the marketing manager uses the cost-plus pricing to set the new model’s target selling price. For previous scooter models, management usually adds 35% as the markup on total unit cost.

Required:

Compute each of the following for the new product: (Round all calculations to two decimal places.)

a)​Total variable cost per unit, total fixed cost per unit, and total cost per unit.

b)​Desired ROI per unit.

c)​Target selling price. (3 marks

d)​Another cost-based approach to pricing is called time and material pricing. Under this approach, two pricing rates are set.  Explain where this approach is used and identify the steps involved in time-and-material pricing. Also explain why this approach is used in some industries.

Answer 1

a) ​Total variable cost per unit, total fixed cost per unit, and total cost per unit.

Total variable cost per unit =

Direct materials	$1,800,000
Direct labor	$2,400,000
Variable manufacturing overhead	$600,000
Variable selling and administrative expenses	$360,000
Total variable cost	$5160000
Total units	70000
Total variable cost per unit	$73.71

total fixed cost per unit

Fixed manufacturing overhead	1800000
Fixed selling and administrative expenses	1440000
Total Fixed cost	3240000
Total units	70000
Total Fixed cost per unit	$46.29

total cost per unit

Total variable cost per unit	$73.71
Total Fixed cost per unit	$46.29
Total cost per unit	$120

b) ​Desired ROI per unit.

Desired ROI per unit. = 35% as the markup on total unit cost

ROI = 120 * 35% = $42

c) ​Target selling price.

Target selling price = Total cost per unit + Desired ROI per unit

Target selling price = 120 + 42 = $162

d)​Another cost-based approach to pricing is called time and material pricing. Under this approach, two pricing rates are set.  Explain where this approach is used and identify the steps involved in time-and-material pricing. Also explain why this approach is used in some industries.

Under this approach, two pricing rates are set, standard labor rate per hour used and actual cost of materials used, and calculate pricing rate based on these cost.

Time and materials pricing is used in the service and construction industries to bill customers for a standard labor rate per hour used, plus the actual cost of materials used.

Service industries like Accounting, auditing, and tax services,Consulting services and Legal work etc..

Customers are charged for the amount of hours used on a specific project or contract, plus costs of materials. The main benefits of T&M model is flexibility and opportunity to adjust any requirements.