Question

Terra Potteryworks is a price−setter that uses the cost−plus pricing approach for pricing its products. These products are​ unique, artistically designed architectural decorations. Terra produces and sells 6,200 units per​ year, which represent maximum capacity. Variable costs are $320.00 per unit. Total fixed costs are $920,000 per year. The CEO has a target of $40,000 in operating​ income, which he wants to achieve by year−end. Using the cost−plus pricing​ method, what sales price per unit should Terra​ use? (Round your answer to the nearest​ cent.)

A.

$154.84

per unit

B.

$326.45

per unit

C.

$468.39

per unit

D.

$474.84

per unit

2) Helmsman Products sells a special type of navigation equipment for $1,300. Variable costs are $800 per unit. When a special order arrived from a foreign contractor to buy 40 units at a reduced sales price of $1,000 per​ unit, there was a discussion among the managers. The controller said that as long as the special price was greater than the variable​ costs, the sale would contribute to the​ company's profits and should be accepted as offered. The vice​ president, however, decided to decline the order. Which of the following statements supports the decision of the vice​ president?

A.

The company will need to hire additional staff to execute this order.

B.The variable costs of

$800

includes variable costs of packing the product.

C.

The company is operating at​ 70% of its production capacity.

D.

The order is not likely to affect the regular sales.

Answer 1

1.

Answer:

Option D - $474.84

Calculation:

To calculate the  sales price per unit should Terra​ use, we need to find the target revenue and divide it with the number of units.

To calculate the target revenuewe need to add the variable costs andfixed costs and then add the oeprating income to it.

Current variable costs = 6,200 units x 320 = 1,984,000

Variable costs	1,984,000
Add: Fixed Costs	920,000
Total Costs	2,904,000
Add: Operating Income	40,000
Target revenue	2,944,000

Cost-plus price per unit = Target revenue / No of units = 2,944,000 / 6,200 = 474.84

2.

Answer:

Option A. The company will need to hire additional staff to execute this order.

Explanation:

Here, the sales price is low and the order is a special order. Becasue it affects the normal sales, it is required to have additional staff to overcome this. The fixed costs will be same, even if the company accepted the offer. But, additional variable cost according to the number of units will be incurred by the firm. The deal will be beneficial for the firm, but it is high chance that the firm might need to employ more staff to go forward with the deal. So option A is correct.