Question

Product Pricing: Two Products
Quality Data manufactures two products, CDs and DVDs, both on the same assembly lines and packaged 10 disks per pack. The predicted sales are 400,000 packs of CDs and 500,000 packs of DVDs. The predicted costs for the year 2009 are as follows:

	Variable Costs	Fixed Costs
Materials	$100,000	$600,000
Other	250,000	600,000

Each product uses 50 percent of the materials costs. Based on manufacturing time, 40 percent of the other costs are assigned to the CDs, and 60 percent of the other costs are assigned to the DVDs. The management of Quality Data desires an annual profit of $150,000.

(a) What price should Quality Data charge for each disk pack if management believes the DVDs sell for 20 percent more than the CDs? Round answers to the nearest cent.
CDs $Answer

DVDs $Answer

(b) What is the total profit per product using the selling prices determined in part (a)? Use negative signs with answers, if appropriate.
CDs $Answer

DVDs $Answer

Answer 1

The answer is as follows÷

(a). The price per pack

CD_s =$1.70/ pack

DVD_s = $2.04 / pack

(b) The total profit per product

CD_s = $ - 10,000

DVD_s = $ 160,000

Working notes ÷

Particulars    CD_s        DVDs

Sales in Packs 400,000 500,000   

Material -(50%)

Variable cost($) 50,000 50,000

Fixed cost ($) 300,000 300,000

Other-(40%:60%)

Variable($)    100,000 150,000

Fixed($) 240,000 360,000

Total VC($) 150,000 200,000

Total FC($)    540,000 660,000

(a) Profit = Sales - Variable cost - fixed cost

Let assume the price of CD be x ,then the price of DVD will be 1.20x i.e. [x + (x *20%)]

So , profit =

150,000 =(400,000x + 500,000 × 1.20x) - 350,000 - 1200,000

150,000 =1000,000x - 1550,000

1000,000x = 1550,000 + 150,000

1000,000 x = 1700,000

x = 1700,000/1000,000

x = 1.70

So the price of CD is $ 1.70 / pack

the price of DVD is 1.20 * 1.70 =$ 2.04 / pack

(b) The total profit per product is as follows÷

Particulars   CDs($) DVD_s($)

Sales    680,000 1020,000

Less VC 150,000    200,000

Contribution 530,000 820,000

Less FC 540,000 660,000

Profit    - 10,000 160,000

Total profit is $ 150,000 i.e. $(- 10,000 + 160,000) as stated in the question.

Note

1. VC = Variable Costs

2. FC = Fixed Costs