Question

RooPhone Inc. uses the product cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 5,000 units of cellular phones are as follows:   (7 points)

Variable costs                                                  Fixed Costs:

Direct materials    $625,000                     Factory overhead                     $215,000

Direct labor                     225,000                    Selling & Admin. expenses          75,000

Factory Overhead           200,000

Selling & admin. Exp.    150,000

                                    $1,200,000

RooPhone desires a profit equal to a 18% rate of return on invested assets of $550,000.

Required:

a.) Determine the amount of desired profit.

b.) Determine the product cost per unit for the production of 5,000 phones.

c.) Determine the total cost markup percentage (e.g. 20%) using the product cost concept.

d.) Determine the selling price of each cellular phone. Round to nearest dollar.

Answer 1

Answer a.

Desired Profit = Required Rate of Return * Invested Assets
Desired Profit = 18% * $550,000
Desired Profit = $99,000

Answer b.

Total Product Cost = Direct Materials + Direct Labor + Variable Factory Overhead + Fixed Factory Overhead
Total Product Cost = $625,000 + $225,000 + $200,000 + $215,000
Total Product Cost = $1,265,000

Total Selling and Administrative Expenses = Variable Selling and Administrative Expenses + Fixed Selling and Administrative Expenses
Total Selling and Administrative Expenses = $150,000 + $75,000
Total Selling and Administrative Expenses = $225,000

Product Cost per unit = Total Product Cost / Number of units
Product Cost per unit = $1,265,000 / 5,000
Product Cost per unit = $253

Answer c.

Cost Markup Percentage = (Desired Profit + Total Selling and Administrative Expenses) / Total Product Costs
Cost Markup Percentage = ($99,000 + $225,000) / $1,265,000
Cost Markup Percentage = 25.6%

Answer d.

Selling Price = Product Cost per unit + Markup per unit
Selling Price = $253 + $253 * 25.6%
Selling Price = $253 + $65
Selling Price = $318