Question

1.

Pinkin Inc. needs to determine a price for a new phone model. Pinkin desires a 20% markup on the total cost of the phone. Pinkin expects to sell 37,000 phones. Additional information is as follows:

Variable product cost per unit	$	77
Variable administrative cost per unit		58
Total fixed overhead		95,000
Total fixed administrative		90,000

Using the total cost method what price should Pinkin charge?

2.

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $9.70; direct labor, $13.70, variable overhead $2.70 and fixed overhead, $7.70. An outside supplier has offered to sell the product to Paxton for $33.80. Compute the net incremental cost or savings of buying the component.

3.Bricktan Inc. makes three products, basic, classic, and deluxe. The maximum Bricktan can sell is 110,000 units of basic, 476,000 units of classic, and 190,000 units of deluxe. Bricktan has limited production capacity of 118,000 hours. It can produce 10 units of basic, 8 units of classic, and 4 units of deluxe per hour. Contribution margin per unit is $15 for the basic, $25 for the classic, and $55 for the deluxe. What is the total contribution margin if Bricktan chooses the most profitable sales mix?

Answer 1

Answer to Q1: Determination of price to be charged as per total cost method
Price to be charged = Total cost per unit + Desired markup on the total cost
Price to be charged = $140 + 20% of $140 = $168
Computation of total cost per unit:
Particulars	Cost per unit
Variable cost per unit	$77
Variable administrative cost per unit	$58
Total fixed cost per unit [($95,000 + $90,000)/37,000 units]	$5
Total cost per unit	$140
Answer to Q2: Net incremental cost or savings of buying the component
The relevant cost of producing the component = Variable cost of production
Hence, the relevant cost of producing the component = $26.10 per unit ($9.70 + $13.70 + $2.70)
Fixed overhead is not relevant for decision-making since it will be incurred whether the company produces or buys the product
Now, the product is being offered by the supplier @ $33.80 per unit.
So, if the company buys it from the supplier it will lead to a net incremental cost of $7.70 per unit ($33.80 - $26.10)
Answer to Q3: Total contribution margin if Bricktan chooses the most profitable sales mix
Bricktan Inc. would produce more units of the product which has the highest contribution margin per hour of production capacity, then the time should be used to produce the product having second highest contribution margin and balance time should be used for the third product.
Contribution margin per hour = Contribution margin per unit x Units per hour
Particulars	Basic	Classic	Deluxe
Contribution margin per unit	$15	$25	$55
Units per hour	10	8	4
Contribution margin per hour	$150	$200	$220
Ranking on the basis of contribution margin per minute	Rank 3	Rank 2	Rank 1
Maximum number of units that can be sold	110,000	476,000	190,000
Hours required to produce maximum units	11,000	59,500	47,500
For the most profitable sales mix, the production capacity of 118,000 hours shall be used as follows:
Deluxe = 47,500 hours i.e. 190,000 units
Classic = 59,500 hours i.e. 476,000 units
Basic = 11,000 hours (118,000 - 47,500 - 59,500) i.e. 110,000 units
Most profitable contribution margin:
Particulars	Basic	Classic	Deluxe
Contribution margin per unit (A)	$15	$25	$55
Units to be produced (B)	110,000	476,000	190,000
Contribution margin (A x B)	$1,650,000	$11,900,000	$10,450,000
Total contribution margin	$24,000,000