Question

Problem 1.2 Product Pricing

Your boss asked you for the per unit price of a new product at 200 units and at 400 units given that:

Material Cost is linear from $25/unit for 100 units to $20/unit for 600 units

Labor Hours are 2.2 hours/unit for 100 to 299 units and 2.0 hours/unit for 300 to 599 units

Labor Rate is $15/hour

Overhead is 120% of labor dollars

Markup is 28% of COGS dollars.

Answer 1

Details for 200 units :

Material cost for 200 units = $24 ( taking into account the slope of linear curve if drawn for price vs unit values ) per unit

Labour hours = 2.2 hours/ unit

Labor rate = $15 / hour

Therefore , Labour cost = $15 x 2.2 =$33 per unit

Overhead = 120% of Labour cost = 33 x 1.2 = $39.6

Total COGS = Material cost + Labour cost + overhead = $24 + $33 + $39.6 = $96.6

Mark up = 28% of COGS = 0.28 x $96.6 = $27.05

Total price per unit = COGS + Mark up = $96.6 + $27.05 = $123.65

Answer : Per unit price = $123.65

Details for 400 units :

Material cost for 200 units = $22 ( taking into account the slope of linear curve if drawn for price vs unit values ) per unit

Labour hours = 2 hours/ unit

Labor rate = $15 / hour

Therefore , Labour cost = $15 x 2 =$30 per unit

Overhead = 120% of Labour cost = 30 x 1.2 = $36

Total COGS = Material cost + Labour cost + overhead = $22 + $30 + $36 = $88

Mark up = 28% of COGS = 0.28 x $88 = $24.64

Total price per unit = COGS + Mark up = $88 + $24.64 = $112.64

Answer : Per unit price = $112.64