Question

Variable Cost Methodof Product Pricing

Smart Stream Inc. uses the variable cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cell phones are as follows:

Variable costs per unit:						Fixed costs:
	Direct materials		$150				Factory overhead	$350,000
	Direct labor		25				Selling and admin. exp.	140,000
	Factory overhead		40
	Selling and administrative expenses		25
		Total variable cost per unit	$240

Smart Stream desires a profit equal to a 30% return on invested assets of $1,200,000.

a. Determine the variable costs and the variable cost amount per unit for the production and sale of 10,000 cellular phones.

Total variable cost	$
Variable cost amount per unit	$

b. Determine the variable cost markuppercentage for cellular phones. Round to two decimal places.
%

c. Determine the selling price of cellular phones. If required, round to the nearest dollar.
$per cellular phone

Answer 1

(a) Desired profit is $360,000.

The desired profit is equal to 30% rate of return on invested assets of $1,200,000, which is calculated by this formula:

• Desired profit =R.O.R × Invested assets
  Desired profit = 30% × $,200,000
  Desired profit = $360,000

The cost per unit for the production fo 10,000 cellular phones is $289.

We already have the total variable cost per unit of $240. So, we need to calculate the total fixed cost per unit by accumulating all the fixed costs and dividing them by the 10,000 units:

• Total cost per unit = Total variable cost per unit + (Total fixed costs ÷ Total production)
  where:
  Total variable cost per unit = $240
  Total fixed costs = Factory overhead + Selling and admin expense

Expanding the formula above to include the details of the total fixed costs, we continue to solve for the total unit cost:

• Total unit cost per unit = Total variable cost per unit + [(Factory overhead + Selling and admin expense) ÷ Total production]
  Total unit cost per unit = $240 + [($350,000 + $140,000) ÷ 10,000 units]
  Total unit cost per unit = $240 + $490,000 ÷ 10,000
  Total unit cost per unit = $240 + $49
  Total unit cost per unit = $289

(b) The product cost markup percentage for cellular phones is 12.5%.

To calculate the product cost markup, divide the desired profit of $360,000 by the total product cost, which is the total cost per unit of $289 multiplied by the total production of 10,000:

• Product cost markup percentage = Desired profit ÷ Total product cost
  where:
  Total product cost = Total unit cost × Total production in units
• Product cost markup percentage = $360,000 ÷ ($289 × 10,000)
  Product cost markup percentage = $360,000 ÷ ($2,890,000)
  Product cost markup percentage = 12.5%

(c) The selling price of cellular phones is $325 per unit.

The selling price is equal to the total product cost per unit plus the markup of 12.5% of the total product cost per unit:

• Selling price per unit = Total product cost per unit + (12.5% × Total product cost per unit)
  Selling price per unit = 112.5% × Total product cost per unit
  Selling price per unit = 112.5% × $289
  Selling price per unit = $325