Question

Hummingbird Company uses the product cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing 25,000 units of Product K are as follows:

Variable costs:
Direct materials		$2.50
Direct labor		4.25
Factory overhead		1.25
Selling and administrative expenses		0.50
Total		8.50
Fixed costs:
Factory overhead		$25,000
Selling and administrative expenses		17,000

Hummingbird desires a profit equal to a 5% rate of return on invested assets of $642,500.

a. Determine the amount of desired profit from the production and sale of Product K.
$_________

b. Determine the total manufacturing costs and the cost amount per unit for the production of 25,000 units of Product K.

Total manufacturing costs	$_________
Cost amount per unit	$_________

c. Determine the markup percentage for Product K. Round your answer to one decimal place.
%__________

d. Determine the selling price of Product K. Round your answer to two decimal places.
$_________

Answer 1

(a)Computation of the amount of Desired Profit

$642,500 x 5%   = $32,125

(b) Computation of Total Manufacturing Cost

Variable cost          25,000 units @ $8.50             $212,500

Fixed cost              $25,000 + $17,000                  $42,000

Total manufacturing cost                                   $254,500

Cost per unit = $254,500/25,000         = $10.18

(c ) Computation of Manufacturing Costs and cost amount per unit

Total manufacturing cost                                   $254,500

Add desired profit $642,500 x 5%                        $32,125

Total Sales                                                       $286,625

markup percentage   = $32,125 x 100 / $254,500 = 12.62%

(d) Computation of selling price of Product K

Total manufacturing cost                                   $254,500

Add desired profit $642,500 x 5%                        $32,125

Total Sales                                                       $286,625

$286,625 / 25,000 = $11.465