In: Accounting
Product Pricing: Two Products
Quality Data manufactures two products, CDs and DVDs, both on the
same assembly lines and packaged 10 disks per pack. The predicted
sales are 400,000 packs of CDs and 500,000 packs of DVDs. The
predicted costs for the year 2009 are as follows:
Variable Costs | Fixed Costs | |
---|---|---|
Materials | $200,000 | $500,000 |
Other | 150,000 | 600,000 |
Each product uses 50 percent of the materials costs. Based on
manufacturing time, 40 percent of the other costs are assigned to
the CDs, and 60 percent of the other costs are assigned to the
DVDs. The management of Quality Data desires an annual profit of
$50,000.
(a) What price should Quality Data charge for each disk pack if
management believes the DVDs sell for 20 percent more than the CDs?
Round answers to the nearest cent.
CDs $Answer
DVDs $Answer
(b) What is the total profit per product using the selling prices
determined in part (a)? Use negative signs with answers, if
appropriate.
CDs $Answer
DVDs $Answer
Answer:
A)
Material cost = variable cost + fixed cost = $200,000 +
$500,000=$700,000
other cost = variable cost + fixed cost = $150,000+
$600,000 = $750,000
Material
cost for CDs = .50 * 700,000 = $350,000
other cost for CDs = .40 * 750,000 = $300,000
total cost for CDs = $350,000 + $300,000 = $650,000
Material
cost for DVDs = .50 * 700,000 = $350,000
Other cost for DVDs = .60 * 750,000 = $450,000
total cost for DVDs = $350,000 + $450,000= $800,000
Total
cost for CDs and DVDs = $650,000 + $800,000 = $1,450,000
Annual profit $50,000
Total sales revenue = $1,450,000+$50,000= $1,500,000
Let
price for the CDs = X so the price for DVDs = X + .20 * X = 1.2
X
So 400,000 * X + 500,000 * 1.2 X = $1,500,000
1,000,000 X = $1,500,000, X = $1.5
Sale price of CDs = $1.5
Sale price of DVDs = $1.5 + 1.5 * .20 = $1.8
b)
Sale
revenue for CDs = $1.5 * 400,000 = $600,000
Sale revenue for DVDs = $1.8 * 500,000 = $900,000
Total profit per product is as calculated below:
Particulars |
CDs |
DVDs |
Total |
Sale value |
600,000 |
900,000 |
|
Less: Total Cost |
650,000 |
800,000 |
|
Profit |
-50,000 |
1,00,000 |
50,000 |