Question

Gracius Manufacturing invested $5,000,000 in producing a special product for car accessories. Their annual sales for normal customers is 50,000 units and currently has excess capacity. The following per unit data apply for sales to regular customers:

Variable costs:

Direct materials $30

Direct labor 10

Manufacturing overhead 20

Marketing costs 10

Fixed costs:

Fixed Manufacturing overhead 100

Fixed Marketing costs 20

Answer following independent questions

1. Compute the most likely price to be quoted assuming the markup is 10% of total cost

2. If they want to price a unit for one-time special order and have excess capacity. What is the minimum price could be assigned for each unit?

3. The market price is $100 and the company would maintain the same markup of 10% of investment, calculate the target cost

Answer 1

1 markup percentage = 10%

Total cost = 30 + 10 + 20 + 10 + 100 + 20 = 190

Therefore the price of the product

= 190 + 10% = 209

The price of the product when 10% markup is 209

2 if there is excess capacity the minimum price charged by the company for the product is its variable cost. Because company producing the additional unit the variable cost increases but fixed cost are not increase . So the company willing to sale the product for its variable cost minimum.

Minimum price charged by the company

= 30 + 10 + 20 + 10 = 70

The minimum price at which company willing to sales the product is 70 ( variable costs )

3 in finding the target cost firstly we need to find the desired profit .

If the markup percentage is 10% and the market price is 100 .

Desired profit = 100 × 10% = 10

The desired profit is 10 . So in order to find out the target cost we need to subtract the desired profit from market price .

Target cost = market price - desired profit

Target cost = 100 - 10 = 90

The above are the detailed explanation and calculations