Comtel Electronics Inc predicted 2014 variable and fixed costs are as follows: V

Question

Comtel Electronics Inc predicted 2014 variable and fixed costs are as follows: Variable Costs Fixed Costs Manufacturing $400,000 260,000 Selling & administrative 180,000 50,400 Total: $580,000 $310,400 Comtel Electronics Inc is a small company producing a wide variety of computer interface devices, Per-unit manufacturing cost information about one of these patients, a high-capacity flash drive, is as follows: Direct materials - $8 Direct labor - 7 Manufacturing overhead Variable 5 Fixed 7 Total manufacturing costs: $27 Variable selling and administrative costs for the flash drive is $4 per unit. Management has set a 2014 target profit of $200,000 on the sale of the flash drive. Required a. Determine the markup percentage on variable costs required to earn the desired profit. b. Use variable cost markup to determine a suggested selling price for the flash drive. c. For the flash drive, break the markup on variable costs into separate parts for fixed costs and profit. Explain the significance of each part. d. Determine the markup percentage on manufacturing costs required to earn the desired profit. e. Use the manufacturing costs markup to determine a suggested selling price for the flash drive. f. Evaluate the variable and the manufacturing cost approaches to determine the markup percentage.

Explanation / Answer

Total Variable Costs = $580000 , Total Fixed Costs = $310400 and desired Profit = $200000

a. the markup percentage on variable costs required to earn the desired profit = Variable cost + Fixed costs + Profit = Sales revenue

So, Markup % on variable costs= (Fixed costs+Profit ) * 100 / Variable costs= 310400 + 200000 / 580000 = 88%

b. Suggested selling price for the flash drive on the basis of variable cost markup = Variable cost per unit (1+88%)

= (20 + 4) (1 + 0.88) = 24 * 1.88 = $45.12 per unit

c. Selling Price $45.12 - (Direct Material $8 + Direct Labor $7 + Manufacturing overhead $5 + Selling & Administrative expenses $4) = $21.12 (includes all fixed costs and the profit margin)

The variable cost vary with every unit of production whereas fixed costs reduces with every increase of a unit.

d.  

total selling price = 580000+310400 + 200000 =$1,090,400 , manufacturing cost = 400000 + 260000 = $660000

the markup percentage on manufacturing costs required to earn the desired profit

= [($1090400 / $660000 * 100) - 100] = 65.21%

e. Selling price = 27 (1 + 0.6521) = $44.61

f. Determining of markup on the basis of variable costs allow us to know/seperate the variable cost from all other costs. Here we must have the perfect knowledge of the fixed cost to fix the selling price on its basis. So, this method of determining the selling price is seldomly used.

On the other hand, determining of markup on the basis of manufacturing costs provide us all out-of-pocket expenses to produce the product. It includes both fixed and variable costs. So, we have to determine all administrative and selling costs (both fixed and variable) to add to manufacturing costs to determine selling price. This is the best method which is used to determine selling price usually.

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