Net sales for the year were $600,000 and cost of goods sold was $366,000 for the

Question

Net sales for the year were $600,000 and cost of goods sold was $366,000 for the company’s existing products. A new product is presently under development and has an expected selling price of not more than $59 per unit in order to remain competitive with similar products in the marketplace. Required: a. Calculate gross profit and the gross profit ratio for the year. b. What is the maximum cost per unit that can be incurred to manufacture the new product so that the product can be priced competitively and will not result in a reduction to the company’s gross profit ratio? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Explanation / Answer

Solution:

Part a --- Calculation of Gross Profit and Gross Profit Ratio

Gross Profit = Net Sales - Cost of Goods Sold = $600,000 - $366,000 = $234,000

Gross Profit Ratio = Gross Profit / Net Sales x 100 = $234,000 / 600,000 x 100 = 39%

Part b --- Maximum Cost per unit that can be incurred to manufacture the new product so that the product can be priced competitively

Expected Selling price per unit = $59

Since gross profit ratio is 39%, Gross Profit = Expected selling price x 39% = $59 * 39% = $23.01

Tthe maximum cost per unit = Expected Selling Price Per Unit - Gross Profit = 59 - 23.01 = $35.99

the maximum cost per unit that can be incurred to manufacture the new product so that the product can be priced competitively and will not result in a reduction to the company’s gross profit ratio = $35.99 Per Unit

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