Technology Inc. predicted 2017 variable and fixed costs are as follows: Variable
ID: 2566107 • Letter: T
Question
Technology Inc. predicted 2017 variable and fixed costs are as follows: Variable costs Fixed costs Manufacturing 480,000 315900 Selling and Administrative 216,000 60500 Total 696,000 376,400 Technology Inc. produces a wide variety of computer interface devices. Per unit manufacturing cost information about one of these products, a high-capacity flash drive is as follows: Direct material $10 Direct labor 9 Variable Manufacturing Overhead 7 Fixed Manufacturing Overhead 9 Total manufacturing costs $35 The following is the variable selling and administrative costs for the flash drive: $6 Management has set a 2017 target profit on the flash drive of: $250,000 Required: 1. Determine the markup percentage on variable costs required to earn the desired profit 2. Use the variable cost markup to determine a suggested selling price for a flash drive. You are determining selling price per unit) 3. For the flash drive, break the markup on variable costs into separate parts for fixed costs and profit. 4. Explain what the minimum unit selling price a company would use in special order decision, if the company had excess capacity. 5. In the long run, what would be the lowest unit selling price the company would sell for? Explain your answer.
Explanation / Answer
1
Calculation of Markup on Variable Cost :
A.
No. of Units sold (Note 1)
36,000
B.
Desired Profit
250,000
C.
Fixed Cost (36,000x9) (Note 2)
324,000
D.
Markup ((B+C)/A)
15.94
2
Calculation of Selling Price:
A.
Variable Cost per unit
32
B.
Markup per unit
15.94
C.
Selling price per unit (A+B)
47.94
3
Breakup of Markup into Fixed cost and Profit:
A.
Total Markup over Variable cost
15.94
B.
Fixed Cost per unit
9.00
C.
Profit (A-B)
6.94
4
If the company had the excess spare capacity to produce, it will not bother of the Fixed cost because that won't incur.
Therefore the minimum selling price could be the price at which the company would be making zero contribution i.e. equal to Variable Costs.
hence the minimum selling price would be USD 32 per unit
Note 1:
Calculation of No. of Units sold:
A.
Variable Selling & Admin exp
216,000
B.
Selling & Admin exp per unit
6
C.
No. of units sold (A/B)
36,000
Note 2:
Assumed the company is using Absorption Costing Method hence the Fixed cost has been absorbed per unit basis.
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1
Calculation of Markup on Variable Cost :
A.
No. of Units sold (Note 1)
36,000
B.
Desired Profit
250,000
C.
Fixed Cost (36,000x9) (Note 2)
324,000
D.
Markup ((B+C)/A)
15.94
2
Calculation of Selling Price:
A.
Variable Cost per unit
32
B.
Markup per unit
15.94
C.
Selling price per unit (A+B)
47.94
3
Breakup of Markup into Fixed cost and Profit:
A.
Total Markup over Variable cost
15.94
B.
Fixed Cost per unit
9.00
C.
Profit (A-B)
6.94
4
If the company had the excess spare capacity to produce, it will not bother of the Fixed cost because that won't incur.
Therefore the minimum selling price could be the price at which the company would be making zero contribution i.e. equal to Variable Costs.
hence the minimum selling price would be USD 32 per unit
Note 1:
Calculation of No. of Units sold:
A.
Variable Selling & Admin exp
216,000
B.
Selling & Admin exp per unit
6
C.
No. of units sold (A/B)
36,000
Note 2:
Assumed the company is using Absorption Costing Method hence the Fixed cost has been absorbed per unit basis.
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