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Lethal Industries has recently patented a new product called MaxiDrive, an autom

ID: 2632018 • Letter: L

Question

Lethal Industries has recently patented a new product called MaxiDrive, an automobile oil for maximum engine performance. The following annual information was developed by the company's controller for use in price determination:

Variable production costs

$1,860,000

Fixed overhead

620,000

Selling expenses

420,000

General and administrative expenses

230,000

Desired profit

342,000

Annual demand for the product is expected to be 500,000 quarts. Round answers to nearest two decimal places.  

a. Compute the projected unit cost for one quart of MaxiDrive

B. Prepare the formulas for computing the markup percentage and the selling price for one quart using the gross margin pricing method

Variable production costs

$1,860,000

Fixed overhead

620,000

Selling expenses

420,000

General and administrative expenses

230,000

Desired profit

342,000

Explanation / Answer

a. Compute the projected unit cost for one quart of MaxiDrive

Projected unit cost for one quart of MaxiDrive = 6.26

Working

B. Prepare the formulas for computing the markup percentage and the selling price for one quart using the gross margin pricing method

Formula:

Markup Percentage = Profit Margin per Unit/ Projected Unit Cost

Markup Percentage = 0.684/6.26

Markup Percentage = 10.926%

Selling price for one quart = 6.26 + 0.684

Selling price for one quart = $ 6.944

Variable production costs $1,860,000 Fixed overhead 620,000 Selling expenses 420,000 General and administrative expenses 230,000 Total Cost $3,130,000 No of unit produced & sold 500,000 Projected Unit Cost = Total Cost/No of unit produced & sold = $6.26