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Product Pricing using the Cost-Plus Approach Concepts; Differential Analysis for Accepting Additional Business
Night Glow Inc. recently began production of a new product, the halogen light, which required the investment of $600,000 in assets. The costs of producing and selling 10,000 halogen lights are estimated as follows:
Variable costs per unit: Fixed costs:
Direct materials $81 Factory overhead $324,000
Direct labor 18 Selling and administrative expenses 162,000
Factory overhead 36
Selling and administrative expenses 32
Total variable cost per unit $167
Night Glow Inc. is currently considering establishing a selling price for the halogen light. The president of Night Glow Inc. has decided to use the cost-plus approach to product pricing and has indicated that the halogen light must earn a 10% rate of return on invested assets.
Note: Round all markup percentages to two decimal places, if required.
1. Determine the amount of desired profit from the production and sale of the halogen light.
2. Assuming that the product cost concept is used, determine the following:
a. Cost amount per unit
b. Markup percentage %
c. Selling price per unit
3. Appendix Assuming that the total cost concept is used, determine the following:
a. Cost amount per unit
b. Markup percentage %
c. Selling price per unit
4. Appendix Assuming that the variable cost concept is used, determine the following:
a. Variable cost amount per unit
b. Markup percentage %
c. Selling price per unit
Solution:
1. Amount of desired profit from the production and sale of the halogen light:
Desired profit = 10% x $600,000 = $60,000
2. Assuming that the product cost concept is used, determine the following:
a. Cost amount per unit = $167.4 $( 167 - 32 + 324,000/10,000)
b. Markup percentage % = 32.38% ((Selling price - cost)/cost price x 100)
c. Selling price per unit = $ 221.60 (Total costs plus profit)/10,000
3. Appendix Assuming that the total cost concept is used, determine the following:
a. Cost amount per unit = $ 215.60
b. Markup percentage % = 2.78%
c. Selling price per unit = $ 221.60
4. Appendix Assuming that the variable cost concept is used, determine the following:
a. Variable cost amount per unit = $ 167
b. Markup percentage % = 32.69%
c. Selling price per unit = $221.60
Explanation:
a) Product cost concept: This concept includes all the costs associated with the production of products, including the variable costs and factory overhead.
b) Total cost concept: This concept includes all the costs, including selling and distribution costs.
c) Variable cost concept: This concept includes only the variable costs, leaving out all the fixed costs.
These concepts help to measure costs, in making decisions, and in evaluating business performance.
