Question

Steeze Co. makes snowboards and uses the total cost approach in setting product prices. Its costs for producing 10,000 units follow. The company targets a profit of \(300,000 on this product.

Variable Costs per Unit

Direct materials \)100

Direct labor . 25

Overhead 20

Selling . 5

Fixed Costs (in total)

Overhead $470,000

Selling . 105,000

Administrative. 325,000

1. Compute the total cost per unit.

2. Compute the markup percentage on total cost.

3. Compute the product’s selling price using the total cost method.

Short answer

Total cost per unit is $240. Markup percentage on total cost is 12.5%. The selling price of the product using the total cost method is $270

Step-by-step solution

 Definition of variable cost

The variable cost is the cost that changes according to the production level or other activities.

Calculation of total cost per unit

$\begin{array}{rcl}\mathrm{Total} \mathrm{Cost} \mathrm{Per} \mathrm{Unit}& =& \mathrm{Variable} \mathrm{Cost} \mathrm{Per} \mathrm{Unit}+ \mathrm{Fixed} \mathrm{Cost} \mathrm{Per} \mathrm{Unit}\\ & =& \$150+ \$90\\ & =& \$240\\ & & \end{array}$

Hence the total cost per unit is $240.

Markup percentage on total cost

$\begin{array}{rcl}\mathrm{Target} \mathrm{Profit} \mathrm{Per} \mathrm{Unit}& =& \frac{\mathrm{Target} \mathrm{Profit}}{\mathrm{Production} \mathrm{Units}}\\ & =& \frac{\$300,000}{\$10,000}\\ & =& \$30\\ & & \end{array}$

$\begin{array}{rcl}\mathrm{Markup} \mathrm{Percentage}& =& \frac{\mathrm{Target} \mathrm{Profit} \mathrm{Per} \mathrm{Unit}}{\mathrm{Total} \mathrm{Cost} \mathrm{Per} \mathrm{Unit}}\times 100\\ & =& \frac{\$30}{\$240}\times 100\\ & =& 12.5\%\\ & & \end{array}$

The selling price of the product

$\begin{array}{rcl}\mathrm{Selling} \mathrm{Price} & =& \mathrm{Cost} \mathrm{Price} \mathrm{Per} \mathrm{Unit}+ 12.5\% \mathrm{of} \mathrm{Cost} \mathrm{Price} \mathrm{per} \mathrm{Unit}\\ & =& \$240+ \$30\\ & =& \$270\\ & & \end{array}$