Concept explainers
(a)
Cost-plus pricing: The pricing approach used by the companies to set the target selling price based on the cost plus desired profit is referred to as cost-plus pricing.
Formula:
Markup percentage: The percentage of
Formula:
Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.
Formula for ROI per unit:
To determine: The markup percentage and target selling price for the new parts of Parts LC
(b)
Cost-plus pricing: The pricing approach used by the companies to set the target selling price based on the cost plus desired profit is referred to as cost-plus pricing.
Formula:
Markup percentage: The percentage of return on investment (ROI) achieved per unit over the total cost of production per unit, is referred to as markup percentage.
Formula:
To determine: The markup percentage and target selling price for the new parts of Parts LC, if the volume is 40,000 units, instead of 50,000 units
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Managerial Accounting, Binder Ready Version: Tools for Business Decision Making
- Cullumber Corporation is in the process of setting a selling price for a recently designed product. The following data relate to this product at a budgeted volume of 60,000 units. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses (a1) Total unit variable cost $ Total unit fixed cost Total unit cost Per Unit $ $30 $ 40 Cullumber uses cost-plus pricing to set its target selling price and has a markup on total unit cost of 30%. 10 6 Compute total unit variable cost, total unit fixed cost, and total unit cost for the new product. Total $2,220,000 1,920,000arrow_forwardLazer Tag manufactures computer parts within a relevant range of 50,000 to 100,000 units per year. Complete the following manufacturing cost schedule (a through j) for Lazer Tag. Fill in the following chart. Parts Produced 50,000 100,000 TOTAL COSTS: Variable $75,000 ? Fixed 50,000 ? Total ? ? COSTS PER UNIT: Variable ? ? Fixed ? ? Total ? ?arrow_forwardGonzales Corp. needs to set a target price for its newly designed product EverReady. The following data relate to this product. Per Unit Total Direct Material $20 Direct Labor $40 Variable manufacturing Overhead $10 Fixed manufacturing overhead $1,200,000 Variable selling and administrative $5 Fixed selling and administrative $1,120,000 The costs shown above are based on a budgeted volume of 80,000 units produced and sold each year. Gonzales uses cost-plus pricing methods to set its target selling price. Because some managers prefer absorption-cost pricing and others prefer variable-cost pricing, the accounting department provides information under both approaches using a markup of 50% on absorption cost and a markup of 70% on variable cost.…arrow_forward
- Gonzales Corp. needs to set a target price for its newly designed product EverReady. The following data relate to this product. Per Unit Total Direct Material $20 Direct Labor $40 Variable manufacturing Overhead $10 Fixed manufacturing overhead $1,200,000 Variable selling and administrative $5 Fixed selling and administrative $1,120,000 The costs shown above are based on a budgeted volume of 80,000 units produced and sold each year. Gonzales uses cost-plus pricing methods to set its target selling price. Because some managers prefer absorption-cost pricing and others prefer variable-cost pricing, the accounting department provides information under both approaches using a markup of 50% on absorption cost and a markup of 70% on variable cost.…arrow_forwardAldean Company wants to use absorption cost-plus pricing to set the selling price on a new product. The company plans to invest $180,000 in operating assets to produce and sell 18,000 units. Its required return on investment (ROI) in its operating assets is 18%. The accounting department has provided cost estimates for the new product as shown below: Per Unit Total Direct materials $7.90 Direct labor $5.90 $2.90 Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $138,600 $1.90 $ 43,200 Required: 1. What is the unit product cost for the new product? (Round intermediate calculations and final answer to 2 decimal places.) 2. What is the markup percentage on absorption cost for the new product? (Round intermediate calculations to 2 decimal places.) 3. What selling price would the company establish for its new product using a markup percentage on absorption cost? (Round intermediate calculations…arrow_forwardYou are advising the management at the company ABC regarding their pricing decisions in relation to a new product. Existing information is as follows: Direct materials $4 per unit; direct labor $3 per unit; variable manufacturing overhead $5 per unit; variable selling and administrative expenses $2 per unit; fixed manufacturing overhead expenses $$40,000; and fixed selling and administrative expenses $70,000. There is an expectation that company will sell 20,000 units. Determine the unit product cost if company uses an absorption costing approach in its cost-plus pricing. Determine the target selling price given that company uses a 40 percent markup percentage. It has been brought to your attention that company is making an investment of $100,000 in the making, marketing, and distribution of the 20,000 units of their new product. The management require a 50 percent return on this investment. Calculate the markup percentage on absorption costing given this information. If the…arrow_forward
- Ritner Corporation manufactures a product that has the following costs: Per Unit Per Year Direct materials $24.20 $15.70 $ 4.10 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $451,500 $ 3.50 $593,600 The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 31,000 units per year. The company has invested $362,000 in this product and expects a return on investment of 9%. Required: a. Compute the markup on absorption cost. (Round your intermediate and final answer to 2 decimal places.) b. Compute the selling price of the product using the absorption costing approach. (Round your intermediate and final answer to 2 decimal places.)arrow_forwardRitner Corporation manufactures a product that has the following costs: Per Unit Per Year Direct materials $24.20 Direct labor $15.70 $ 4.10 Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $451,500 $ 3.50 $593,600 The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 31,000 units per year. The company has invested $362,000 in this product and expects a return on investment of 9%. Required: a. Compute the markup on absorption cost. (Round your intermediate and final answer to 2 decimal places.) b. Compute the selling price of the product using the absorption costing approach. (Round your intermediate and final answer to 2 decimal places.) a. Markup percentage on absorption cost b. Selling price 40.47 % 82.26arrow_forwardYour CFO has supplied you with the following information. Current product standard costs are as follows: Selling price per unit: $5,000 $1,400/unit direct material $400/unit direct labor $200/unit variable overhead $200/unit fixed overhead (this figure is the result of the budgeted fixed overhead of $2,000,000 and budgeted sales volume of 10,000 units) Income Tax rate = 40% The board of directors has requested a thorough presentation to determine whether taking on this potential customer is a good idea. Assume that your factory is fully operational and that you will not have any learning curve impacts. In your presentation, answer the following questions from the board using the data from the CFO: What is meant by cost variance? What is an effective way to incorporate variance analysis in the budget process? What are the differences between labor and material variances? How is a quantity variance different from a rate variance? What are the subcomponents of fixed overhead? What are…arrow_forward
- Your CFO has supplied you with the following information. Current product standard costs are as follows: Selling price per unit: $5,000 $1,400/unit direct material $400/unit direct labor $200/unit variable overhead $200/unit fixed overhead (this figure is the result of the budgeted fixed overhead of $2,000,000 and budgeted sales volume of 10,000 units) Income Tax rate = 40% What is the lowest possible price you could offer to this potential customer (you know that you have sufficient capacity without working overtime and without adding any new equipment to make this order)? Please show your calculations. In terms of capacity, under what conditions would offering this lowest possible price be a bad decision? Why? Create a pro-forma income statement to show a net income/net loss for the year. You have been considering investing in automation to eliminate some factory labor if you get this large order. This technology advancement will cost an added $100,000/yr. to lease (net of…arrow_forwardUse this information for Mallard Corporation to answer the question that follow.Mallard Corporation uses the product cost concept of product pricing. Below is the cost information for the production and sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% rate of return on invested assets of $800,000. Fixed factory overhead cost $82,000 Fixed selling and administrative costs 45,000 Variable direct materials cost per unit 5.50 Variable direct labor cost per unit 7.65 Variable factory overhead cost per unit 2.25 Variable selling and administrative cost per unit 0.90 The cost per unit for the production of the company's product isarrow_forwardA company is analyzing a make-versus-purchase situation for a component used in several products and the engineering department has developed these data: Option A: Purchase 10,000 items per year at a fixed cost of Php 340 per item. The cost of placing the order is negligible according to the present cost accounting procedure. Option B: Manufacture 10,000 items per year, using available capacity in the factory. Cost estimates are direct materials= Php 200 per item and direct labor = Php 60 per item. Manufacturing overhead is allocated at 200% of direct labor. Based on these data, should the item be purchased or manufacture?arrow_forward
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