Question

Rios Co. makes drones and uses the variable cost approach in setting product prices. Its costs for producing 30,000 units follow. The company targets a profit of $310,000 on this product. Variable Costs per Unit Fixed Costs Direct materials Direct labor Overhead Selling $70Overhead 40 25 15 Selling Administrative $670,000 305,000 285,000 1. Compute the variable cost per unit 2. Compute the markup percentage on variable cost. 3. Compute the product's selling price using the variable cost method 1 Variable cost per unit 2 Markup percentage 3 Selling price

Answer 1

Answer: The variable cost per unit is 150, The mark up percentage on variable cost is 5%, The selling price is $192

Explanation:

To calculate variable cost per unit

= (40 + 25 + 15 + 70)

= 150

To calculate fixed cost per unit

(670,000 + 305,000 + 285,000)

=1,260,000

Fixed cost per unit

= Total Fixed cost ÷ Total unit produced

= 1,260,000 ÷ 30,000

= 42

To compute the total variable cost

=Total Variable cost = Total quantity of output × variable cost per unit of output

= 30,000 × 150

= 4,500,000

Total Cost

= TFC + TVC

= 1,260, 000 + 4,500,000

= 5,760,000

To compute the mark up percentage on variable cost

= profit/ cost price ×100

= 310,000/ 5,760,000 × 100

= 0.05 × 100

= 5%

To compute the product selling price using the variable cost method

= variable cost per unit + Fixed cost per unit

= 150 + 42

= 192

Therefore the selling price is $192 in order to cover the fixed cost.

Answer 2

Answer:

1. Variable cost per unit   = $150

2. Markup percentage     = 34.89%

3. Selling price                 = $202.33

Explanation:

Variable cost per unit = 70+40+25+15= $150

Fixed cost   =  670,000+ 305,000 +285,000= $1,260,000

Fixed cost per unit  =    1,260,000/30,000= $42

Profit per unit   =        Targeted profit

                               Targeted production unit

                          = $310,000   =$10.33

                                30,000

Markup percenge =     Fixed cost per unit + profit per unit

                                          Variable cost per unit

                                =$42+ $10.33    =    52.33 * 100   = 34.89%

                                       $150                   $150      1

Selling Price        =  Variable cost per unit + markup

                            =  $150+$42+$10.33

                             = $202.33

Variable cost-plus pricing is calculated by  determining variable costs per unit and adding mark-up which will cover fixed costs per unit and generate a targeted profit margin.