Question

Case Study
Camelback Communications Inc.
1.What will CCI now have to charge for each product to make a 40% mark-on? If CCI maintains its rule about dropping products with a mark-on below 25%, which additional products, if any, will it drop?
	A	B	C	D
Material Cost	15	5	10	5
Direct Labor	30	5	15	10
Variable Overhead	15	7.5	5	7.5
Variable Cost Per Unit	60	17.5	30	22.5
Fixed Cost Per Unit	22.5	6.56	11.25	8.43	$45,000/12,000 = 3.75
Total Cost	82.5	24.06	41.25	30.93	3.75 x Variable Cost
Existing Unit Cost	$85	$16.67	$45	$28.34
Total Cost	82.5	24.06	41.25	30.93
Total Profit	$2.50	($7.39)	$3.75	($2.59)
Mark-on 40%	33	9.624	16.5	12.373
Selling Price	115.5	33.68	57.75	43.3	Price W/ 40% Mark-on
5.What would happen if the firm modified its cost system so that all variable costs were traced to the product accurately but fixed costs were allocated using the existing system?
Drop Product B and D because they're showing the lowest profits

Answer 1

1. Generally, the markup should be made on the cost of the item but not on the existing unit cost.

CCI now have to charge for each product to make a 40% mark on,

	A	B	C	D
Total cost	$ 82.5	$ 24.06	$ 41.25	$ 30.93
Mark on 40%	$ 33	$ 9.624	$ 16.5	$ 12.373
Selling price	$ 115.5	$ 33.68	$ 57.75	$ 43.3

When deciding if a company should drop an unprofitable segment, the company should observe the contribution margin, if it is positive it should observe the fixed costs.

	A	B	C	D
selling price	$ 115.5	$ 33.68	$ 57.75	$ 43.3
Less: variable cost	(60)	(17.5)	(30)	(22.5)
Contribution margin	55.5	16.18	27.75	20.8
Fixed cost per unit	(22.5)	(6.56)	(11.25)	(8.43)
Net profit	$ 33	$ 9.62	$ 16.5	$ 12.37

As the profit is mark up of 40% no product is drop out, as the profit is not below 25%.

5. This will yield accurate and effective results, because when variable costs are modified, that means every variable cost per unit is properly allocated according to the product and fixed costs always remain fixed. This will provide more accurate and efficient results and increase profits, if modified variable costs decrease and selling prices remain.

Answer 2

What will CCI now have to charge for each product to make a 40% mark-on?