Question

Total Cost Method of Product Pricing Smart Stream Inc. uses the total cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 6,500 units of cell phones are as follows: Fixed costs: Variable costs: Direct materials $ 72 per unit Factory overhead $235,700 Selling and administrative expenses 82,800 Direct labor Factory overhead 17 Selling and administrative expenses $144 per unit Total variable cost per unit Smart Stream desires a profit equal to a 15% return on invested assets of $702,520. a. Determine the total cost and the total cost amount per unit for the production and sale of 6,500 units of cellular phones. Round the cost per unit to two decimal places Total cost Total cost amount per unit b. Determine the total cost markup percentage (rounded to two decimal places) for cellular phones. c. Determine the selling price of cellular phones. Round to the nearest cent. per cellular phone

Answer 1

a.	Variable cost per unit = $144 per unit
	Total Fixed cost = Factory overhead + selling and admin expense
	Total Fixed cost = $235,700 + 82,800 = $318,500
	Fixed cost per unit = $318,500 / 6,500 units
	Fixed cost per unit = $49 per unit
	Product cost per unit = Variable cost per unit + Fixed cost per unit
	Product cost per unit = $144 + $49 = $193 per unit
	Total cost = 6,500 units*$193 = $1,254,500
b	Desired Return = Rate of return*Invested assets
	Desired Return = 15% of $702,520 = $105,378
	Product cost markup = Desired profit / Total cost
	Product cost markup = $105,378 / 1,254,500
	Product cost markup = 8.40%
c	Selling price of cellular phone = Product cost per unit(1+product cost markup %)
	Selling price of cellular phone = $193(1.0840)
	Selling price of cellular phone = $209.212 per phone