1. I Co. recently began production of a new product, an electric clock, which required the investment of $3,200,000 in assets. The costs of producing and selling 160,000 units of the clocks are estimated as
follows:
Variable costs:
Per unit
Direct labor
$
10
Direct materials
6
Factory overhead
$
4
Administrative and selling
$
5
EA
Fixed costs:
Manufacturing
Administrative and selling
$ 1,600,000
800,000
I Co. is considering establishing a price to sell it's electrical clock to the market. The CEO has
decided to use a cost plus approach to product pricing and that the clock must eam 10 percent on
it's invested assets.
Instructions: NOTE: SHOW ALL WORK
1. Determine the amount of desired profit from the production and sale of the
electric clock.
2. Assuming that the product cost concept is used, determine (a) total variable
cost per unit, the total fixed cost per unit, and the selling price per unit.

I Co.

1. Desired profit = 10% of invested assets

= $3,200,000 x 10%

= $320,000

2a. Total Variable cost per unit

Variable costs Per unit :

Direct labor                                 $ 10

Direct materials                              6

Factory overhead                         $ 4

Variable Product Cost  ($20)

Administrative and selling           $ 5

Total Variable cost per unit     $25

b. Total fixed cost per unit

Total fixed cost per unit = $2,400,000/160,000 = $15

c. The selling price per unit

Sales / quantity = $7,520,000/160,000 = $47

Explanation:

Data:

Variable costs Per unit :

Direct labor                         $ 10

Direct materials                      6

Factory overhead                $ 4

Variable Product Cost      $20

Administrative and selling  $ 5

Total Variable cost per unit      $25

EA

Fixed costs:

Manufacturing                       $ 1,600,000

Administrative and selling          800,000

Total fixed costs                   $2,400,000

b) Cost-plus approach to product pricing:  This approach requires the addition of the direct materials, direct labor, and overhead costs

c) Required profit = 10% of invested assets

= $3,200,000 x 10%

= $320,000

d) Product cost:

Variable cost = $20 x 160,000 = $3,200,000

Fixed manufacturing costs          $1,600,000

Total production cost                  $4,800,000

Product cost per unit $4,800,000/160,000 = $30

e) Income Statement to determine Sales Revenue

Sales                           $7,520,000

Cost of goods sold

      ($30 x 160,000)     4,800,000

Gross profit                $2,720,000

Fixed Costs:

Manufacturing            $ 1,600,000

Administrative & selling  800,000

Profit                             $320,000

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