Total Cost Concept of Product Pricing - Exercise 25-25 Smart Stream Inc. uses th
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Question
Total Cost Concept of Product Pricing - Exercise 25-25
Smart Stream Inc. uses the total cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cellular phones are as follows:
Smart Stream desires a profit equal to a 30% rate of return on invested assets of $1,200,000.
A. Determine the total costs and the total cost amount per unit for the production and sale of 10,000 cellular phones.
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 dollar.
$ ____ per phone
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a. Divide the variable and fixed manufacturing costs by the number of units.
b. Divide the desired profit by the total cost.
c. Add the cost (a) and markup [(a) × (b)].
Smart Stream desires a profit equal to a 30% rate of return on invested assets of $1,200,000.
A. Determine the total costs and the total cost amount per unit for the production and sale of 10,000 cellular phones.
Total cost $ 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 dollar.
$ ____ per phone
Explanation / Answer
A. Total cost $ = 10000 phones X $ 240 per unit + $ 350,000 + $ 140,000 = $ 2,400,000 + $ 490,000 = $ 2,890,000. Cost amount per unit $ = $ 2,890,000 / 10,000 = $ 289 per unit B. %_______ Profit margin is 30% on invested assets of $ 1,200,000 = $ 360,000. Hence, the profit markup on cost is $ 360,000 / $ 2,890,000 = 12.46% C. $ ____ per phone Selling Price per phone = ($ 2,890,000 + $ 360,000) / 10,000 = $ 3,250,000 / 10,000 = $ 325 per phone