ABC Company would like to purchase a particular item from a potential supplier.
ID: 2747648 • Letter: A
Question
ABC Company would like to purchase a particular item from a potential supplier. ABC does not know the supplier’s specific cost structure for producing this item, but hope to estimate the cost using some information gathered from the supplier. After a couple of meetings with the supplier, ABC is able to gather the following information.
If the purchase price is $12, the supplier requires at least 6,000 units to avoid a loss (break-even).
If the purchase price is $15, the supplier requires at least 4,000 units to avoid a loss (break-even).
The supplier’s SGA expense (selling, general, administrative) is estimated to be $1.5 per unit.
The supplier’s direct material cost is estimated to be $2 per unit.
The supplier’s material to labor ratio is estimated to be 1.25.
ABC finally agrees to pay $12 per unit and anticipates a volume of 8,000 in the upcoming year. Based on the information above, answer the following questions.
1. What is the unit production cost for the supplier? If the supplier uses the cost markup pricing model for pricing, what is the markup (in terms of percentage)? What is the profit margin rate (in terms of percentage) if the supplier uses the margin pricing model?
Explanation / Answer
Price Break Even Qty Revenue a b a*b Scenario 1 $ 12.00 6000 $ 72,000.00 Scenario 2 $ 15.00 4000 $ 60,000.00 Variable Cost per unit = Change in Revenue / Change in Qty = 12000/2000 = $6 Fixed Cost = 72000 - 6*6000 = $36000 Selling and Distribution Expenses $ 1.50 Direct Material $ 2.00 Labor (Material * 1.25) $ 2.50 Total Variable Cost $ 6.00 Units Sold (a) 8000 Price per unit (b) $ 12.00 Revenue (c=a*b) $ 96,000.00 Variable Cost (d = 6*8000) $ 48,000.00 Fixed Cost ( e) $ 36,000.00 Total Cost (f = d+e) $ 84,000.00 Profit (g = c - f) $ 12,000.00 Mark up (g/f) 14.29% Profit Margin Rate (g/c) 12.50%