Smart Stream Inc. uses the product cost concept of applying the cost-plus approach to product pricing

Smart Stream Inc. uses the product cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cellular phones are as follows:


Variable costs:Fixed costs:
Direct materials $150 per unit Factory overhead $350,000
Direct labor 25 Selling and admin. exp. 140,000
Factory overhead 40
Selling and admin. exp. 25
Total $240 per unit

Smart Stream desires a profit equal to a 30% rate of return on invested assets of $1,200,000.

a. Determine the amount of desired profit from the production and sale of 10,000 cellular phones.

b. Determine the product cost and the cost amount per unit for the production of 10,000 cellular phones.

c. Determine the product cost markup percentage for cellular phones.

d. Determine the selling price of cellular phones.


Answer:

a. Desired profit = $1,200,000 × 30% = $360,000 
b. Cost amount (product cost) per unit:  $2,500,000* ÷ 10,000 units = $250 
* ($215 manufacturing variable cost per unit × 10,000 units) + $350,000 
manufacturing fixed cost 
c. Markup Percentage = 
Markup Percentage = 
Desired Profit + 
Total Selling and Administrative Expenses 
Total Manufacturing Costs 

$360,000 + $140,000 + ($25 × 10,000) 
$2,500,000 
Markup Percentage = $360,000 + $140,000 + $250,000 
$2,500,000 
Markup Percentage = $
750,000 
$2,500,000 
Markup Percentage =  30% 
d. Cost amount per unit………………………………………………………………… $250 
Markup ($250 × 30%)…………………………………………………………………     75 
Selling price…………………………………………………………………………… $325