Question

Westfield Graziers packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are as follows.Product Material cost Estimated salesSuper Premium $16.00 2,000 tonnesPremium $12.00 3,000 tonnesEconomy $10.0 5,000 tonnesThe indirect cost of operating the machinery used to package all three products is $40 000 per year. In the past, prices have been set by allocating the indirect costs to products on the basis of estimated sales in tonnes. The resulting total costs (material costs plus allocated fixed overhead) are then marked up by 100 per cent.RequiredCalculate the price per tonne for each grade of feed using the method described for setting prices. (10 marks)Does the price in part (a) take into account how much customers are willing to pay for the product? (5 marks)

Answer 1

1. Particulars Super premium Premium Economy

Material cost $16 $12 $10

Indirect cost (40000/10000) $4 $4 $4

Total cost $20 $16 $14

Profit (100% of total cost) $20 $16 $14

Selling price $40 $32 $28

2. Yes, the price calculated in part A takes into account what customers are willing to pay. This can be said because the company has the policy of adding 100% to the total cost. This means that the company knows that customers will be willing to pay that much amount.