Question

Smart Stream Inc. uses the variable 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 per unit: Fixed costs: Direct materials $150 Factory overhead $350,000 Direct labor 25 Selling and admin. exp. 140,000 Factory overhead 40 Selling and administrative expenses 25 Total $240 Smart Stream desires a profit equal to a 30% rate of return on invested assets of $1,200,000. a. Determine the variable costs and the variable cost amount per unit for the production and sale of 10,000 cellular phones. Total variable costs $ fill in the blank 1 Variable cost amount per unit $ fill in the blank 2 b. Determine the variable cost markup percentage for cellular phones. Round to two decimal places. fill in the blank 3 % c. Determine the selling price of cellular phones. If required round to the nearest dollar. $ fill in the blank 4 per phone

Answer 1

Smart Stream Inc.

1. Total variable costs = $2,400,000

2a. Variable cost per unit = $240

2b. The variable cost markup percentage = 12.46%

2c. Selling price per unit = $325

Step-by-step explanation:

a) Data and Calculations:

Variable costs per unit:

Direct materials $150

Direct labor 25

Factory overhead 40

Selling and administrative expenses 25

Total $240

Fixed costs:

Factory overhead $350,000

Selling and admin. exp. 140,000

Total fixed costs = $490,000

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

Profit target = $360,000 ($1,200,000 * 30%)

Total variable costs = $2,400,000 ($240 * 10,000)

Variable cost per unit = $240

b. The variable cost markup percentage =

Variable cost markup = $360,000 * $2,400,000/$2,890,000 = $298,962

Variable cost markup percentage = $298,962/$2,400,000 * 100 = 12.46%

Fixed cost markup = $360,000 * $490,000/$2,890,000 = $61,038

Total cost = $2,890,000

Target profit 360,000

Total sales revenue = $3,250,000

Selling price = $325 ($3,250,000/10,000)