Question

Product Pricing: Two Products Quality Data manufactures two products, CDs and DVDs, both on the same assembly lines and packaged 10 disks per pack. The predicted sales are 400,000 packs of CDs and 500,000 packs of DVDs. The predicted costs for the year 2014 are as follows:

Variable Costs Fixed Costs
Materials $200,000 $500,000
Other 250,000 800,000
Each product uses 50 percent of the materials costs. Based on manufacturing time, 40 percent of the other costs are assigned to the CDs, and 60 percent of the other costs are assigned to the DVDs. The management of Quality Data desires an annual profit of $100,000.
(a) What price should Quality Data charge for each disk pack if management believes the DVDs sell for 20 percent more than the CDs? Round answers to the nearest cent.
CDs $
DVDs $
(b) What is the total profit per product using the selling prices determined in part (a)? Use negative signs with answers, if appropriate.
CDs $
DVDs $

Answer 1

a) $1.85 per CD pack

$2.22 per DVD pack

b) profits for selling CDs = -$30,000

profits for selling DVDs = $130,000

Step-by-step explanation:

Variable costs Fixed costs

Materials $200,000 $500,000

Other $250,000 $800,000

DVDs:

materials = $700,000 x 50% = $350,000 ($250,000 fixed)

Other = $1,050,000 x 60% = $630,000 ($480,000 fixed)

total = $980,000

CDs:

materials = $350,000 ($250,000 fixed)

Other = $420,000 ($320,000 fixed)

total = $770,000

Expected sales:

CDs 400,000 packs

DVDs 500,000 packs

since the company wants to earn $100,000 in profits, it should charge:

400,000X - $770,000 + 500,000Y - $980,000 = $100,000

400,000X + 500,000Y = $1,850,000

Y = 1.2X (we replace Y)

400,000X + 600,000X = $1,850,000

1,000,000X = $1,850,000

X = $1,850,000 / 1,000,000 = $1.85 per CD pack

Y = $1.85 x 1.2 = $2.22 per DVD pack

profits for selling CDs = ($1.85 x 400,000) - $770,000 = -$30,000

profits for selling DVDs = ($2.22 x 500,000) - $980,000 = $130,000