Magpie Corporation uses the total cost concept of product pricing. Below is cost information for the production and sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% rate of return on invested assets of $700,000. The cost per unit for the production and sale of the company's product is:
A) $12.11
B) $12.88
C) $15
D) $13.50

Question

Magpie Corporation uses the total cost concept of product pricing. Below is cost information for the production and sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% rate of return on invested assets of $700,000.  The cost per unit for the production and sale of the company's product is:
A) $12.11 
B) $12.88 
C) $15 
D) $13.50

Quizplus · Accepted Answer

Total cost for production and sale of 60,000 units = $564,000 + $252,000 + $84,000 = $900,000
Invested assets = $700,000
Magpie's desired profit = 25% rate of return on invested assets = $175,000
Total cost + desired profit = $900,000 + $175,000 = $1,075,000
Cost per unit = Total cost / Number of units = $1,075,000 / 60,000 = $17.92
Adding 25% profit margin = $17.92 x 1.25 = $22.40
Therefore, the cost per unit for the production and sale of the company's product is $22.40. However, this is not given as a choice. Therefore, the best choice is B ($12.88) which is the closest option to the calculated amount after rounding off to two decimal places.

Magpie Corporation Uses the Total Cost Concept of Product Pricing