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) $15.00
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) $15.00 
D) $13.50

Quizplus · Accepted Answer

Total cost for 60,000 units = $630,000 (variable cost of $300,000 + fixed cost of $330,000)
Invested assets = $700,000
Desired profit = 25% of $700,000 = $175,000

Total cost + desired profit = total revenue
$630,000 + $175,000 = $805,000

Cost per unit = total cost / number of units
$630,000 / 60,000 = $10.50 (variable cost per unit)
$330,000 / 60,000 = $5.50 (fixed cost per unit)

Total cost per unit = variable cost per unit + fixed cost per unit
$10.50 + $5.50 = $16.00

Selling price per unit = total revenue / number of units
$805,000 / 60,000 = $13.42

Since Magpie Corporation uses the total cost concept of product pricing, the cost per unit should be used as the basis for the selling price. To achieve the desired profit of $175,000, the selling price per unit should be $16.00. However, this exceeds the market price of $13.42, so Magpie needs to lower its cost per unit.

To lower the cost per unit, Magpie can try to reduce its variable cost or fixed cost. Let's assume that Magpie can negotiate a 10% reduction in its variable cost per unit, which would result in a variable cost per unit of $9.45.

Total cost per unit = $9.45 + $5.50 = $14.95

Selling price per unit = total revenue / number of units
$805,000 / 60,000 = $13.42

The cost per unit is now $14.95, which is closest to option B ($12.88).

Magpie Corporation Uses the Total Cost Concept of Product Pricing