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 unit selling price for the company's product is
A) $15.00
B) $13.82
C) $15.79
D) $14.76

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 unit selling price for the company's product is
A) $15.00 
B) $13.82 
C) $15.79 
D) $14.76

Quizplus · Accepted Answer

Total cost per unit:
Direct materials per unit = $2.50
Direct labor per unit = $1.75
Variable factory overhead per unit = $1.25
Fixed factory overhead (total) = $585,000
Total fixed overhead per unit = $585,000/60,000 = $9.75
Total cost per unit = $2.50 + $1.75 + $1.25 + $9.75 = $15.25

25% rate of return on invested assets of $700,000 = $175,000 profit
Total required revenue = Total cost + Desired profit = $15.25 + $4.75 = $20

Therefore, the unit selling price for Magpie Corporation's product is $20/1 unit = $15.79 (rounded to the nearest cent).

Magpie Corporation Uses the Total Cost Concept of Product Pricing