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) $15.80
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) $15.80 
D) $14.76

Quizplus · Accepted Answer

Using the total cost concept, we need to include a markup to cover the desired profit.

Total cost = variable cost per unit * number of units + fixed cost

We are given:

Variable cost per unit = $5.50 
Number of units = 60,000 
Fixed cost = $700,000

Total cost = $5.50 * 60,000 + $700,000 = $1,030,000

Now, we need to add a markup for the desired profit:

Profit = 0.25 * $700,000 = $175,000

Selling price = (Total cost + Profit) / Number of units

Selling price = ($1,030,000 + $175,000) / 60,000

Selling price = $17.42 / unit

Therefore, the answer is C: $15.80 is the unit selling price for the company's product.

Magpie Corporation Uses the Total Cost Concept of Product Pricing