Output for the month is budgeted to be 5,000 units and monthly fixed overhead are expected to be $100,000. Fixed cost are expected to remain at this level if output rises to 7,500 units per month.
accounting
Description
Optim Ltd makes a single product, a washing machine. The
standard cost card for a machine is:
$
Material
50
Labour 30
Variable
overheads 40
Output for the month is budgeted to be 5,000 units and
monthly fixed overhead are expected to be $100,000. Fixed cost are expected to
remain at this level if output rises to 7,500 units per month.
The company currently uses a full cost plus approach to
pricing and add 100% onto the full cost per unit to calculate the selling
price. However, sales volume and profit have been disappointing. Therefore, the
company commissioned some market research to determine costs and volumes. The
research showed that, at a price of $250 per unit, sales volume would be 6,000
per month and would reduce by 500 per month for each $10 rise in price.
Required:
a)
Using the company’s current full cost plus
approach to pricing, what selling price are they attempting to charge?
b)
Derive the demand function and use that to
calculate the monthly profit based on the cost plus approach to pricing.
c)
Equate marginal revenue and marginal cost to
determine profit maximizing price
