ECONOMICS

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COST ACCOUNTING

COST VOLUME PROFIT ANALYSIS

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
H Co uses a marginal cost plus pricing system to determine the selling price for one of its products, Product X. Product X has the following costs:$ Direct materials 12 Direct labour 5 Variable overheads 3 Fixed overheads 40 Fixed overheads are $20, 000 for the year. Budgeted output and sales for the year are 500 units and this should be sufficient for Product X to break even. What profit mark-up would H Co need to add to the marginal cost to allow H Co to break even?
A
200%
B
20%
C
40%
D
100%
Explanation: 

Detailed explanation-1: -Say, to sell 20 units of output, the firm adopts cost-plus pricing and takes a profit margin of 5% of the cost. From the information, we can calculate that the selling price per unit is $ 15.75 per unit = $ 15 x (1 + 5%). Meanwhile, if the company adopts a marginal cost pricing strategy, it charges $ 5 per unit.

Detailed explanation-2: -Marginal cost is the addition to the total cost from producing one more unit of output. Marginal cost focuses on variable or marginal cost (rather than indirect/fixed costs), such as wages and raw material costs. It ignores any indirect/fixed costs in relation to the product, such as rent or interest payments.

Detailed explanation-3: -The cost-plus pricing formula is calculated by adding material, labor, and overhead costs and multiplying it by (1 + the markup amount).

Detailed explanation-4: -Cost Plus Pricing is also referred to as Markup Pricing.

There is 1 question to complete.
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