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GIVEN: Kann Corporation produces industrial robots for high-precision manufacturing. The following information is available:
| Per Unit | Total | ||
| Direct materials | $25.00 | ||
| Direct labor | $10.00 | ||
| Variable manufacturing overhead | $6.00 | ||
| Fixed manufacturing overhead | $36,000 | ||
| Variable selling and administrative costs | $4.00 | ||
| Fixed selling and administrative costs | $15,000 |
The company has a desired ROI of 20%. It has invested assets of $420,000. It anticipates making and selling 3,000 units per year.
REQUIRED:
Part 1: Using the total (full) cost concept, determine the (a) unit cost amount; (b) markup percentage; and (c) unit target selling price.
Part 2: Using the product (absorption) cost concept, determine the (a) unit cost amount; and (b) markup percentage.
Part 3: Using the variable cost concept, determine the (a) unit cost amount; and (b) markup percentage.
Part 4: What is the target unit selling price under the three cost assumptions?
Part 5: What else should be considered when setting the product’s selling price?
Part 6: Which of the three costing concepts would be most appropriate in each of the following situations?
External reporting for GAAP
Normal (long-run) pricing
Evaluating special orders
Part 7: Kann Corporation received a special order for 500 robots at $50 each from a foreign customer. Acceptance of the order would increase variable selling costs by $1.70 per unit because of shipping costs, but would not increase fixed costs or interfere with any current orders. Prepare a differential analysis to determine whether the special order should be accepted or not.
Expert Answer
| Per Unit | |||
| Direct materials | $25.00 | ||
| Direct labor | $10.00 | ||
| Variable manufacturing overhead | $6.00 | ||
| Fixed manufacturing overhead (36000/3000) | 12 | ||
| Variable selling and administrative costs | $4.00 | ||
| Fixed selling and administrative costs (15000/3000) | $5.00 | ||
| ans 1, 2 and 3 and 4 | |||
| Full cost | Absorption costing | Variable costing | |
| Per Unit | |||
| Direct materials | $25.00 | $25.00 | $25.00 |
| Direct labor | $10.00 | $10.00 | $10.00 |
| Variable manufacturing overhead | $6.00 | $6.00 | $6.00 |
| Fixed manufacturing overhead (36000/3000) | 12 | 12 | |
| Variable selling and administrative costs | $4.00 | ||
| Fixed selling and administrative costs (15000/3000) | $5.00 | ||
| ans Unit cost amount | $62.00 | $53.00 | $41.00 |
| ans b Add: Markup % M | 45.2 | 52.8 | 68.3 |
| (28/62*100) | (28/53*100) | (28/41*100) | |
| ans 4 Unit target selling price F+M | $107.16 | $105.83 | $109.29 |
| if rounded to whole no. | $107 | $106 | $109 |
| Markup amt would be | |||
| 420000*20% | 84000 | ||
| per unit profit 84000/3000 | 28 | ||
| ans 5 other factors as | |||
| Demand for the product | |||
| The competitor’s pricing | |||
| ans 6 | |||
| External reporting for GAAP | Absorption costing | ||
| Normal (long-run) pricing | Full cost | ||
| Evaluating special orders | Variable cost | ||
| ans 7 | |||
| Sales (500*50) | 25000 | ||
| Less: Relevant cost | |||
| Direct materials (25*500) | $12,500 | ||
| Direct labor (10*500) | $5,000 | ||
| Variable manufacturing overhead (6*500) | $3,000 | ||
| Variable selling and administrative costs (5.7*500) | $2,850 | ||
| Total relevant cost | $23,350 | ||
| Profit from special order | $1,650 | ||
