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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?For break even, the total contribution must be $20,000. Given that they are budgeting on selling 500 units, this means a contribution per unit of $20,000/500 = $40.
The marginal/variable cost per unit is $20 per unit, and therefore the selling price has to be $60 (so as to give a contribution of $40).
This means a mark-up of 40/20 = 200%.
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