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Hi John I came across a question in kaplan on marginal cost plus and it says.
H Co uses a marginal cost plus pricing system to determine the selling price for one of its products.
Product has the following costs:
Direct Materials 12
Direct Labour 5
Variable Overheads 3
Fixed Overheads 40Fixed overheads are $20,000 for the year. Budgeted output and sales for the year are 500 units and this should be sufficient for the Product to break even.
What profit mark-up would H Co need to add to the marginal cost to allow H Co to break even?
the answer is given but I cant quit understand how they’ve come up with the answer.
Thanks in advance for the help.
At breakeven, the contribution is equal to the fixed overheads and is therefore $20,000.
The question says they breakeven at 500 units, and therefore the contribution per unit must be 20,000 / 500 = $40.
The variable costs per unit are 12 + 5 + 3 = $20 .
Therefore the mark-up on the marginal cost = 40/20 = 200%
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