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Dear Mr Moffat,
By doing below question I came across few points that I could not fully understand. Could you please help me?
A small company is engaged in the production of plastic tools for the garden
Modulding Dep Finishing Dep Genaral F
Vaiable overhead $000 1600 500 1050
Fixed overhead $000 2500 850 1750Budgeted activity Mach hours 800,000 600,000
Practical Capacity Mach hours 1200,000 800,000For the purposes of reallocation of general factory overdhead it is agreed that the variable overheads accrue in line with the machine hours worked in each department. General facory fixed overdhead is to be reallocated on the basis of the practical machine hour capacity of the two departments.
It has been a long standing copany practivce to establish selling prices by applying a mark up on full manufacturing cos of between 25% and 35%
A possible price is sought for one new product which is in a final development stage. The toal market for this product is estimated at 200,000 units per annu. Market research indicates that the company could expect to obtain and hold about 10% of the market. It is hoped the product will offer some improvement over competitors products. Which are currently marketed at between $90 and $100 each.
The product development department have determined that the direct material content is $9 per unit. Each unit of the product will take two labour hours (four machine hours) in the moulding deparment and tree labour hours (three machine hours) in finishing . Hourly labour rates are $ 5 and $5.50 respectively
Management estiamte the annual fixed costs which would be speciafically incurred in realtion to the rpoduct are supervision $20,000, depreciation of a recently acquired machine $120,000 and advertising $27,000. It may be assumed that these costs are included in the budget given above. Given the state of development of this new product., management do not consider it necessry to make revisions to the budgeted activity levels given above of any possible extra machine hours involved in its manufacture.
A) Prepare full cost and marginal cost information which may ehlp with the pricing decision.
No problem with calculating the marginal and full cost however I could not understand the logic used to calculate the incrementatl fixed cost and why the incremental total cost does not include the fixed cost per unit?
Variable manufacturing cost (from previous calculation) $ 51,24
Incremental fixed cost supervision 20,000
depreciation 120,000
advertising 27,000Total 167,000
Incremental fixed cost per unit (/20000 (10%of 200000) 8,35
Incremental total cost per unit 59,59In order to define the selling price the answer provide a full price with 25% – 35% and average mark up % (30%). can you help me to understand why?
Thanks a lot for your help
Gabbi
If all that the question asked is what you have typed against “A)” then I am surprised that they then looked at the incremental costs as well. Certainly if the exam asked just for the marginal and/or the full costs, then you would not consider incremental as well.
However, incremental costs are extra costs, and all the other fixed costs would stay the same in total whether or not they produced the new product.
With regard to using 25% and 35%, that is fair enough because the question says that it is long standing practice of the company to apply a mark up of between 25% and 35% so they are giving a range of possible prices (and 30% is simply the average of the two).
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