Please see attached for answers.
Variable manufacturing cost= 20+30+10+40+8*2=116
Total=Variable + Fixed =116+12*2=140
- (116X*10000-5*10000-24*10000-20000) *(1-28%)=228600
X=54.09% selling price=116*(1+54.09%)=178.74
- (140*10000*Y-5*10000-20000)*(1-28%)=228600
Y=27.68% selling price=140*（1+27.68%）=178.752
|
Sales |
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1400000*(1+Y) |
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Less variable expenses |
|
|
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Direct material(20+30+10) |
60*10000=600000 |
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Direct Labor |
40*10000=400000 |
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Variable manufacturing overhead(8*2) |
16*10000=160000 |
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Total variable manufacturing cost |
|
1160000 |
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Variable selling expenses |
5*10000 |
50000 |
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Contribution margin |
|
190000+1400000Y |
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Less fixed expenses: |
|
|
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Fixed manufacturing overhead (12*2) |
24*10000=240000 |
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|
Fixed selling and admin expenses |
20000 |
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Total fixed expense |
|
260000 |
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Total manufacturing costs |
1400000 |
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Operating income |
|
1400000Y-70000 |
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Tax(28%) |
|
(1400000Y-70000)*28% |
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Profit after tax (Y=27.68%) |
(1400000Y-70000)*0.72=228600 |
228600 |
|
Sales |
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140*(1+Y)*8000 |
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Less variable expenses |
|
|
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Direct material(20+30+10) |
60*8000=480000 |
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Direct Labor |
40*8000=320000 |
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Variable manufacturing overhead(8*2) |
16*8000=128000 |
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Total variable manufacturing cost |
|
928000 |
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Variable selling expenses |
5*8000 |
40000 |
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Contribution margin |
|
152000+1120000Y |
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Less fixed expenses: |
|
|
|
Fixed manufacturing overhead (12*2) |
24*8000=192000 |
|
|
Fixed selling and admin expenses |
20000 |
|
|
Total fixed expense |
|
212000 |
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Total manufacturing costs |
1120000 |
|
|
Operating income |
|
1120000Y-60000 |
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Tax(28%) |
|
(1120000Y-60000)*28% |
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Profit after tax (Y=33.70%) |
(1120000Y-60000)*0.72=228600 |
228600 |
As we can see , when selling volume changes to 80,000 the mark-up will increase to 33.7% and the selling price will also change to 140*(1+33.7%)=187.18.
The reason why the mark-up increases due to the decline of the sales volume is that to achieve a certain profit, the more products we sell, the lower cost per unit we will achieve, and the mark-up will be required less, as we already achieve a lower cost which lead to a higher margin.
The total manufacturing cost method includes fixed manufacturing overheads in the cost of the product, which is only gradually released as sales of the product are realised. In other words, fixed manufacturing overheads are allocated to sales as they are incurred. This pricing method is not only easy to implement, but also allows for full cost recovery and provides the business with a certain level of profit, in this case, it’s a good idea to use this method.
However, unlike under the variable cost method, fixed manufacturing overheads are recognised directly in profit or loss, which means that they are recognised as an expense in the period in which they are incurred, irrespective of the volume of sales. It Facilitates the correct evaluation of performance between periods and simplifies costing and avoids subjective arbitrariness in the apportionment of fixed costs.
