Tidewater Company Uses The Product Cost Concept Of Applying The Cost P
Tidewater Company uses the product cost concept of applying the cost-plus approach to product pricing. The cost and expenses of producing and selling 50,000 units of Product K are as follows: Tidewater desires a profit equal to a 10% rate of return on invested assets of $1,285,000.
a. Determine the amount of desired profit from the production and sale of Product K.
b. Determine the total manufacturing costs and the cost amount per unit for the production and sale of 50,000 units of Product K.
c. Determine the markup percentage for Product K.
d. Determine the selling price of Product K. Round your answer to two decimal places.
Paper For Above instruction
The pricing strategy applied by Tidewater Company, which relies on a product cost concept combined with a cost-plus approach, underscores a methodical approach to ensuring profitability while also covering costs. This method entails calculating the total manufacturing costs, desired profit, and subsequently determining the appropriate markup and selling price. Such strategies are fundamental in managerial accounting to establish sustainable and profitable pricing models that align with company objectives.
**Calculation of Desired Profit**
The first step involves determining the amount of profit Tidewater Company aims to achieve from its investment in Product K. Given that the company desires a 10% return on invested assets of $1,285,000, the calculation results in:
Desired Profit = Investment Assets × Rate of Return
Desired Profit = $1,285,000 × 10%
Desired Profit = $128,500
This desired profit must be incorporated into the product pricing to ensure that the company attains its financial goals.
**Total Manufacturing Costs and Cost per Unit**
The total manufacturing costs for producing 50,000 units are derived from the data provided, which should
encompass direct materials, direct labor, and manufacturing overhead. For the sake of this example, assume the total manufacturing costs (which are typically supplied in the problem) are, for example, $500,000. The cost per unit is then calculated as:
Cost per Unit = Total Manufacturing Costs / Total Units Produced
Cost per Unit = $500,000 / 50,000
Cost per Unit = $10
The total manufacturing costs are crucial for understanding the base cost structure before applying the markup.
**Markup Percentage Calculation**
The markup percentage is the proportion of the desired profit and the cost included in the selling price. It can be calculated as:
Markup Percentage = (Desired Profit + Total Manufacturing Costs) / Total Manufacturing Costs × 100%
Markup Percentage = ($128,500 + $500,000) / $500,000 × 100%
Markup Percentage = $628,500 / $500,000 × 100%
Markup Percentage = 1.257 or 125.7%
This percentage indicates how much above the cost the selling price must be to meet profit objectives.
**Determining the Selling Price**
The selling price per unit is derived by applying the markup percentage on the cost per unit:
Selling Price per Unit = Cost per Unit × (1 + Markup Percentage)
Selling Price per Unit = $10 × (1 + 1.257)
Selling Price per Unit = $10 × 2.257
Selling Price per Unit = $22.57
Rounded to two decimal places, the selling price of Product K should be $22.57.
**Conclusion**
Tidewater Company's use of a cost-plus pricing approach ensures that all costs are covered while achieving the targeted return on investment. By carefully calculating costs, desired profit, and markup, the company can set a competitive yet profitable price for Product K. This strategy, rooted in managerial accounting principles, facilitates sustainable profit margins and supports strategic financial planning.
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