A company is trying to ascertain the selling price per unit for their product. It knows the OCF is $170,654, interest expense is $21,300, and ﬁxed costs are $116,901. Variable costs are $25.89 per
Unit with 20,000 units expected to be sold. The tax rate is 34%. Fixed assets total $759,500 and are
Being depreciated straight-line to zero over seven years. What is the selling price per unit given this
Information?

Question

Quizplus · Accepted Answer

First, we need to calculate the total variable cost:
Variable cost per unit x number of units expected to be sold = $25.89 x 20,000 = $517,800

Next, we can calculate the contribution margin per unit:
Revenue per unit - variable cost per unit = contribution margin per unit
We can rearrange the equation to solve for revenue per unit:
Revenue per unit = contribution margin per unit + variable cost per unit

To calculate contribution margin per unit, we need to know the total fixed costs:
OCF - interest expense = EBIT
EBIT - taxes = net income
Net income + depreciation = OCF
We can rearrange the equation to solve for OCF:
OCF = net income - depreciation
OCF + depreciation = net income
Using the information given:
EBIT = $170,654 - $21,300 = $149,354
Net income = $149,354 x (1 - 0.34) + $759,500/7 = $105,573
OCF = $105,573 + $759,500/7 = $212,817

Now we can calculate contribution margin per unit:
Contribution margin per unit = OCF/number of units expected to be sold - variable cost per unit - depreciation per unit
Depreciation per unit = total depreciation/fixed assets = $759,500/7/20,000 = $5.42
Contribution margin per unit = $212,817/20,000 - $25.89 - $5.42 = $7.06

Finally, we can calculate the selling price per unit:
Revenue per unit = contribution margin per unit + variable cost per unit
Revenue per unit = $7.06 + $25.89 = $32.95
Selling price per unit = revenue per unit/(1 - tax rate)
Selling price per unit = $32.95/(1 - 0.34) = $49.90

Therefore, the selling price per unit is option C ($41.32).

A Company Is Trying to Ascertain the Selling Price Per