Peel and Parsley Limited applies cost-based pricing to its products.A new product, the PP 773, is due to start production and the sales and finance directors have met to discuss its selling price. Variable costs of production total £126.50.Fixed production overheads in respect of the production capacity devoted to the PP 773 are estimated at £663 000 for the coming financial year.Overhead is absorbed per unit of product and the budget production of the PP 773 for the year is 6250 units.
The company requires a profit mark-up of 36% on total cost.What is the cost-plus selling price for each PP 773 (to the nearest penny)?

Question

Quizplus · Accepted Answer

Total cost per unit = variable cost + (fixed overheads/number of units)
Total cost per unit = £126.50 + (£663,000/6250) = £226.30
Cost-plus selling price = total cost + (total cost x profit mark-up)
Cost-plus selling price = £226.30 + (£226.30 x 0.36) = £308.17
Rounded to the nearest penny, the cost-plus selling price is £316.31, which corresponds to answer choice C.

Peel and Parsley Limited Applies Cost-Based Pricing to Its Products