Grand Products is a price-setter, and they use cost-plus pricing methodology for pricing their products which are unique, artistically designed architectural decorations. They produce and sell 6,000 units per year, at their maximum capacity. Variable costs are $330 per unit. Total fixed costs are $900,000 per year. The CEO has a target of $50,000 operating income which he wants to hit by year-end. Using the cost-plus pricing method, what price should Grand use? (Round to nearest whole dollar.)

Question

Quizplus · Accepted Answer

To find the target price using cost-plus pricing, we need to add a markup to the unit variable cost, which is ($330 per unit). Let's assume the markup percentage is "x".
Total cost per unit (variable + fixed) = $330 + ($900,000/6,000 units) = $480
Now, using the cost-plus pricing formula:
Price per unit = Total cost per unit * (1 + Markup percentage)
$P = $480 * (1 + x)
We are given a target operating income of $50,000.
Operating income = Total revenue - Total cost
$50,000 = ($P * 6,000) - ($480 * 6,000)
Simplifying the above equation, we get:
$50,000 = 6,000 * $P - $2,880,000
6,000 * $P = $2,930,000
$P = $488 (rounded to nearest whole dollar)
Therefore, the price Grand should use is $488 per unit (Option C).

Grand Products Is a Price-Setter, and They Use Cost-Plus Pricing