Nelson Products is a price-setter, and they use cost-plus pricing methodology for pricing their products which are specialty vacuum tubes used in sound equipment. The CEO is certain that he can produce and sell 300,000 units per year, due to the high demand for the product. Variable costs are $2.40 per unit. Total fixed costs are $980,000 per year. The CEO will receive stock options if he reports $200,000 of operating income for the year. Using the cost-plus pricing method, what price would allow the CEO to achieve his target? (Please round to nearest cent.)

Question

Quizplus · Accepted Answer

To achieve the target operating income of $200,000, the total revenue must cover both the total costs and the desired operating income. Total costs are the sum of total fixed costs ($980,000) and total variable costs ($2.40 per unit * 300,000 units = $720,000), which equals $1,700,000. Adding the desired operating income of $200,000 gives a total revenue target of $1,900,000. Dividing this by 300,000 units gives a price of $6.33 per unit.

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