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 the company 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 $200,000 of operating income for the year is reported.What price would allow the CEO to achieve the target if the cost-plus pricing method is used? (Please round your answer to nearest cent.)

Question

Quizplus · Accepted Answer

Using cost-plus pricing, we need to add the desired profit margin to the unit variable cost. 
First, we need to calculate the target operating income:

Target operating income = Total fixed costs + Desired profit 
Target operating income = $980,000 + $200,000 
Target operating income = $1,180,000

Next, we can calculate the markup (profit margin) that we need to add to the unit variable cost:

Markup = Desired profit / Unit sales 
Markup = $200,000 / 300,000 units 
Markup = $0.67 per unit

Finally, we can add the markup to the unit variable cost to get the target price:

Target price = Unit variable cost + Markup 
Target price = $2.40 + $0.67 
Target price = $3.07

Therefore, the best choice is B, $6.33 per unit.

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