Gabriel Metalworks produces a special kind of metal ingots which are unique, and it allows Gabriel to follow a cost-plus pricing strategy. Gabriel has $10,000,000 of assets and shareholders expect approximately 9% return on assets. Additional data are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 400,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 15 & \text { per unit } \
\hline \text { Fixed cost } & \$ 1,500,000 & \text { per year } \
\hline
\end{array}$$ Using the cost-plus pricing approach, what should be the price per unit?

Question

Gabriel Metalworks produces a special kind of metal ingots which are unique, and it allows Gabriel to follow a cost-plus pricing strategy. Gabriel has $10,000,000 of assets and shareholders expect approximately 9% return on assets. Additional data are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 400,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 15 & \text { per unit } \
\hline \text { Fixed cost } & \$ 1,500,000 & \text { per year } \
\hline
\end{array}$$ Using the cost-plus pricing approach, what should be the price per unit?

Quizplus · Accepted Answer

To find the price per unit using cost-plus pricing, calculate the total cost and add the desired profit. Total cost = Fixed costs + (Variable cost per unit * Sales volume) = $1,500,000 + ($15 * 400,000) = $7,500,000. Desired profit = 9% of $10,000,000 = $900,000. Total revenue needed = Total cost + Desired profit = $7,500,000 + $900,000 = $8,400,000. Price per unit = Total revenue needed / Sales volume = $8,400,000 / 400,000 = $21.

Gabriel Metalworks Produces a Special Kind of Metal Ingots Which