Berkeley Company currently has idle plant capacity and wishes to make as large a profit as possible. It could use some of its facilities to produce 5 000 units of a new product that could be sold through its existing sales network. The new product would have the following estimated costs.
$$\begin{array} { l c }
& \text { Per unit } \
\text { Materials } & \$ 6 \
\text { Labour } & \$ 12 \
\text { Variable factory overhead } & \$ 5 \
\text { Variable selling \& administrative costs } & \$ 3
\end{array}$$
Assume the fixed factory overhead for the plant is $8 000 per month and the fixed selling and administrative costs are $1800 per month. What is the minimum price per unit that Berkeley could charge for this product without reducing overall profits?

Question

Berkeley Company currently has idle plant capacity and wishes to make as large a profit as possible. It could use some of its facilities to produce 5 000 units of a new product that could be sold through its existing sales network. The new product would have the following estimated costs.
$$\begin{array} { l c } 
& \text { Per unit } \
\text { Materials } & \$ 6 \
\text { Labour } & \$ 12 \
\text { Variable factory overhead } & \$ 5 \
\text { Variable selling \& administrative costs } & \$ 3
\end{array}$$
Assume the fixed factory overhead for the plant is $8 000 per month and the fixed selling and administrative costs are $1800 per month. What is the minimum price per unit that Berkeley could charge for this product without reducing overall profits?

Quizplus · Accepted Answer

The minimum price per unit that Berkeley could charge without reducing overall profits is calculated by adding the per unit costs (materials, labor, variable factory overhead, and variable selling & administrative costs) and then dividing the total fixed costs by the number of units to find the fixed cost per unit. The per unit costs are $6 (materials) + $12 (labor) + $5 (variable factory overhead) + $3 (variable selling & administrative costs) = $26. Fixed costs do not affect the minimum price per unit calculation in this context because the question asks for the price to avoid reducing overall profits, implying covering variable costs.

Berkeley Company Currently Has Idle Plant Capacity and Wishes to Make