The Houston Company manufactures office equipment. They are ready to introduce a new line of desktop copiers. The following data concerns the copiers:
If the company uses cost-plus pricing based on total variable cost, what price must the company charge when the mark-up percentage is 150 per cent?

Question

The Houston Company manufactures office equipment. They are ready to introduce a new line of desktop copiers. The following data concerns the copiers: 
If the company uses cost-plus pricing based on total variable cost, what price must the company charge when the mark-up percentage is 150 per cent?

Quizplus · Accepted Answer

To find the price using cost-plus pricing based on total variable cost, we need to calculate the total variable cost and then add the mark-up percentage. 
Let TVC be the total variable cost of producing a copier. 
Mark-up percentage = 150% = 1.5
Price = TVC + (Mark-up percentage x TVC)
Price = TVC(1 + 1.5)
Price = 2.5TVC
We are not given the total variable cost of producing a copier, so we cannot calculate the exact price. However, we can use the answer choices to determine which one fits the equation 2.5TVC.
Option A: $360. This price implies that the total variable cost is $144 ($360/2.5). This is possible, but it is quite low for a copier, so we can eliminate this option. 
Option B: $525. This price implies that the total variable cost is $210 ($525/2.5). This is also a possibility, but we cannot be sure without more information. 
Option C: $600. This price implies that the total variable cost is $240 ($600/2.5). This is a more reasonable cost for a copier, and the mark-up percentage of 150% is consistent with industry standards. Therefore, this is the best choice. 
Option D: $495. This price implies that the total variable cost is $198 ($495/2.5). This is possible, but it is closer to the lower end of the total variable cost range, so we cannot be sure without more information.

The Houston Company Manufactures Office Equipment