ASSIGNMENT 17.4

QUESTION:

A manufacturer of a small hydraulic turbine has the annual cost data given. Calculate the manufacturing cost and the selling price for the turbine:

Raw material and components costs                                              $2,150,000

Direct labor                                                                                                  950,000

Direct expenses                                                                                             60,000

Plant manager and staff                                                                           180,000

Utilities for plant                                                                                          70,000

Taxes and insurance                                                                                    50,000

Plant and equipment depreciation                                                       120,000

Warehouse Expenses                                                                                  60,000

Office Utilities                                                                                               10,000

Engineering expenses (plant)                                                                  90,000

Engineering staff and salaries (plant)                                                   30,000

Administrative staff salaries                                                                  120,000

Sales staff, salaries and commissions                                                 100,000

Total Annual Sales: 60 units

Profit Margin: 15%

SOLUTION:

Variable costs

Raw material and components costs                                                          $2,150,000

Direct labor                                                                                                              950,000

Direct expenses                                                                                                         60,000

Engineering expenses (plant)                                                                               90,000

Engineering staff and salaries (plant)                                                                30,000

                                                                                                                                                    

Total Variable Costs                                                                                   $3,280,000 

Factory Expenses

Utilities for plant                                                                                                $70,000

Taxes and insurance                                                                                            50,000

Plant and equipment depreciation                                                               120,000

Warehouse Expenses                                                                                          60,000

                                                                                                                                                 

Total Factory Expenses                                                                             $300,000

General and Administrative Expenses (G & A)

Plant manager and staff                                                                                $180,000

Office Utilities                                                                                                        10,000

Administrative staff salaries                                                                           120,000

                                                                                                                                                 

Total G & A                                                                                                      $310,000

Manufacturing Cost = Variable costs + Factory Expenses +
                                              General and Administrative Expenses

                                          = $3,280,000 + $300,000 + $310,000

                                          = $3,890,000

Sales, staff, salaries and commissions: $100,000

Total Cost                       = Manufacturing costs + Sales, staff, salaries and commissions 
                                           = $3,990,000

Manufacturing cost for a turbine = $3,990,000


Profit Margin = Profit / Sales 
0.15 = Profit / Sales  -> equation 1
 Sales = Profit + Total Cost
 Sales = (0.15)Sales + $3 990 000  -> equation 2
Interception equation 1 & 2
Sales = $ 4 987 500.00

Sales = Selling Price

   

Total Annual Sales = 60 units

Selling Price for One Turbine    = Selling Price / 60 = $4,987,500.00 / 60

Selling Price                                           = $83,125.00 per unit