Arizona Company provided the following information regarding

Arizona Company provided the following information regarding its most recent year of operations Administrative salaries Direct labor Direct raw material Marketing and distribution costs Overheads costs Product design and testing Research and development Sales revenues Sales salaries and commissions Warranty costs $ 24,006 48,000 80,000 60,000 36,000 30,000 40,000 410,000 54,000 4,000 Number of units produced Number of units sold 20,000 20,000 Required Determine the following amounts (a) Total product costs (b) Total upstream costs (c) Total downstream costs (d) Product cost per unit (e) Total cost per unit, including product costs and upstream and downstream costs (f) The selling price per unit that would be required if the company wishes to earn a profit margin equal to 25% of total cost (g) Comment on the company\'s profitability at its current selling price

Solution

Solution:

1) Total product cost

Direct raw material

80000

Direct labor

48000

OH Cost

36000

Total product cost

164000

2) Total upstream cost

Product design and testing

30,000

Research and development costs

40,000

Total upstream cost

70,000

3) Total downstream cost

Administrative salaries

24,000

Marketing and distribution cost

60,000

Sales salaries and commissions

54,000

Warranty costs

4,000

Total downstream cost

142,000

4) Total product cost per unit

164,000 / 20,000 = 8.2 per unit

8.2

5) Total cost per unit

(164,000+70,000+142,000)/20,000 = 18.80

18.8

6) Selling price to earn a profit margin equal to 25% of total cost

(18.80 + 18.8*25%) = 23.50

23.5

7) Current profitability

The company\'s current selling price of $20.50 ($410,000/20,000 units) covers the product costs and the upstream and downstream costs, however it is not providing the amount of profit that the company would like to earn. Instead of generating a profit margin of 25% of total costs, it is earning a profit margin of nearly 9% of total costs

1) Total product cost
Direct raw material	80000
Direct labor	48000
OH Cost	36000
Total product cost	164000
2) Total upstream cost
Product design and testing	30,000
Research and development costs	40,000
Total upstream cost	70,000
3) Total downstream cost
Administrative salaries	24,000
Marketing and distribution cost	60,000
Sales salaries and commissions	54,000
Warranty costs	4,000
Total downstream cost	142,000
4) Total product cost per unit
164,000 / 20,000 = 8.2 per unit	8.2
5) Total cost per unit
(164,000+70,000+142,000)/20,000 = 18.80	18.8
6) Selling price to earn a profit margin equal to 25% of total cost
(18.80 + 18.8*25%) = 23.50	23.5
7) Current profitability