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

a) Product cost includes the cost incurred in manufacturing of product (i.e. material, labor and overheads)

Total Product cost = Direct Labor+Direct raw material+Overheads costs

= $48,000+$80,000+$36,000 = $164,000

b) Upstream costs refers to the cost that the company incurs prior to the production process (i.e. product design and testing, research and development)

Total Upstream costs = Product design and testing+Research and Development

= $30,000+$40,000 = $70,000

c) Downstream costs refers to the cost that the company incurs after the finished product is ready for delivery.

Total Downstream costs = Administrative salaries+Marketing and distribution costs+Sales Salaries and commissions+Warranty costs

= $24,000+$60,000+$54,000+$4,000 = $142,000

d) Product cost per unit = Total Product cost/No. of units produced = $164,000/20,000 = $8.20 per unit

e) Total cost = Product cost+Upstream cost+Downstream cost = $164,000+$70,000+$142,000

= $376,000

Total cost per unit = Total cost/No. of units = $376,000/20,000 = $18.80 per unit

f) Required profit per unit = 25% of total cost per unit = 25%*$18.80 = $4.70 per unit

Selling Price per unit = Total cost per unit+Profit per unit = $18.80+$4.70 = $23.50 per unit

g) Current Selling price = Current Sales revenues/No. of units sold = $410,000/20,000 = $20.50 per unit

The company\'s current profit per unit = Selling price per unit-Total cost per unit

= $20.50-$18.80 = $1.70

Current profit margin on total cost = (Profit/Total cost)*100 = ($1.70/$18.80)*100 = 9.04%

The current profitablity of the company is very less than the required profitability of 25% on total cost.