The Blueray Ltd produces a range of products. The firm uses full manufacturing cost plus pricing to determine the selling price of products. An enquiry for a batch of 500 units of product X1A has been received. The estimated costs and production times for the batch are as follows:
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Product X
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Product X1A
500 units
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Direct Costs
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Materials
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£20,000
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Labour Dept A
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300 hours
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£8.00 per hour
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Labour Dept B
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400 hours
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£9.00 per hour
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Factory Overheads*
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Dept A
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£15 per labour hour
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Dept B
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£10 per labour hour
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Recovery of Sales and Administrative overhead Costs
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40% is added to the total manufacturing costs
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* Recovery method - Direct Labour Hours for both departments. All factory overheads are fixed costs.
The firm's normal profit margin is 15% of the selling price.
Required.
a. i. Calculate the selling price per unit.
ii. The net profit per unit.
iii. The total profit for the batch.
b. For product X1A calculate the markup required to give the same selling price per unit as you have calculated in a(i) if the firm uses marginal cost plus pricing
c. Cost plus pricing suffers from a circular argument problem. Explain what the circular argument problem is and critically evaluate the role marketing plays in resolving this problem.