Hummingbird Company uses the product cost method of applying the cost-plus approach to product pricing. The costs and expenses of producing 25,000 units of Product K are as follows: Variable costs per unit:
Direct materials $2.50
Direct labor 4.25
Factory overhead 1.25
Selling and administrative expenses 0.50
Total 8.50
Fixed costs:
Factory overhead $25,000
Selling and administrative expenses 17,000

Hummingbird desires a profit equal to a 5% rate of return on invested assets of $642,500.

Required:
a. Determine the amount of desired profit from the production and sale of Product K.
b. Determine the total manufacturing costs and the cost amount per unit for the production and sale of 25,000 units of Product K.
c. Determine the markup percentage for Product K.
d. Determine the selling price of Product K.

Hummingbird Company

a. The amount of desired profit from the production and sale of Product K is: $32,125.

b. The total manufacturing costs is: $237,500

The cost amount per unit for the production and sale of 25,000 units of Product K is: $10.18 ($274,500/25,000)

c. The markup percentage for Product K is:

=  11.70% ($32,125/$274,500 * 100)

d. The selling price of Product K is:

= $11.47 ($286,625/25,000)

Explanation:

a) Data and Calculations:

Production and sales unit of Product K = 25,000

Variable costs per unit:

Direct materials                                  $2.50

Direct labor                                           4.25

Factory overhead                                 1.25

Selling and administrative expenses 0.50

Total                                                     8.50      $212,500

Fixed costs:

Factory overhead                                              $25,000  $237,500

Selling and administrative expenses                   17,000

Total production and sales costs =                $254,500

5% rate of return on invested assets                 32,125 ($642,500 * 5%)

Total costs + target profit                              $286,625

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