Question

A watch manufacturer incurs a variable cost of $10 per watch and fixed costs of $400,000. To earn a 25 percent markup on selling price, the manufacturer would charge _____ for each of the 50,000 watches it expects to sell.

Answer 1

Answer:

$22.50 per unit

Explanation:

Mark -up is the percentage of cost that is earned as profit.

Using mark-up,

Selling price = Total cost + total profit

Total cot = Fixed cost + variable cost

Total costs = $400,000 +  (10× 50,000)

                   = $900,000

Sales revenue = 125%× 900,000

                       = 1,125,000

Selling price per unit = Sales revenue/units

                       =1,125,000/50,000

                     = $22.50 per unit

Answer 2

Answer:

$24

Explanation:

50,000 watches are sold

variable cost per watch = $10

fixed costs = $400,000

contribution margin to break even = $400,000 / 50,000 watches = $8 per watch

selling price without markup = $8 (contribution margin) + $10 (variable costs) = $18

X - 25% markup = $18

0.75X = $18

X = $18 / 0.75 = $24