A company has $7.70 per unit in variable cost and$4.90 per unit in fixed costs at a volume of...

Question:

A company has $7.70 per unit in variable cost and$4.90 per unit in fixed costs at a volume of \$50,000 units. If the company marks up total cost by 0.59, what price should be charged if 62,000 units are expected to be sold?

Markup:

Markup is the difference between the price of a product and the total cost, expressed as a percentage of total cost. In a perfectly competitive market, the markup of an individual firm is zero.

We first compute the average total cost:

• average total cost = average variable cost + average fixed cost
• average total cost = 7.7 + (4.9 * 50,000) / 62,000
• average total cost = 7.7 + 3.95
• average total cost = 11.65

Since there is a markup above total cost of 0.59, the price charged will be:

• 11.65 * (1 + 0.59) = 18.5235