XYZ Company manufactures clay pots. Pots are shaped with a potter's wheel, painted, and then baked in a kiln.
The company produced 14,000 pots last month. Selected cost information for the company for the month is as follows:

Clay $14,000
Paint 7,000
Factory labor 28,000
Supervisory labor 15,000
Kiln and wheel depreciation 3,000
Sales commissions 1,400
Electricity for kiln 3,000
Advertising 2,000
Administrative expenses 10,000


A. What is the total unit cost of the product?
B. If the company wants a 30% markup on product cost, for how much should the product be sold?
C. Assume that the company has conducted a market survey and determined that the maximum price that the market will accept is $5.20. How much cost must be eliminated from the product to achieve the desired 30% markup?

A. Simply divide the total costs among the pots.

B. Work out the markup on the cost to produce one pot. Remember that markup is based on the cost.

Selling price = Cost + Markup on cost

Cost is considered to be 100%, Markup is 30%, so selling price is 130% of cost.

C. Use the same thing as in B. but work out the cost now from the selling price (meaning that 130% of the cost represents $5.60).

Thanks for your reply, isn't variable cost/total units = total unit cost ?

You have to consider the overheads too.

Otherwise, where would you be including the overheads?

Say you spend $1,000,000 on overheads, the cost of production only is $500,000 and you sell the goods at a total of $750,000.

If you look at the cost of production only, you will think you're making $250,000 profit, while in reality, you are making $750,000 loss!