Problem 16.4 : COST EVALUATION

Prime cost

Direct labor                                                     950,000

Direct material                                                              2,150,000

Direct expenses                                                             60,000

Direct engineering                                           90,000

Direct engr. expenses                                                    30,000

                                                            3,280,000                               (1)

Factory expense

Plant utilities                                                   70,000

Plant & equip. depreciation                                           120,000

Warehouse expense                                        60,000

Taxes & insurance                                           50,000

                                                                        300,000                       (2)

General and administrative expenses (G&A)

Plant manager and staff                      180,000

Administrative salaries                        120,000

Office utilities                                     10,000

                                                            310,000                                               (3)

Manufacturing cost = (1) + (2) +(3) = 3,890,000                                          (4)

Sales  expense = 100,000                                                                               (5)

Total cost = (4) + (5) = 3,990,000                                           (6) this ignores corporate overhead, which should be small for a company of this size.

The problem states that the profit margin is 0.15 or 15%. One is tempted to multiply the total cost by 0.15 to get the profit, and add this to cost to find the selling price.

However, this is not strictly correct. By definition:

    But, from Equation  (16.2),

The unit selling price of turbine is