A company produces 2,000 units of Yogies and 800 units of Zeldas each month. Direct materials cost £2 per unit for Yogies and £4 per unit for Zeldas. One hour of direct labour charged at £16 per hour is needed to produce one unit of each product. The total overheads for the company are £8,400 per m

Question

A company produces 2,000 units of Yogies and 800 units of Zeldas each month.
Direct materials cost £2 per unit for Yogies and £4 per unit for Zeldas. One hour of
direct labour charged at £16 per hour is needed to produce one unit of each product.
The total overheads for the company are £8,400 per month.
If a mark-up of 40% on costs is required, what selling prices should be charged per
unit for Yogies and Zeldas, assuming that the overhead absorption rate is based on
the rate per unit? Show a cost statement explaining how you arrive at your figures.

Accepted Answer

The selling prices are: Yogies £29.40 per unit, Zeldas £32.20 per unit.
Workings
Overhead absorption rate (OAR) = [latex]\frac{Total overheads}{Total units} [/latex]

[latex]\frac{£8,400}{£8,400} = £3 per unit [/latex]

Cost statement:	Yogies	Zeldas	Total
Units	2,000	800	2,800
Direct materials (£2 per Yogie, £4 per Zelda)	4,000	3,200	7,200
Direct labour (£16 per unit)	32,000	12,800	44,800
Prime costs	36,000	16,000	52,000
Overheads (£3 per unit – see above)	6,000	2,400	8,400
Total cost	42,000	18,400	60,400
Total cost per unit	£21.00	£23.00
Mark-up (40%)	£8.40	£9.20
Selling price	£29.40	£32.20

Note: What we have seen here is the benefit of using absorption (total) costing to
arrive at a realistic selling price per unit of each product.

Question 10.4: A company produces 2,000 units of Yogies and 800 units of Ze...

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