In this case, the total manufacturing cost of new product equal to the fixed manufacturing cost add the variable cost. As time goes on, the variable cost would change, but the fixed manufacturing cost would not. So the price of the new product needs according to the variable cost. Therefore, the price of the new product should be $16.00 in the Frank’s computation.
The important case facts are the total manufacturing cost and the sell price of the productions would decide the sales volume. That would effect the company to get a short running or a long running.
In this case, the fixed overhead cost should not be taken into consideration because the fixed cost would not changed and it is the part of the fixed cost in the manufacturing cost. Due to this case, the overhead cost just need to consider variable amount of the overhead items. So, the overhead cost is the 82% of the direct labor. That means the overhead cost of per new timer would be $2.00.
Frank figured that, if they set the factory price of $8.00, they will sell 50000 timers. At the same time, they need to spend $50000 advertising budget, and this expense is just be covered in the SG&A costs in the fixed. But the president, Jim, does not like this strategy of marking the product. He thought there is not another timer like this in the market, so he wants to figure out the value of the product. So he decide to set the factory price of $14.70 and the sell price of $29.40. Tom, the controller also…