CIMA P1 Syllabus C. Short-term Decision Making - Cost plus selling price - Notes ^{1 / 2}

Cost plus selling price

1. Step 1: Calculate Return required (Profit per unit)

   = Investment x %

   And then you need to divide it by number of units

2. Step 2: Calculate Total Costs per unit

3. Step 3: Calculate the Selling price

   = Profit + Total Cost

Illustration

Cow Co manufactures a product X. It incurs a total cost of $100 per unit.

Cow Co manufactures 10,000 units each year and the directors wish to achieve a return of 20% on the total capital of $1,000,000 invested in the company.

The cost-plus selling price of one unit of product X should be:

Solution:

1. Step 1:
    
   20% return on $1m = $200,000 required profit

   Per unit = $200,000 / 10,000 = $20

2. Step 2:  

   Total cost = $100 per unit.

3. Step 3:  

   Total cost plus profit = selling price

   $100 + $20 = $120