Starly Unlimited is gearing up to manufacture a new, improved fidget available for sale in 2021. They have spent $150,000 in R&D costs, and $10,000 in design costs to date. No further R&D will be required. They will spend an additional $5,000 in design costs each year in order to keep the product fresh. They believe they can charge a mark-up of 12% on full cost. Of course, fidgets can’t hold the market long so they anticipate after 3 years in production they will drop the product from their line.

The 2021 production run will be constrained by the 25,000 direct labour hours available.

The standard costs list for the new product is as follows:

	Standard Quantity	Standard Rate	Standard Cost
Direct materials	10.0 grams	$2.00 per gram	$20.00
Direct labour	0.25 hours	20.00 per hour	5.00
Manufacturing overhead	1.00 gram	2.00 per gram	2.00
Total standard cost per Fidget			$27.00

Manufacturing overhead costs are allocated to products at 10% of direct materials required.

Additional costs are:

• Variable selling, general or administrative costs will be $0.25 per fidget.
• Fixed selling, general and administrative costs will be (per year):

Salaries $240,000

Advertising and other 500,000

Total $740,000

Required: Show all calculations for full marks

a. Calculate the target selling price for the fidgets. (7 marks)

b. If the market price for fidgets is $39, should Starly produce and sell it? (1 mark)

c. If Starly sets a price for fidgets of $39, and Starly requires 12% pre-tax on full cost, what is the target cost per fidget? (2 marks)

d. Explain the two key differences between short-run and long-run pricing decisions. (2 marks)

Answer rating: 100% (QA)

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