Differential Analysis, Product Pricing, and
Activity-Based Costing
LO 2a – Determining the
Selling Price of a
Product Using the
Product Cost Concept
@ 2012, Cengage Learning
LO 2
Setting Normal Product Selling Prices
The basic approaches to setting prices are:
 Market methods
 Demand-based concept
 Competition-based concept
 Cost-plus methods
 Total cost concept
 Product cost concept
 Variable cost concept
LO 2
Setting Normal Product Selling Prices
The demand-based concept sets the price
according to the demand for the product.
The competition-based concept sets the price
according to the price offered by competitors.
LO 2
Product Cost Concept
Under the product cost concept, only the costs
of manufacturing the product, termed the
product costs, are included in the cost amount
per unit to which the markup is added.
LO 2
Product Cost Concept
 Step 1: Estimate the total product costs as
follows:
Product costs:
Direct materials
Direct labor
Factory overhead
Total product cost
$XXX
XXX
XXX
$XXX
LO 2
Product Cost Concept
 Step 2: Estimate the total selling and
administrative expenses.
LO 2
Product Cost Concept
 Step 3: Divide the total product cost by the
number of units expected to be produced
and sold to determine the total product cost
per unit, as shown below.
Product Cost per unit =
Total Product Cost
Estimated Units Produced
and Sold
LO 2
Product Cost Concept
 Step 4. Compute the markup percentage as follows:
Markup Percentage =
Desired Profit + Total Selling
and Administrative Expenses
Total Product Cost
LO 2
Product Cost Concept
 Step 5. Determine the markup per unit by
multiplying the markup percentage
times the product cost per unit as
follows:
Markup per Unit = Markup Percentage x Product Cost per Unit
LO 2
Product Cost Concept
 Step 6. Determine the normal selling price by
adding the markup per unit to the product
cost per unit as follows:
Total product cost per unit
Markup per unit
Normal selling price per unit
$XXX
XXX
$XXX
LO 2
Product Cost Concept
Assume the following data for 100,000 calculators that
Digital Solutions Inc. expects to produce and sell during
the current year:
Manufacturing costs:
Direct materials ($3.00 * 100,000)
Direct labor ($10.00 * 100,000)
Factory overhead
Total Manufacturing costs
Selling and administrative expenses
Total cost
Total assets
Desired rate of return
$ 300,000
1,000,000
200,000
$1,500,000
170,000
$1,670,000
$800,000
20%
LO 2
Product Cost Concept
 Step 1: Estimate the total product cost as
follows:
Product costs:
Direct materials
Direct labor
Factory overhead
Total product cost
$ XXXXX
XXXXX
XXX
$1,500,000
LO 2
Product Cost Concept
 Step 2: Estimate the total selling and
administrative expenses.
Management expects total
selling and administrative
expenses to be $170,000.
LO 2
Product Cost Concept
 Step 3: Divide the total product cost by the
number of units expected to be produced
and sold to determine the total product cost
per unit, as shown below.
Product Cost per Unit =
Product Cost per Unit =
Total Product Cost
Estimated Units Produced
and Sold
$1,500,000
= $15.00 per unit
100,000 units
LO 2
Product Cost Concept
 Step 4. Compute the markup percentage as follows:
Desired Profit + Total Selling
and Administrative Expenses
Markup Percentage =
Total Product Cost
Desired Rate of
Return
x Total
$160,000
+ $170,000
Markup Percentage =
Assets
$1,500,000
$330,000 = 22%
Markup Percentage =
$1,500,000 0.20 x $800,000
LO 2
Product Cost Concept
 Step 5. Determine the markup per unit by
multiplying the markup percentage
times the product cost per unit as
follows:
Markup per Unit = Markup Percentage x Product Cost per Unit
Markup per Unit = 22% x $15.00 = $3.30 per unit
LO 2
Product Cost Concept
 Step 6. Determine the normal selling price by
adding the markup per unit to the product
cost per unit as follows:
Total product cost per unit
Markup per unit
Normal selling price per unit
$15.00
3.30
$18.30
LO 2
Product Cost Concept
Administrative
Expense
+
Selling Expense
+
Desired Profit
Manufacturing
Cost
Markup
Product Cost