Markup has begun to produce a new product, Product X, for which the following cost estimates have been made.
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Direct materials
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$27
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Direct labour: 4 hrs at $5 per hour
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$20
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Variable production overheads: machining, ½ hr at $6 per hour
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$3
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$50
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Production fixed overheads are budgeted at $300,000 per month and because of the shortage of available machining capacity, the company will be restricted to 10,000 hours of machine time per month. The absorption rate will be a direct labour rate, however, and budgeted direct labour hours are 25,000 per month. It is estimated that the company could obtain a minimum contribution of $10 per machine hour on producing items other than product X.
The direct cost estimates are not certain as to material usage rates and direct labour productivity, and it is recognised that the estimates of direct materials and direct labour costs may be subject to an error of r 15%. Machine time estimates are similarly subject to an error of r 10%.
The company wishes to make a profit of 20% on full production cost from product X.
Required
Ascertain the full cost-plus based price.