Question

Lovell Computer Parts Inc. is in the process of setting a selling price on a new component it has just designed and developed. The following cost estimates for this new component have been provided by the accounting department for a budgeted volume of 50,000 units.

		Per Unit				Total
Direct materials			$46
Direct labor			$29
Variable manufacturing overhead			$20
Fixed manufacturing overhead						$600,000
Variable selling and administrative expenses			$18
Fixed selling and administrative expenses						$450,000

Lovell Computer Parts management requests that the total cost per unit be used in cost-plus pricing its products. On this particular product, management also directs that the target price be set to provide a 20% return on investment (ROI) on invested assets of $1,000,000.

Compute the markup percentage and target selling price that will allow Lovell Computer Parts to earn its desired ROI of 20% on this new component. (Round markup percentage to 2 decimal places, e.g. 10.50%.) Assuming that the volume is 40,000 units, compute the markup percentage and target selling price that will allow Lovell Computer Parts to earn its desired ROI of 20% on this new component. (Round answers to 2 decimal places, e.g. 10.50% or 10.50.)

Answer 1

1
Direct materials	46.00
Direct labor	29.00
Variable manufacturing overhead	20.00
Fixed manufacturing overhead	12.00	=600000/50000
Variable selling and administrative expenses	18.00
Fixed selling and administrative expenses	9.00	=450000/50000
Total cost per unit	134.00
Desired ROI per unit	4.00	=(1000000*20%)/50000
Desired ROI per unit	4.00
Divide by Total cost per unit	134.00
Markup Percentage	2.99%
Desired ROI per unit	4.00
Add: Total cost per unit	134.00
Target Selling price	138.00	or 138.01
2
Direct materials	46.00
Direct labor	29.00
Variable manufacturing overhead	20.00
Fixed manufacturing overhead	15.00	=600000/40000
Variable selling and administrative expenses	18.00
Fixed selling and administrative expenses	11.25	=450000/40000
Total cost per unit	139.25
Desired ROI per unit	5.00	=(1000000*20%)/40000
Desired ROI per unit	5.00
Divide by Total cost per unit	139.25
Markup Percentage	3.59%
Desired ROI per unit	5.00
Add: Total cost per unit	139.25
Target Selling price	144.25