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 45,000 units.

		Per Unit				Total
Direct materials			$51
Direct labor			$27
Variable manufacturing overhead			$24
Fixed manufacturing overhead						$540,000
Variable selling and administrative expenses			$17
Fixed selling and administrative expenses						$405,000

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 18% return on investment (ROI) on invested assets of $1,000,000.

1. ) Compute the markup percentage and target selling price that will allow Lovell Computer Parts to earn its desired ROI of 18% on this new component. (Round markup percentage to 2 decimal places, e.g. 10.50%.)

Markup percentage			%
Target selling price		$

2.) Assuming that the volume is 36,000 units, compute the markup percentage and target selling price that will allow Lovell Computer Parts to earn its desired ROI of 18% on this new component. (Round answers to 2 decimal places, e.g. 10.50% or 10.50.)

Markup percentage			%
Target selling price		$

Answer 1

1
Direct materials	51
Direct labor	27
Variable manufacturing overhead	24
Fixed manufacturing overhead	12	=540000/45000
Variable selling and administrative expenses	17
Fixed selling and administrative expenses	9	=405000/45000
Total cost per unit	140
Desired ROI per unit	4	=(1000000*18%)/45000
Desired ROI per unit	4
Divide by Total cost per unit	140
Markup Percentage	2.86%
Desired ROI per unit	4
Add: Total cost per unit	140
Target Selling price	144
2
Direct materials	51.00
Direct labor	27.00
Variable manufacturing overhead	24.00
Fixed manufacturing overhead	15.00	=540000/36000
Variable selling and administrative expenses	17.00
Fixed selling and administrative expenses	11.25	=405000/36000
Total cost per unit	145.25
Desired ROI per unit	5.00	=(1000000*18%)/36000
Desired ROI per unit	5.00
Divide by Total cost per unit	145.25
Markup Percentage	3.44%
Desired ROI per unit	5.00
Add: Total cost per unit	145.25
Target Selling price	150.25