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			$ 50
Direct labor			$ 26
Variable manufacturing overhead			$ 20
Fixed manufacturing overhead						$ 600,000
Variable selling and administrative expenses			$ 19
Fixed selling and administrative expenses						$ 400,000

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 25% return on investment (ROI) on invested assets of $ 1,000,000 .

Round all calculations to two decimal places

A. Compute the markup percentage and target selling price that will allow Lovell Computer Parts to earn its desired ROI of 25% on this new component.

B. 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 25% on this new component.

Answer 1

(a)		Per Unit
	Direct materials	$50
	Direct labor	$26
	Variable manufacturing overhead	$20
	Variable selling and admin expense	$19
	Variable cost per unit	$115
	Fixed cost per unit (50,000 units)	Total cost	Budgeted Volume	Cost per unit
	Fixed manufacturing overhead	$600,000	50,000	$12
	Fixed selling and administrative expenses	$400,000	50,000	$8
	Fixed Cost	$1,000,000		$20
	Computation of desired ROI per unit
	ROI: 25% x $1,000,000 = $250,000	Expected income
	ROI Per Unit: $250,000 / 50,000 = $5.00
	Variable cost per unit	$115
	Fixed cost per unit	$20
	Total unit cost	$135
	Desired ROI per unit	$5
	Selling price	$140
	The mark-up percentage	3.70%
	($5 / $135)
(b)		Per Unit
	Direct materials	$50
	Direct labor	$26
	Variable manufacturing overhead	$20
	Variable selling and admin expense	$19
	Variable cost per unit	$115
	Fixed cost per unit (50,000 units)	Total cost	Budgeted Volume	Cost per unit
	Fixed manufacturing overhead	$600,000	40,000	$15
	Fixed selling and administrative expenses	$400,000	40,000	$10
	Fixed Cost	$1,000,000		$25
	Computation of desired ROI per unit
	ROI: 25% x $1,000,000 = $250,000	Expected income
	ROI Per Unit: $250,000 / 40,000 = $6.25
	Variable cost per unit	$115
	Fixed cost per unit	$25
	Total unit cost	$140
	Desired ROI per unit	$6.25
	Selling price	$146.25
	The mark-up percentage	4.46%
	($6.25 / $140)