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 52,000 units.

Per Unit Total Direct materials $45

Direct labor $21

Variable manufacturing overhead $15

Fixed manufacturing overhead $624,000

Variable selling and administrative expenses $17

Fixed selling and administrative expenses $468,000

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 26% 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 26% on this new component. & Assuming that the volume is 41,600 units, compute the markup percentage and target selling price that will allow Lovell Computer Parts to earn its desired ROI of 26% on this new component.

Answer 1

**Target cost = Anticipated Selling Price - Desired Profit.

**Target Selling Price = Total Variable cost + Total Fixed cost + Desired Profit.

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