Question

Martin Company is considering the introduction of a new product. To determine a selling price, the company has gathered the following information: Number of units to be produced and sold each year 19,000 Unit product cost $ 50 Projected annual selling and administrative expenses $ 72,000 Estimated investment required by the company $ 340,000 Desired return on investment (ROI) 19 % The company uses the absorption costing approach to cost-plus pricing. Required: 1. Compute the markup required to achieve the desired ROI. (Round your Required ROI answers to the nearest whole percentage (i.e, 0.1234 should be entered as 12). Round your "Markup Percentage" answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34.)) 2. Compute the selling price per unit. (Round your intermediate and final answers to 2 decimal places. )

Answer 1

Part - 1:

Computation of markup percentage is:

Markup percentage = (Total markup cost / Total cost of production) * 100

= ($136,600 / $950,000) * 100

= 0.1438 * 100

= 14.38%

Hence, the markup percentage is 14.38%.

Working notes:

a.

Computation the value of profit is:

Value of profit = Estimated value of investment * Return on investment

= $340,000 * 19%

= $64,600

Hence, the value of profit is $64,600.

b.

Computation the total cost of markup is:

Total cost of markup = Value of profit + Projected annual expense on selling and administration

= $64,600 + $72,000

= $136,600

Hence, the total cost of markup is $136,600.

c.

Computation the total cost of production is:

Total cost of production = Total units produced * Cost of product per unit

= 19,000 * $50

= $950,000

Hence, the total cost of production is $950,000.

Part - 2:

Computation the sales price of each unit is:

Sales price of each unit = Cost of product per unit + Cost of markup per unit

= $50 + $7.19

= $57.19

Hence, the sales price of each unit is $57.19

Working note:

Computation the Cost of markup per unit is:

Cost of markup per unit = Cost of product per unit * Markup percentage

= $50 * 14.38%

= $7.19

Hence, the cost of markup per unit is $7.19