Question

Q.2 Babloo Toys, manufactures and sells 15,000 units of Teddy Bear toy (TB), in 2015. The full cost per unit is USD 200. Babloo Toys earns a 20% return on an investment of USD 1800,000 in 2015. Required: (1) Calculate the selling price and the markup percentage on the full cost per unit of TB toy in 2015. (2) If the selling price in requirement 1 represents a markup percentage of 40% on variable cost per unit, calculate the variable cost per unit of TB toy in 2015. (3) Calculate Babloo Toys's operating income if it had increased the selling price to USD 230. At this price Babloo Toys would have sold 13,500 units of TB toy. Assume no change in total fixed costs. Should Babloo Toys increase the selling price of TB toy to USD 230? (4) In response to competitive pressures, Babloo Toys must reduce the price of TB toy to USD 210 in 2016, in order to achieve sales of 15,000 units. Babloo Toys plans to reduce its investment to USD 1,650,000. If Babloo Toys wants to maintain a 20% return on investment, what is the target cost per unit in 2016?

Answer 1

Answer for questions 1 - 4 are given in the below table.

Sl. No.	Particulars	Value
	Units sold - A	15,000
	Cost per Unit - B	$                200
	Total Cost - C= AxB	$    3,000,000
	Investment cost - D	$    1,800,000
	ROI - E	20%
	Net Income - F = DxE	$        360,000
	Sales - G = C+F	$    3,360,000
	Sales per Unit - H = G/A	$                224
1	Sales Markup s a % of cost - I = (H-C)/Cx100	12%
	Variable cost markup on sales - J	40%
2	Variable cost K = H/1.4	$                160
	Contribution per unit L = H-K	$                   64
	Total Contribution M = LxA	$        960,000
	Fixed cost N = M-F	600,000
	Revised Selling price per Unit P	$                230
	Revised sale units Q	13,500
	Revised Sales - PxQ	$    3,105,000
	Less: Variable cost KxQ	$    2,160,000
	Contribution	$        945,000
	Less: Fixed costs	$        600,000
3	Net Operating Income	$        345,000
Babloo Toys should not increase the selling price of TB toy to USD 230 as the Net Operating Income is lesser compared to 1.
	2016 Selling price per unit - R	$                210
	2016 Sales Unit - S	15,000
	2016 Sales in Value - T = RxS	$    3,150,000
	2016 Investment - U	$    1,650,000
	ROI expected for 2016 - V	20%
	2016 Net Income W = UxV	$        330,000
4	2016 Target costs X = T-W	$    2,820,000