Question

PROBLEM A-7 Missing Data; Markup Computations: Return on Investment (ROI); Pricing

[LO2 South Seas Products, Inc., has designed a new surfboard to replace its old surfboard line. Because of the unique design of the new surfboard, the company anticipates that it will be able to sell all the boards that it can produce. On this basis, the following incomplete budgeted income statement for the first year of activity is available: Sales (? boards at ? per board) . Cost of goods sold (? boards at? per board). Gross margirn 1,600,000 .1,130,000 Net Additional information on the new surfboard follows: a. An investment of $1,500,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment. The company's required rate of return is 18% on all investments A partially completed standard cost card for the new surfboard follows: b. Standard Quantity or Hours Standard Standard Price or RateCost 6 feet 2 hours ? hours $4.50 per foot ? per hour ? per hour $27 Manufacturing overhead Total standard cost per surfboard......... s ? The company will employ 20 workers to make the new surfboards. Each will work a 40-hour week, 50 weeks a year. Other information relating to production and costs follows: c, d. Variable manufacturing overhead cost (per board)… … . . . . . . . . . . . . . Variable selling expense (per board Fixed manufacturing overhead cost (total)...... Fixed selling and administrative expense (total) Number of boards produced and sold (per year)..................... $5 $10 $600,000 e. Overhead costs are allocated to production on the basis of direct labor-hours.

Required:
1. Complete the standard cost card for a single surfboard
2. Assume that the company uses the absorption costing approach to cost-plus pricing. Compute the markup that the company needs on the surfboards to achieve an 18% return on investment (ROI).

Answer 1

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