Question

Gibbs Corporation produces industrial robots for high-precision manufacturing. The following information is given for Gibbs Corporation Total Per Unit Direct materials $390 Direct labor $340 Variable manufacturing overhead $78 Fixed manufacturing overhead Variable selling and administrative expenses $1,759,600 58 Fixed selling and administrative expenses 584,320 The company has a desired ROI of 23%. It has invested assets of $52,456,000. It anticipates production of 3,320 units per year

Answer 1

Answer.

Step 1. Compute Variable Cost per unit as follows.

Direct Material	$390
Direct Labor	340
Variable MOH	78
Variable S & Adm. exp	58
Variable Cost per unit	$ 866

Step 2. Compute Fixed cost per unit at anticipated production volume of 3,320 units.

	Total cost	Budgeted Volume	Cost per unit
Fixed manufacturing overhead	$1,759,600	3,320	$530
Fixed selling & Adm. expense	584,320	3,320	176
Fixed Cost per unit			$706

Step 3. Compute Total cost per unit:

Total cost = Variable cost per unit + Fixed Cost per unit

= $ 866 + $ 706 = $1,572

Step 4. Compute Desired 23% ROI per unit.

Total desired Return on investment (ROI) = $52,456,000 $\times$ 0.23 = $12,064,880

Desired ROI per unit = Total desired ROI $\div$ Anticipated Volume

= 12,064,880 $\div$ 3,320 units

= $3,634

Step 5. Setting Target Selling Price as follows

Step 1. Variable cost per unit	$ 866
Step 2. Fixes cost per unit	$ 706
Step 3. Total Cost per unit	$ 1,572
Step 4. Add: desired ROI per unit	$ 3,634
Step 5. Target Selling price per unit	$,5,206

The total target selling price may be computed by multiplying target selling price per unit with 3,320 units. It is $17,283,920.