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 45,000 units.

		Per Unit				Total
Direct materials			$51
Direct labor			$27
Variable manufacturing overhead			$24
Fixed manufacturing overhead						$540,000
Variable selling and administrative expenses			$17
Fixed selling and administrative expenses						$405,000

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 18% 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 18% on this new component. (Round markup percentage to 2 decimal places, e.g. 10.50%.)

Markup percentage			%
Target selling price		$

Assuming that the volume is 36,000 units, compute the markup percentage and target selling price that will allow Lovell Computer Parts to earn its desired ROI of 18% on this new component. (Round answers to 2 decimal places, e.g. 10.50% or 10.50.)

Markup percentage			%
Target selling price		$

Answer 1

1.

If volume is 45,000 units

Variable cost = (Direct materials + Direct labor + Variable manufacturing overhead + Variable selling and administrative expenses) * Units

= ($51 + $27 + $24 + $17) * 45,000

= $5,355,000

Fixed cost = Fixed manufacturing overhead + Fixed selling and administrative expenses

= $540,000 + $405,000

= $945,000

Total cost = Variable cost + Fixed cost

= $5,355,000 + $945,000

= $6,300,000

Desired ROI = $1,000,000 * 18%

= $180,000

Markup Percentage = Desired ROI / Total cost

= $180,000 / $6,300,000

= 2.86%

Target Selling price = (Total cost + Desired ROI) / Units

= ($6,300,000 + $180,000) / 45,000 units

= $144

2.

If volume is 36,000 units

Variable cost = (Direct materials + Direct labor + Variable manufacturing overhead + Variable selling and administrative expenses) * Units

= ($51 + $27 + $24 + $17) * 36,000

= $4,284,000

Fixed cost = Fixed manufacturing overhead + Fixed selling and administrative expenses

= $540,000 + $405,000

= $945,000

Total cost = Variable cost + Fixed cost

= $4,284,000 + $945,000

= $5,229,000

Desired ROI = $1,000,000 * 18%

= $180,000

Markup Percentage = Desired ROI / Total cost

= $180,000 / $5,229,000

= 3.44%

Target Selling price = (Total cost + Desired ROI) / Units

= ($5,229,000 + $180,000) / 36,000 units

= $150.25