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 Total Unit $51 $30 $20 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $495,000 $18 $225,000 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.

Answer 1

a)

	Total cost per unit
Direct material	51
Direct labor	30
variable manufacturing overhead	20
Fixed manufacturing overhead	495000/45000 = 11
variable selling and administrative expense	18
Fixed selling and administrative expense	225000/45000=5
Total cost per unit	135

Profit desired on invested asset = 1000000*18% =180000

Profit desired per unit = 180000/45000 = 4

Mark UP % =Desired profit per unit /Total cost per unit

              = 4/135

               = 2.96%

Target selling price =Total cost +Desired profit per unit

             = 135 +4

               = $ 139 per unit

b)

	Total cost per unit
Direct material	51
Direct labor	30
variable manufacturing overhead	20
Fixed manufacturing overhead	495000/36000 = 13.75
variable selling and administrative expense	18
Fixed selling and administrative expense	225000/36000=6.25
Total cost per unit	139

Profit desired on invested asset = 1000000*18% =180000

Profit desired per unit = 180000/36000 = $ 5 per unit

Mark UP % =Desired profit per unit /Total cost per unit

              =5 /139

               = 3.60%

Target selling price =Total cost +Desired profit per unit

             = 139+5

            = $ 144 per unit

               = $ 139 per unit