Sunny Days is coming out with a new sunscreen lotion. The company has estimated that the investment required for this product is $150,000, and it is estimated that they can produce and sell 20,000 bottles of the sunscreen this summer. Other costs associated with the product are as follows:
Variable unit product cost | $6.00 per unit |
Total fixed overhead cost | $100,000 |
Variable selling & administrative expense per unit | $1.20 per unit |
Total fixed selling & administrative expense | $23,400 |
The company uses the absorption costing approach to cost-plus pricing. Based on this information, what markup is required to achieve a desired return on investment (ROI) of 30%?
42% |
30% |
68% |
77% |
solution ) In order to achieve the desired return on investment ( ROI) of 30 %, markup of 42% is required ( option a is the correct answer)
return on investment = (gain from investment - cost of investment ) / cost of investment
30% = ( gain from investment - $150000 ) / $150000
solving the equation, we get gain from investment = $195000
In order to get required gain from the investment of $ 195000, we have to earn revenue equal to cost + profit
= $267400 + $195000
= $462400
required markup = ($195000/ $462400) * 100
= 42% appoximately
cost of 20000 units is as follows
variable cost = 20000 units * $6 per unit = $120000
add : fixed cost = $100000
add: variable selling and administrative cost = 20000 * $1.20 per unit = $24000
add: fixed selling and administrative cost = $ 23400
we total cost of $267400
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