Question

I have no idea how to use the tax rate. I know how to do it without a tax rate. Can someone show me the steps to do this with the tax rate?

Gold Corporation is attempting to establish a price on a new widget that it creates. Information on the widget is reported below:

Per Unit                       Total

Direct Materials                                                          $75

Direct Labor                                                                $115

Variable Manufacturing Overhead                             $25

Fixed Manufacturing Overhead                                                                      $500,000

Variable Selling Costs                                                 $35

Fixed Selling Costs                                                                                          $250,000

Budgeted production is 37,000 units.  Gold Corporation invested $2,000,000 in technology to produce this new and improved widget, and they desire an annual return on investment of 35% after taxes (assume an income tax rate of 30%).  Determine the markup percentage and target selling price which will allow them to earn the desired 35% after tax return on investment.

Answer 1

investment	$2,000,000
desired return on investment (35% * 2,000,000) after tax	700,000
deisred return before tax (after tax return / (1 - tax rate)) (700,000 / (1-0.30)	1,000,000

now,

let us determine the desired selling price:

total variable cost (75+115+25+35)*37,000 units	9,250,000
add total fixed cost (500,000+ 250,000)	750,000
total cost	10,000,000
add: desired before tax return	1,000,000
total sales revenue from 37,000 units	11,000,000

target selling price = (11,000,000 / 37,000) =>$297.30.per unit...(rounded to two decimals).

target cost = (10,000,000 / 37,000) =>$270.27.

markup percentage = (target selling price - target cost ) / target cost * 100

=> (297.30 -270.27) / 270.27 *100

=>10%.......(rounded to two decimals).

markup percentage	10%
taget selling price (rounded to nearest dollar) (else it is $297.30)	$297