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 46,000 units.

		Per Unit				Total
Direct materials			$ 46
Direct labor			$ 26
Variable manufacturing overhead			$ 17
Fixed manufacturing overhead						$ 506,000
Variable selling and administrative expenses			$ 15
Fixed selling and administrative expenses						$ 368,000

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 20 % return on investment (ROI) on invested assets of $ 1,280,300 .

A) Compute the markup percentage and target selling price that will allow Lovell Computer Parts to earn its desired ROI of 20 % on this new component. (Round answers to 2 decimal places, e.g. 10.50.)

Answer 1

• All working forms part of the answer
• Working for desired markup/profits/ROI

Invested Assets	$1,280,300
ROI at 20% [1280300 x 20%]	$256,060

• Answers

Working column		Per Unit	Total for 46000 units
	Direct materials	46	$2116000
	Direct labor	26	$1196000
	Variable manufacturing overhead	17	$782000
	Fixed manufacturing overhead		$506000
	Variable selling and administrative expenses	15	$690000
	Fixed selling and administrative expenses		$368000
A	TOTAL COST		$5,658,000
B=A/46000	Total cost per unit		$123
C [calculated above]	Desired profit as per ROI		$256,060
D=A+C	Sales Revenue [total]		$5,914,060
E	Total Unit		46000
F=D/E	Target Sale price per unit		$128.57
G=(F-B)/B	Mark Up Percentage		4.53%