Question

Problem 21-02A 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 50,000 units. Total Per Unit $48 $25 $22 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $700,000 $15 $250,000 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 30% 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 30% on this new component. (Round markup percentage to 2 decimal places, e.g. 10.50%.) Markup percentage Target selling price

Answer 1

1.

Markup % (6/129)*100

4.65%

Desired selling price (129 + 6)

$                 135.00

Working:

Variable cost per unit
	Per Unit $
Direct Material	48
Direct Labor	25
Variable Manufacturing Overhead	22
Variable Selling and Administrative expenses	15
Total Variable cost	110
Fixed Cost per unit	Total	units	Cost per unit
Fixed Manufacturing Overhead	700000	50000	14
Fixed Selling and Administrative expenses	250000	50000	5
Total fixed cost	950000		19
Total cost per unit	129
Desired ROI (1,000,000*30%)	300000
Desired ROI per unit (300000/50,000)	6
Desired selling price (129 + 6)	$                 135.00
Markup % (6/129)*100	4.65%

2.

Markup % (7.5 /133.75)*100

5.61%

Desired selling price (133.75 + 7.5)

$                 141.25

Working:

Variable cost per unit
	Per Unit $
Direct Material	48
Direct Labor	25
Variable Manufacturing Overhead	22
Variable Selling and Administrative expenses	15
Total Variable cost	110
Fixed Cost per unit	Total	units	Cost per unit
Fixed Manufacturing Overhead	700000	40000	17.5
Fixed Selling and Administrative expenses	250000	40000	6.25
Total fixed cost	950000		23.75
Total cost per unit (110+23.75)	133.75
Desired ROI (1,000,000*30%)	300000
Desired ROI per unit (300000/40,000)	7.5
Desired selling price (133.75 + 7.5)	$                 141.25
Markup % (7.5 /133.75)*100	5.61%