Question

Sheridan 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 55,000 units Per Total Unit $55 S29 $23 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $770,000 $16 $275,000 Sheridan 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 22% retum on investment (ROI) on invested assets of $1,000,000 Your answer is incorrect. Try again Compute the markup percentage and target selling price that will allow Sheridan Computer Parts to earn its desired ROI of 22% on this new component. (Round markup percentage to 2 decimal places, e.g. 10.5090.) Markup percentage Target selling price 145.45

Answer 1

Investment in Assets	$      10,00,000
Required ROI is 22% of $1000,000	$        2,20,000
COST per Unit When budgeted volume is 55000 Units
Particulars	Amount
Direct Material	$                    55
Direct Labor	$                    29
Variable Manufacturing Overhead	$                    23
Fixed Manufacturing Overhead (770000/55000)	$                    14
Variable Selling and administrative Overhead	$                    16
Fixed Selling and administrative Overhead (275000/55000)	$                       5
Total Cost per Unit (55000 Units)	$                  142
Profit Margin Required to cover per Unit Shall be	$                       4
i.e. ROI / Total Units = (220000/55000)
Hence Mark up Percentage will be	2.82%
Mark up Percentage = Profit Margin / Cost per Unit *100
Target Selling Price shall be	$                  146
Total Cost + Profit Margin
COST per Unit When budgeted volume is 44000 Units
Particulars	Amount
Direct Material	$                    55
Direct Labor	$                    29
Variable Manufacturing Overhead	$                    23
Fixed Manufacturing Overhead	$                    18
Variable Selling and administrative Overhead	$                    16
Fixed Selling and administrative Overhead	$                       6
Total Cost per Unit (44000 Units)	$                  147
Profit Margin Required to cover per Unit Shall be	$                       5
i.e. ROI / Total Units = (220000/44000)
Hence Mark up Percentage will be	3.41%
Mark up Percentage = Profit Margin / Cost per Unit *100
Target Selling Price shall be	$                  152
Total Cost + Profit Margin

NOTE : In both the case ROI will Remain $ 22,000 only because the investment remains same in both the cases i.e. $ 1000,000.