Bolus Computer Parts Inc. is in the process of setting a selling price on a new
ID: 2387124 • Letter: B
Question
Bolus 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.Per Unit Total
Direct materials $50
Direct labor $25
Variable manufacturing overhead $20
Fixed manufacturing overhead $600,000
Variable selling and administrative expenses $18
Fixed selling and administrative expense $400,000
Bolus 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 25% return on investment (ROI) on invested assets of $1,200,000.
Compute the markup percentage and target selling price that will allow Bolus Computer Parts to earn its desired ROI of 25% on this new component. Assuming that the volume is 40,000 units, compute the markup percentage and target selling price that will allow Bolus Computer Parts to earn its desired ROI of 25% on this new component.Round all calculations to two decimal places
Explanation / Answer
Budgeted units 50,000 40,000 Required return on investment (ROI), in $ =1,200,000*25% 300,000 300,000 Fixed expense Selling and administrative expense 400,000 400,000 Manufacturing overhead 600,000 600,000 Total fixed expenses 1,000,000 1,000,000 Total required contribution = Required ROI + Fixed expense =1,000,000+300,000 1,300,000 1,300,000 Variable cost per unit Direct materials 50 50 Direct labor 25 25 Variable manufacturing overhead 20 20 Variable selling and administrative 18 18 Total variable cost per unit (b) 113 113 Budgeted output (a) 50,000 40,000 Total variable cost (a*b) 5,650,000 4,520,000 Total required selling price,d = Total required contribution + total variable cost = 1,300,000 + 5,650,000 = 1,300,000 + 4,520,000 6,950,000 5,820,000 Selling price per unit = (d/a) 139.00 145.5 Total cost incurred: Fixed expense 1,000,000 1,000,000 Variable cost 5,650,000 4,520,000 Total cost incurred 6,650,000 5,520,000 Profit 300,000 300,000 Mark up% = Profit/total cost*100 4.51% 5.43%