Bolus Computer Parts Inc. is in the process of setting a selling price on a new

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 newcomponent 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 expenses $400,000
Bolus Computer Parts management requests that the total cost per unit be used in costplus 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.

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.

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%

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