Cost Plus Target Pricing Stardom, Inc. cans peaches for sale to food distributor
ID: 2476547 • Letter: C
Question
Cost Plus Target Pricing
Stardom, Inc. cans peaches for sale to food distributors. In 2014 Stardom, Inc. sold the peaches by the gross (144 pounds of peaches is equivalent to a gross or one unit of peaches) and ended up selling 15,000 units. The full cost per unit is $200. Stardom plans on a 20% return on an investment of $1,800,000 in 2014.
REQUIRED:
1. Calculate the selling price and the markup percentage on the full cost per unit of peaches in 2014.
2. If the selling price in requirement 1 represents a markup percentage of 40% on variable cost per unit, calculate the variable cost per unit of peaches in 2014.
3. Calculate Stardom’s operating income if it had increased the selling price to $230. At this price Stardom would have sold 13,500 units of peaches. Assume no change in total fixed costs. Should Stardom increase the selling price of peaches to $230? Explain.
4. In response to competitive pressures, Stardom must reduce the price of Peaches to $210 in 2015 in order to achieve sales of 15,000 units. Stardom plans to reduce its investment to $1,650,000. If Stardom wants to maintain a 20% return on investment, what is the target cost per unit in 2015?
Explanation / Answer
1)Income required= 1,800,000 *.20 =360,000
Income per unit = 360000/15000= 24
Markup on cost = 24/ 200 = .12 or 12%
selling price = 24+200 = $ 24 per unit
2) Let variable cost be "X" ,Then mark up = .4X
224 = 1.4 X
x = 224/1.4 = $ 160 per unit
variable cost = $ 160
3) Fixed cost at 15 000 units = (200-160 ) *15000 = 600,000
Income at 13500 units : [(230 -160)*13500] - 600000
= 945000-600000
= 345000
No selling price shall not be increased as income is decreased from 360000 to 345000
4)Income = 1650000*.20 = 330000
Per unit = 330000/ 15000 = 22
Target cost = 210 -22 = 188