Question

Martin Company is considering the introduction of a new product. To determine a selling price, the company has gathered the following information: Number of units to be produced and sold each year 19,500 Unit product cost $ 35 Projected annual selling and administrative expenses $ 56,000 Estimated investment required by the company $ 460,000 Desired return on investment (ROI) 20 % The company uses the absorption costing approach to cost-plus pricing. Required: 1. Compute the markup required to achieve the desired ROI. (Round your Required ROI answers to the nearest whole percentage (i.e, 0.1234 should be entered as 12). Round your "Markup Percentage" answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34.)) 2. Compute the selling price per unit. (Round your intermediate and final answers to 2 decimal places. g

Answer 1

See below.

Step-by-step explanation:

First we calculate per units costs,

Per unit product cost = $35

Per unit selling and admin cost = 56000/19500 = $2.87/unit

In order to obtain mark up that earns ROI of 20% we first calculate the ROI in $ terms and divide by the planned production. This will be the per unit profit required to earn the desired ROI.

ROI in $s = 460,000*0.20 = $92,000

ROI required per unit = 92,000/19500 = $4.71/unit

Required Gross profit = (4.71 + 2.87) = $7.58/unit (this covers costs and ROI)

The mark up then,

Selling price = Unit production cost + Required Gross profit

Selling price = 35 + 7.58 = $42.58

Mark up = Gross profit / Cost per unit

Mark up = 7.58/35 = 21.66%

Hope that helps.