Question

Linwood Company recently began production of a new navigation device, which required a capital investment of $660,000. Linwood is currently considering establishing a selling price for this new device that will ensure a 25% return on the capital investment. The engineering and the sales department compiled the following estimates for producing and selling 77,000 devices:

Per Unit Total (77,000 units)
Direct Materials $12
Direct Labor $26
Variable Manufacturing Overhead $14
Selling and Administrative Expenses $17
Fixed Manufacturing Overhead $223,000
General and Administrative Expenses $73,000

Required:

Do not enter dollar signs or commas in the input boxes.
Round all answers to 2 decimal places.

a) Using the cost plus pricing method, calculate the markup percentage.

Full Cost: $Answer

Markup Percentage: Answer%

b) The company has a cost plus pricing policy that uses the absorption (full) cost as the cost base and the markup percentage calculated in part a). How much would the company charge for its new navigation device?

Selling Price: $Answer

c) Based on a recent consumer report, the company predicts that its device cannot be priced higher than $63. At this particular price, the company believes it can sell 85,000 units and assumes the fixed costs will remain the same. Using the target costing method, calculate the total target cost and the total manufacturing cost based on 85,000 units.

Total Target Cost: $Answer
Total Manufacturing Cost: $Answer

Answer 1

Explanation:

Total Capital Investment 660,000

Expected return on investment (%) 25%

Expected return on investment ($) 165,000

Cost of Manufacturing

Direct Material cost (77000*$12) 924,000

Direct labor cost (77000*$26) 2,002,000

Variable cost (77000*$14) 1,078,000

Selling & Admin cost (77000*17) 1,309,000

Fixed Manufacturing overhead 223,000

General & Admin Expenses 73,000

Total Manufacting cost 5,609,000

Expected return on Investments 165,000

Ans : a)

Full cost (total manufacturing cost + ROI) 5,774,000

Markup % (Expected ROI/Total Manufacting cost) 2.94%

b) Selling price per unit = 5,774,000/77000 = 74.99

c)

Cost for manufacting 85,000 units

Direct Material cost (85000*$12) 1,020,000

Direct labor cost (85000*$26) 2,210,000

Variable cost (85000*$14) 1,190,000

Selling & Admin cost (85000*17) 1,445,000

Fixed Manufacturing overhead 223,000

General & Admin Expenses 73,000

Total Manufacting cost 6,161,000

Expected return on Investments 165,000

Total cost of sales 6,326,000

Total Target cost = 6,326,000

Total manufacturing cost = 6,161,000