Question

Custom Shoes Co. has gathered the following information concerning one model of the shoe:

Variable manufacturing costs $40,000
Variable selling and administrative costs $20,000
Fixed manufacturing costs $160,000
Fixed selling and administrative costs $120,000
Investment $1,700,000
ROI 30%
Planned production and sales 5,000 pairs

What is the target selling price per pair of shoes?

a. $142

b. $170

c. $114

d. $158

Answer 1

b. $170

Step-by-step explanation:

The computation of target selling price per pair of shoes is shown below:-

Return on investment = $1,700,000 × 30%

= $510,000

Total variable cost = Variable manufacturing costs + Variable selling and administrative costs

= $40,000 + $20,000

= $60,000

Variable cost per unit = Total variable cost ÷ Planned production and sales

= $60,000 ÷ 5,000

= $12

Total Fixed cost = Fixed manufacturing costs + Fixed selling and administrative costs

= $160,000 + $120,000

= $280,000

Target profit = Total Contribution - Fixed cost

Total Contribution = Return on investment + Total Fixed cost

= $510,000 + $280,000

= $790,000

Contribution per unit = Total Contribution ÷Planned production and sales

= $790,000 ÷ 5000

= $158

So, Selling price per unit = Contribution per unit + Variable cost per unit

= $158 + $12

= $170

Therefore for computing the the selling price per unit we simply applied the above formula.