Question

Peachtree Doors, Inc. is in the process of setting a target price on its newly designed patio door. Cost data relating to the door at a budgeted volume of 5,000 units is as follows:

Per Unit Total
Direct materials $100
Direct labor 170
Variable
manufacturing
overhead 80
Fixed
manufacturing
overhead $750,000
Variable selling
and
administrative
expenses 25
Fixed selling
and
administrative
expenses 375,000
Peachtree uses cost-plus pricing that provides it with a 25% ROI on its patio door line. A total of $4,000,000 in assets is committed to production of the new door
Compute the following under the absorption-cost approach:
Markup percentage needed to provide desired ROI
Target price of the patio door.

Answer 1

A. 60%

B. $800

Step-by-step explanation:

Base on the scenario been described in the question, we have the following

a)

Unit price

Direct materials $100

Direct labor $170

Variable manufacturing overhead $80

Fixed manufacturing overhead ($750,000 ÷ 5,000) $150

Cost of manufacturing= $100 + $170 + $80 + $150

Cost of manufacturing = $500

The mark-up percentage to given at 25% (0.25) ROI:

The mark up percentage is given as follows

Our mark up percentage = 60%

b) Target price = Total manufacturing cost + (Total manufacturing cost × mark up percentage) = $500 + ($500 × 0.6) Total target = $800 as our total target

Answer 2

a) 60%

b) $800

Step-by-step explanation:

a)

Unit price

Direct materials $100

Direct labor $170

Variable manufacturing overhead $80

Fixed manufacturing overhead ($750,000 ÷ 5,000) $150

Total manufacturing cost = $100 + $170 + $80 + $150 = $500

The mark-up percentage to provide a 25% (0.25) ROI:

Therefore, mark up percentage is given as:
`Mark -up=([ROI*(Total-assets/volume)]+[var.adm.exp+(fix.adm.exp/volume)])/(Total-manufacturing-cost) \\Mark-up=([0.25*(4000000/5000)]+[25+(375000/5000)])/(500) =(200+100)/(500) =0.6`

mark up percentage = 60%

b) Target price = Total manufacturing cost + (Total manufacturing cost × mark up percentage) = $500 + ($500 × 0.6) = $800