Rollie Company is launching a new cleaning product for ceramic vases. The compan

Question

Rollie Company is launching a new cleaning product for ceramic vases. The company invests $1,200,000 in operating assets, such as production equipment, and plans to produce and sell 400,000 units per year. Rollie wants to make a return on investment of 20% each year. Rollie needs to know what price to charge for this product. Use the absorption costing approach to determine the markup necessary to make the desired return on investment. Round your answer to three decimals. Cost information is below:

Direct Materials $2.00 (per unit)
Direct Labor $1.50 (per unit)
Variable manufacturing overhead $1.00 (per unit)
Fixed manufacturing overhead $200,000 (total)
Variable selling and admin. expense $0.10 (per unit)
Fixed selling and admin. expense $50,000 (total)

Explanation / Answer

2.00+1.50 +1.00+ .10 +(200,000+50,000)/400,000= 5.225 cost per unit 1,200,000*.20= 240,000. So to make 240,000 company needs to make 240,000/400,000= .60/unit. Thus price should be 5.225+.60= $5.825

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