Leekee Shipyards has a new barnacle removing product for ocean going vessels. Th

Question

Leekee Shipyards has a new barnacle removing product for ocean going vessels. The company invests $1,200,000 in operating assets and plans to produce and sell 400,000 units per year. Leekee wants to make a return on investment of 20% each year. Leekee 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 based on the following information:



Per Unit total

Direct Materials $2.00
Direct Labor $1.50
Variable Manufacturing Overhead $1.00
Fixed Manufacturing Overhead $100,000
Variable Selling and Administrative Expense $0.10
Fixed Selling and Administrative Expense $100,000

Explanation / Answer

Cost of Manufactured Goods : ( 1 + 1.5 + 2 + 100000 / 400000 ) = 4.75 * 400000 = 190000 Sales Revenue (5.7 * 400000 ) 2280000 Less cost of goods sold: Beginning inventory 0 Cost of goods manufactured Goods available for sale 1900000 Ending Inventory 0 Gross profit 380000 Less : operating expense Variable Selling and Administrative Expense 40000 Fixed Selling and Administrative Expense 100000 Total fixed cost 140000 Net profit ( 1,200,000 *20%) 240000 The question is solved through working in the reversal mode . You need to calculate the net profit before and then add back all the values to achieve the selling price . If you did not understand any thing in the question then make an comment and I would reply to your question asap :)

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