Sunny Days is coming out with a new sunscreen lotion. The company has estimated

Question

Sunny Days is coming out with a new sunscreen lotion. The company has estimated that the investment required for this product is $150,000, and it is estimated that they can produce and sell 20,000 bottles of the sunscreen this summer. Other costs associated with the product are as follows:

The company uses the absorption costing approach to cost-plus pricing. Based on this information, what markup is required to achieve a desired return on investment (ROI) of 30%?

Variable unit product cost $6.00 per unit Total fixed overhead cost $100,000 Variable selling & administrative expense per unit $1.20 per unit Total fixed selling & administrative expense $23,400

Explanation / Answer

solution ) In order to achieve the desired return on investment ( ROI) of 30 %, markup of 42% is required ( option a is the correct answer)

return on investment = (gain from investment - cost of investment ) / cost of investment

30% = ( gain from investment - $150000 ) / $150000

solving the equation, we get gain from investment = $195000

In order to get required gain from the investment of $ 195000, we have to earn revenue equal to cost + profit

= $267400 + $195000

= $462400

required markup = ($195000/ $462400) * 100

= 42% appoximately

cost of 20000 units is as follows

variable cost = 20000 units * $6 per unit = $120000

add : fixed cost = $100000

add: variable selling and administrative cost = 20000 * $1.20 per unit = $24000

add: fixed selling and administrative cost = $ 23400

we total cost of $267400

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