Martin Company is considering the introduction of a new product. To determine a
ID: 2589252 • Letter: M
Question
Martin Company is considering the introduction of a new product. To determine a selling price, the company has gathered the following information: Number of units to be produced and sold each year 12,000 Unit product cost $ 45 Projected annual selling and administrative expenses $ 64,000 Estimated investment required by the company $ 550,000 Desired return on investment (ROI) 18 % The company uses the absorption costing approach to cost-plus pricing. Required: 1. Compute the markup required to achieve the desired ROI. (Round your Required ROI answers to the nearest whole percentage (i.e, 0.1234 should be entered as 12). Round your "Markup Percentage" answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34.)) 2. Compute the selling price per unit. (Round your intermediate and final answers to 2 decimal places. ) HintsReferenceseBook & Resources Hint #1 Check my work
Explanation / Answer
Given Information:
Number of units produce & sold = 12,000
Per unit cost = $45
Selling & adminstration expense = $64,000
Required investment = $5,50,0000
Required rate of return = 18%
Workings:
(a) Total product cost = Unit produce * cost per unit
Total product cost =12,000 * $45
Total product cost = $540,000
(b) Desired profit = Investment required * ROI
Desired profit = $550,000 * 18%
Desired profit = $99,000
(i) Calculation of markup percentage
Mark up percentage = (Desired profit + Selling & adminstrative expense)/ Total product cost
Mark up percentage = ($99,000 + $64,000)/ $540,000
Mark up percentage = 30.19%
(ii) Calculation of selling price per unit
Selling price per unit = Cost per unit + Mark up value
Selling price per unit = Cost per unit + Cost per unit * Markup%
Selling price per unit = $45 + $45 * 31.43% = $45(1+31.43%)
Selling price per unit = $59.14
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