Question

Martin Company uses the absorption costing approach to cost-plus pricing. It 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 11,500 Unit product cost $ 28 Estimated annual selling and administrative expenses $ 59,700 Estimated investment required by the company $ 710,000 Desired return on investment (ROI) 12 %

Required:

1. Compute the markup percentage on absorption cost required to achieve the desired ROI.
2. Compute the selling price per unit.

B). Shimada Products Corporation of Japan is anxious to enter the electronic calculator market. Management believes that in order to be competitive in world markets, the price of the electronic calculator that the company is developing cannot exceed $15. Shimada’s required rate of return is 12% on all investments. An investment of $11,880,000 would be required to purchase the equipment needed to produce the 396,000 calculators that management believes can be sold each year at the $15 price.

Required:

Compute the target cost of one calculator.

Answer 1

Answer:

 A                          Martin Company

1.    Income statement

 unit sold                                                                  11,500

Sales                                                                          $466,900

Production cost (11,500*$28)                                  $322,000

Gross Profit                                                              144,900

Annual selling and administrative expenses       (59,700)

Net Income                                                              85,200

Desired reurn on investment =  Net Income =  12%*710,000

                                                                           = $85,200

Mark-up   =   Net income/cost  =  $85,200/$322,000 = 26.5%

sales  =   $466,900

B.

SHIMADA PRODUCTS CORPORATION

Target cost  = Estimated  selling price - desired profit

                     =  $15 - $3.6   =  

                     = $11.4                

Desired profit per unit =   ( 12%*11880,000)/396,000

                                     =    $3.6

Explanation: