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Target Pricing Based on Required Return on Investment

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Cary Recording Studios rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recorded CD of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,300,000 in the studio and expects a return on investment (ROI) of 20%. Budgeted costs for the coming year are as follows:

Per Session Total
Direct materials $ 20
Direct labor 400
Variable overhead 50
Fixed overhead $950,000
Variable selling and administrative 40
Fixed selling and administrative 540,000

Instructions
(a) Determine the total cost per session.
(b) Determine the desired ROI per session.
(c) Calculate the markup percentage on the total cost per session.
(d) Calculate the target price per session.

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Solution Summary

This solution illustrates how to compute the total cost per unit produced, the return on investment required and on a per-unit basis, the markup percentage on total cost, and the target price per unit.

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