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Selling price/rate of return/markup

The new CEO of Rolie Manufacturing has asked for a variety of information about the operation of the firm from last year. The CEO is given the following information, but with some data missing:

Total sales revenue ?
Number of units produced and sold 500,000 units
Selling price ?
Operating income $225,000
Total investing in assets $2,500,000
Variable cost per unit $2.50
Fixed costs for the year $3,250,000

1. Find (a) total sales revenue, (b) selling price, (c) rate of return on investment, and (d) markup percentage on full cost for this product.

2. The new CEO has a plan to reduce fixed costs by $250,000 and variable costs by $0.50 per unit. Using the same markup percentage as in requirement 1, calculate the new selling price.

3. Assume the CEO institutes the changes in requirement 2 including the new selling price, expecting to sell more units of product because of the lower price. However, the reduction in variable cost has resulted in lower products quality leading to 10% fewer units being sold compared to before the change. Calculate operating income (loss).

Solution Preview

1. Total revenue- Total Variable cost - Total fixed cost = Operating income
Total fixed cost = 3,250,000
Total variable cost = 2.50 X 500,000 units = 1,250,000
(a) Total revenue = 225,000 + 3,250,000+1,250,000 = $4,725,000
(b) Selling price = 4,725,000/500,000 ...

Solution Summary

The solution explains the calculation of sales revenue, selling price, rate of return, markup percentage