Share
Explore BrainMass

Bolus Computer Parts Inc- Target Pricing

Bolus Computer Parts Inc. is in the process of setting a selling price on a new component it has just designed and developed. The following cost estimates for this new component have been provided by the accounting department for a budgeted volume of 50,000 units.
Per Unit Total:
Direct materials $50
Direct labor $25
Variable manufacturing overhead $20
Fixed manufacturing overhead $600,000
Variable selling and administrative expenses $18
Fixed selling and administrative expenses $400,000
Bolus Computer Parts management requests that the total cost per unit be used in cost plus pricing its products. On this particular product, management also directs that the target price be set to provide a 25% return on investment (ROI) on invested assets of $1,200,000.

Questions:
(Round all calculations to two decimal places.)
(a) Compute the markup percentage and target selling price that will allow Bolus Computer Parts to earn its desired ROI of 25% on this new component.
(b) Assuming that the volume is 40,000 units, compute the markup percentage and target selling price that will allow Bolus Computer Parts to earn its desired ROI of 25% on this new component.

Solution Preview

(a)
Number of units = 50,000
Direct materials @ $50 = $2,500,000 = 50,000. x 50.
Direct labor @ $25 = $1,250,000 = 50,000. x 25.
Variable manufacturing OH @ $20 = $1,000,000 = 50,000. x 20.
Variable selling and administrative expenses @ $18 = $900,000 = 50,000. x 18.
Total Variable costs: $5,650,000

Fixed manufacturing overhead $600,000
Fixed selling and administrative expenses $400,000
Total Fixed Costs $1,000,000

Total Costs = $6,650,000 = 5,650,000. + 1,000,000.

Per Unit Cost = $133.00 = $6,650,000./50,000.

Invested assets = $1,200,000
ROI = 25%
Therefore, profits = $300,000 = $1,200,000. x 25.%

Total sales value = Total Costs + Profits = $6,950,000 = 6,650,000. + 300,000.

Therefore, selling price per unit = $139.00 = $6,950,000./50,000.

Markup % = 4.51% ...

$2.19