Reference no: EM133020919

Question - IKIT Company produces and sells recliner chairs. IKIT uses an absorption product costing system, which means that both variable and fixed overhead are included in the product cost. Cost estimates for a recliner chair and expected production volume for next year are as follows:

Per Unit Total

Direct materials $40

Direct labour $20

Variable manufacturing overhead $14

Variable selling and administrative expenses: $15

Fixed selling and administrative expenses: $380,000

Fixed manufacturing overhead: $460,000

Expected volume of production (units): 42,000

The company's owners expect to earn a rate of return (ROI) of 30% on their invested assets of $2,500,000.

Required -

a. IKIT currently uses the cost-plus pricing method. Compute the mark-up percentage and target selling price that will allow IKIT to earn its desired ROI of 30% for next year.

b. Based on a recent marketing research, the senior management has an optimistic sales expectation of 50,000 units and predicts to earn a higher ROI of 35%. Compute new mark-up percentage and new target selling price that will allow IKIT to earn its new desired ROI.

c. Another cost-based approach to pricing is called time and material pricing. Under this approach, two pricing rates are set. Explain where this approach is used and identify the steps involved in time-and-material pricing. Also explain why this approach is used in some industries.