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Lovell 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 55,000 units.
PER UNIT
Direct materials$54
Direct labor$22
Variable manufacturing overhead$23
TOTAL
Fixed manufacturing overhead$550,000
Variable selling and administrative expenses$13
Fixed selling and administrative expenses$275,000
Lovell 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 22% return on investment (ROI) on invested assets of $1,000,000.
Problem 1: Computing the markup percentage and target selling price that will allow Lovell Computer Parts to earn its desired ROI of 22% on this new component
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