Reference no: EM132594653

Watson specializes in building high-end playhouses for kids. It builds the components in its factory, then ships the parts to the customer's home. It has contracted with carpenters across the country to do the final assembly. Each year, it comes out with a new model. This year's model looks like a miniature castle, complete with spires and drawbridge.

The following cost estimates for this new product have been provided by the accounting department for a budgeted sales volume of 1,000 units:

                                                        Per Unit                                  Total

Direct materials                                        $ 850                                  -

Direct labour                                             1,200                                -

Variable manufacturing overhead                     500                                 -

Fixed manufacturing overhead                            -                       $555,000

Variable selling and administrative expenses        520                                   -

Fixed selling and administrative expenses              -                              315,000

Watson uses cost-plus pricing to set its selling price. Management also wants the target price to provide a 25% return on investment on invested assets of $4 million.

Instructions

Question (a). Calculate the markup percentage and target selling price on this new playhouse.

Question (b). Assuming that the sales volume is 1,500 units instead of 1,000 units, calculate the markup percentage and target selling price that will allow Watson to earn its desired ROI of 25%.