Harrington Corporation needs to set a target price for its newly designed produc

Question

Harrington Corporation needs to set a target price for its newly designed product R2-D2. The following data relate to this new product. Total Per Unit $8 $14 S 7 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses S 6 Fixed selling and administrative expenses $2,000,000 $1,200,000 These costs are based on a budgeted volume of 100,000 units produced and sold each year. Harrington uses cost-plus pricing methods to set its target selling price. The markup on total unit cost is 30%. Instructions Compute the total variable cost per unit, total fixed cost per unit, and total cost per unit for R2-D2 a) b) Compute the desired ROI per unit for R2-D2. c) Compute the target selling price for R2-D2. d) Compute variable cost per unit, fixed cost per unit, and total cost per unit assuming that 80,000 R2-D2s are sold during the year.

Explanation / Answer

(a) (i) Variable cost pu :-

Direct Material

8

Direct Labour

14

Variable manufacturing O/H

7

Variable S & A Exp

6

Variable cost pu

35

(a) (ii) Fixed cost pu :-

Total Fixed Overhead/Budgeted Volume

(2000000 + 1200000)/100000 units = $ 32

(a) (iii) Total cost pu :-

Variable cost pu

35

Fixed cost pu

32

Total cost pu

67

(C) Desired ROI pu = Cost pu * Markup %

       = 67 * 30% = $ 20.1

(D) Units sold = 80000

VC pu = 35

FC pu = Total FC/units sold

   = 3200000/80000 = $ 40

Total cost pu = VC pu + FC pu

      = 35 + 40 = $ 75

Direct Material

8

Direct Labour

14

Variable manufacturing O/H

7

Variable S & A Exp

6

Variable cost pu

35

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