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Reynolds Corporation has the following cost and production information available

Reynolds Corporation has the following cost and production information available for the 10,000 units they plan to produce this year:

Direct Materials$20 per unit
Direct Labor$30 per unit
Variable MOH$8 per unit
Fixed MOH$130,000
Variable Selling Costs$12 per unit
Fixed Selling Costs$70,000

 The company wants to earn a 20% return on their investment of $1,440,000.  Based on this information, determine the following: 

  • Calculate the Total Cost per unit:
  • Calculate the Desired ROI per unit:
  • Calculate the Markup Percentage on Cost:
  • Calculate the Target Selling Price:

Answer

1. Total Cost Per Unit

Direct Materials$20
Direct Labor30
Variable MOH8
Fixed MOH13
Variable Selling Costs12
Fixed Selling Costs 7
Total Cost Per Unit $90

2. Desired ROI per unit:

Desired ROI per unit = ($1,440,000 x 20%) / 10,000 = $28.80

3. Markup Percentage

Markup Percentage = {(Sale Price )/ Cost} – 1

Markup Percentage = { (90 + 28.8)/90} – 1 = 0.32 or

Markup Percentage = 32%

4. Target Selling Price

Target Selling Price = Total Cost + Desired ROI

Target Selling Price = $90 + $28.80 = $118.80
Explanation 

1. When you want to figure out how much it costs to make or sell something, you need to add up all the expenses. This includes not just the cost of making the product, but also other costs like paying people who manage the company (administrative costs) and the expenses related to selling the product (selling costs). So, the total cost is the sum of all these different expenses, not just the basic cost of making the product.

2.  The investor's expected rate is multiplied to investment amount and answer is divided by the total number of units produced.

3. For markup the Selling price is divided by cost it gives what percent of cost is being added to reach to the selling price.

4. Imagine you're selling something, like a toy. To make the toy, it costs you $90. But you also want to make some extra money, say $28.80, as your profit. So, to figure out how much you should sell the toy for, you add the cost ($90) and the profit ($28.80) together.

So, the price you should sell the toy for is $118.80. This way, you cover your costs and make the profit you want.

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