Martin company is considering the introduction of a new product. to determine a selling price, the company has gathered the following information:

number of units to be produced and sold each year 14,000
unit product cost $ 25
projected annual selling and administrative expenses $ 50,000
estimated investment required by the company $ 750,000
desired return on investment (roi) 12 %
the company uses the absorption costing approach to cost-plus pricing.

required:
1. compute the markup required to achieve the desired roi.
2.compute the selling price per unit.

1. The markup required to achieve the desired ROI: 40%;

2. Selling price per unit: $35.

Explanation:

1.

We have:

Allocated annual selling and administrative expenses per unit sold = 50,000 / 14,000 = $3.57.

Desired return per unit sold = 750,000 x 12% / 14,000 = $6.43.

Total markup per unit sold in monetary term = 3.57 + 6.43 = $10 => Total markup per unit sold in percentage term = 10/ Unit product cost = 10/25 = 40%.

2.

Selling price = Unit product cost + Total markup per unit sold in monetary term = 25 + 10 = $35.

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