Question

Linwood Company recently began production of a new navigation device, which required a capital investment of $660,000. Linwood is currently considering establishing a selling price for this new device that will ensure a 25% return on the capital investment. The engineering and the sales department compiled the following estimates for producing and selling 77,000 devices:

Per Unit Total (77,000 units)
Direct Materials $12
Direct Labor $26
Variable Manufacturing Overhead $14
Selling and Administrative Expenses $17
Fixed Manufacturing Overhead $223,000
General and Administrative Expenses $73,000

Required:

Do not enter dollar signs or commas in the input boxes.
Round all answers to 2 decimal places.

a) Using the cost plus pricing method, calculate the markup percentage.

Full Cost: $Answer

Markup Percentage: Answer%

b) The company has a cost plus pricing policy that uses the absorption (full) cost as the cost base and the markup percentage calculated in part a). How much would the company charge for its new navigation device?

Selling Price: $Answer

c) Based on a recent consumer report, the company predicts that its device cannot be priced higher than $63. At this particular price, the company believes it can sell 85,000 units and assumes the fixed costs will remain the same. Using the target costing method, calculate the total target cost and the total manufacturing cost based on 85,000 units.

Total Target Cost: $Answer
Total Manufacturing Cost: $Answer

Answer 1

[AI-generated answer — Bot GPT 3.5]

a) To calculate the full cost, we need to add up the direct materials, direct labor, variable manufacturing overhead, selling and administrative expenses, fixed manufacturing overhead, and general and administrative expenses.

Full Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Selling and Administrative Expenses + Fixed Manufacturing Overhead + General and Administrative Expenses
Full Cost = $12 + $26 + $14 + $17 + $223,000 + $73,000
Full Cost = $334,060

To calculate the markup percentage, we need to divide the desired return on investment by the capital investment.

Markup Percentage = (Desired Return on Investment / Capital Investment) x 100%
Markup Percentage = (25% / $660,000) x 100%
Markup Percentage = 0.0379 x 100%
Markup Percentage = 3.79%

b) To calculate the selling price, we need to add the markup to the full cost.

Selling Price = Full Cost + (Markup Percentage x Full Cost)
Selling Price = $334,060 + (3.79% x $334,060)
Selling Price = $334,060 + $12,657.97
Selling Price = $346,717.97

c) To calculate the total target cost, we multiply the selling price by the estimated units sold.

Total Target Cost = Selling Price x Estimated Units Sold
Total Target Cost = $63 x 85,000
Total Target Cost = $5,355,000

To calculate the total manufacturing cost, we subtract the fixed manufacturing overhead and the general and administrative expenses from the total target cost.

Total Manufacturing Cost = Total Target Cost - Fixed Manufacturing Overhead - General and Administrative Expenses
Total Manufacturing Cost = $5,355,000 - $223,000 - $73,000
Total Manufacturing Cost = $5,059,000