Dexter Incorporated, which manufactures various lines of computer equipment, is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows: $\begin{array} { | c | r | r | }
\hline \text { Variable costs: } & & \
\hline \text { Manufacturing } & \$ 450,000 & \
\hline \text { Selling and administrative } & 100,000 & \
\hline \text { Total variable costs } & & \$ 550,000 \
\hline \text { Fixed costs: } & & \
\hline \text { Manufacturing } & \$ 300,000 & \
\hline \text { Selling and administrative } & 180,000 & \
\hline \text { Total fixed costs } & & 480,000 \
\hline \text { Total costs } & & \$ 1.030,000 \
\hline
\end{array}$ The average amount of capital invested in the laptop product line is $900,000 and Dexter's target return on investment is 18%. What price must Dexter charge if the company uses cost-plus pricing based on total cost?
A)$868.
B)$900.
C)$1,000.
D)$1,192.
E)$1,215.40.

Question

Dexter Incorporated, which manufactures various lines of computer equipment, is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows: $\begin{array} { | c | r | r | } 
\hline \text { Variable costs: } & & \
\hline \text { Manufacturing } & \$ 450,000 & \
\hline \text { Selling and administrative } & 100,000 & \
\hline \text { Total variable costs } & & \$ 550,000 \
\hline \text { Fixed costs: } & & \
\hline \text { Manufacturing } & \$ 300,000 & \
\hline \text { Selling and administrative } & 180,000 & \
\hline \text { Total fixed costs } & & 480,000 \
\hline \text { Total costs } & & \$ 1.030,000 \
\hline
\end{array}$ The average amount of capital invested in the laptop product line is $900,000 and Dexter's target return on investment is 18%. What price must Dexter charge if the company uses cost-plus pricing based on total cost?
A)$868.
B)$900.
C)$1,000.
D)$1,192.
E)$1,215.40.

Quizplus · Accepted Answer

To calculate the target price using cost-plus pricing, we need to add a markup to the total cost. The markup is calculated as a percentage of the average amount of capital invested in the product line.

Markup = ROI x Average Capital Invested
Markup = 18% x $900,000
Markup = $162,000

Total Cost = Variable Cost + Fixed Cost
Total Cost = $550,000 + $480,000
Total Cost = $1,030,000

Target Price = Total Cost + Markup / Number of Units
Target Price = ($1,030,000 + $162,000) / 1,000
Target Price = $1,192

Therefore, Dexter must charge $1,192 per unit to achieve a 18% ROI using cost-plus pricing based on total cost. The answer is (D).

Dexter Incorporated, Which Manufactures Various Lines of Computer Equipment, Is