Revco, Inc. is using the target costing for target pricing approach for its new product. If its expected annual sales for this product are 200,000 units, its total target cost is $170,000, and its ROI is 10% on $500,000 of invested assets, what is the expected selling price per unit?
A) $0.25
B) $0.60
C) $0.85
D) $1.10

Question

Quizplus · Accepted Answer

Target cost per unit = Total target cost ÷ Expected annual unit sales = $170,000 ÷ 200,000 units = $0.85; Budgeted profit per unit = Budgeted profit ÷ Expected annual unit sales = (ROI x Invested Assets) ÷ Expected annual unit sales = (10% x $500,000) ÷ 200,000 units = $0.25; Expected unit selling price = Target cost per unit + Budgeted profit per unit = $0.85 + $0.25 = $1.10.