Off Road Concepts,Inc.produces a special kind of light-weight,recreational vehicle that has a unique design.It allows the company to follow a cost-plus pricing strategy.It has $10,000,000 of average assets,and the desired profit is a 9% return on assets.Assume all products produced are sold.Additional data are as follows: $$\begin{array} { | l | r | l|}
\hline \text { Sales volume } & 2,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 2,000& \text { per unit } \
\hline \text { Fixed costs } & \$ 4,000,000& \text { per year } \
\hline
\end{array}$$ Using the cost-plus pricing approach,what should be the sales price per unit?

Question

Off Road Concepts,Inc.produces a special kind of light-weight,recreational vehicle that has a unique design.It allows the company to follow a cost-plus pricing strategy.It has $10,000,000 of average assets,and the desired profit is a 9% return on assets.Assume all products produced are sold.Additional data are as follows: $$\begin{array} { | l | r | l|} 
\hline \text { Sales volume } & 2,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 2,000& \text { per unit } \
\hline \text { Fixed costs } & \$ 4,000,000& \text { per year } \
\hline
\end{array}$$ Using the cost-plus pricing approach,what should be the sales price per unit?

Quizplus · Accepted Answer

The desired profit is 9% of $10,000,000, which is $900,000. Total cost = Variable costs ($2,000 * 2,000 units) + Fixed costs ($4,000,000) = $8,000,000. Total revenue needed = Total cost + Desired profit = $8,000,000 + $900,000 = $8,900,000. Sales price per unit = Total revenue needed / Sales volume = $8,900,000 / 2,000 units = $4,450.

Off Road Concepts,Inc Using the Cost-Plus Pricing Approach,what Should Be the Sales Price