Silco Pty Ltd manufactures various lines of computer equipment. They are planning to introduce a line of laptop computers in January 2008. Current plans call for the production and sale of 1000 computers with estimated production costs as follows.
The average amount of capital invested in the laptop computer line is $900 000 and Silco's target return on investment for the line is 18 per cent. What price must Silco charge if the company uses cost-plus pricing based on full cost?

Question

Silco Pty Ltd manufactures various lines of computer equipment. They are planning to introduce a line of laptop computers in January 2008. Current plans call for the production and sale of 1000 computers with estimated production costs as follows. 
The average amount of capital invested in the laptop computer line is $900 000 and Silco's target return on investment for the line is 18 per cent. What price must Silco charge if the company uses cost-plus pricing based on full cost?

Quizplus · Accepted Answer

The total cost of producing 1000 laptops is $800 000 + $300 000 = $1 100 000.

To calculate the target price using cost-plus pricing based on full cost, we need to divide the total cost by (1 - desired return on investment).

1 - 0.18 = 0.82

Target price = $1 100 000 ÷ 0.82 = $1 341 463.41

Given that Silco plans to produce and sell 1000 laptops, the price per unit will be:

$1 341 463.41 ÷ 1000 units = $1341.46 per unit

Rounding this up to the nearest dollar, the price Silco must charge is:

$1 341 per unit

Adding a markup to cover selling and administrative expenses would increase the final price, making option C the best choice.

Silco Pty Ltd Manufactures Various Lines of Computer Equipment