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 total variable cost?

Question

Quizplus · Accepted Answer

To calculate the price using cost-plus pricing based on total variable cost, we need to add the total variable cost to the desired profit margin and divide by the number of units produced.

Total variable cost = Direct material cost + direct labor cost + variable overhead cost
= $320 + $480 + $60
= $860 per unit

Desired profit margin = Average amount of capital invested x Target return on investment
= $900,000 x 0.18
= $162,000

Price = (Total variable cost + Desired profit margin)/Number of units produced
= ($860 + $162,000)/1000
= $1192

Therefore, Silco must charge a price of $1192 to achieve its target return on investment of 18% using cost-plus pricing based on total variable cost.

Silco Pty Ltd Manufactures Various Lines of Computer Equipment