An investor decides to invest $2,500,000 in Company Y. The investor demands that Company Y should continue
Question:
An investor decides to invest $2,500,000 in Company Y. The investor demands that Company Y should continue to produce Product A only, and also asks for a return of 30%. The manufacturing costs information follows costs in Table Q (therefore, ignore overhead calculations using activity-based costing). Assume the manufacturing overhead costs are variable costs. Annual sales volume for Product A remains 4,000 for coming years. The selling and administrative expenses follow Table W, 30% of which is variable and 70% is fixed. If the company decides to follow what the investor suggested, (A) Calculate the variable cost per unit, fixed cost per unit, the manufacturing cost per unit, and total cost per unit. (B) Calculate the target selling prices and mark-up percentages, using both the total cost-plus and absorption cost-plus methods.
Based on the pricing calculations, (1) briefly discuss how the new price compares to the original price of Product A.
(2) If managers are reluctant to change the original price of Product A. Which desired rate of return on investment can lead to the original price of Product A? Show calculation.
Table W
| Income Statement | |||
| Year Ended Dec. 31, 2019 | |||
| Product A | Product B | Total | |
| Sales | $5,040,000 | $19,800,000 | $24,840,000 |
| Less: Cost of Goods Sold | ($3,760,000) | ($15,840,000) | ($19,600,000) |
| Gross Margin | $1,280,000 | $3,960,000 | $5,240,000 |
| Less: Selling and administrative expenses | ($780,000) | ($264,000) | ($1,044,000) |
| Net Profit (a) | $500,000 | $3,696,000 | $4,196,000 |
| Units produced and sold (b) | 4,000 | 22,000 | |
| Net Profit per unit (a / b) | $125 | $168 | |
Table Q: Company Y Unit Manufacturing Costs
Labor usage for Product A and Product B | ||
Product A | Product B | |
Direct labor I hours | 3.5 | 1.5 |
Direct labor I cost / hour | $20 | $20 |
Direct labor II hours | 4 | 8 |
Direct labor II cost/hour | $30 | $30 |
Manufacturing Costs per unit for Product A and Product B | ||
Product A | Product B | |
Direct Materials | $650 | $250 |
Direct Labor I | $70 | $30 |
Direct Labor II | $120 | $240 |
Manufacturing Overhead | $100 | $200 |
Manufacturing costs per unit | $940 | $720 |
Expert Answer:
Answer The question states that the investor is willing to invest 2500000 expecting a 30 return only ... View the full answer
