PROBLEM A–6 Missing Data; Markup Computations; Return on Investment; Pricing [LO2]
Rest Easy, Inc., has designed a new puncture-proof, self-inflating sleeping pad that is unlike anything on the market. Because of the unique properties of the new sleeping pad, the company anticipates that it will be able to sell all the pads that it can produce. On this basis, the following budgeted income statement for the first year of activity is available:
Additional information on the new sleeping pad is given below:
a. The company will hire enough workers to commit 100,000 direct labor-hours to the manufac- ture of the pads.
b. A partially completed standard cost card for the new sleeping pad follows:
c. An investment of $3,500,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment. Management has decided that the design of the new pad is unique enough that the company should set a selling price that will yield a 24% return on investment (ROI).
d. Other information relating to production and costs follows:
e. Manufacturing overhead costs are allocated to production on the basis of direct labor-hours.
1. Complete the standard cost card for a single pad.
2. Assume that the company uses the absorption approach to cost-plus pricing.
a. Compute the markup that the company needs on the pads to achieve a 24% return on investment (ROI).
b. Using the markup you have computed, prepare a price quotation sheet for a single pad.
c. Assume, as stated, that the company can sell all the pads that it can produce. Complete the income statement for the first year of activity, and then compute the company’s ROI for the year.
3. Assume that direct labor is a variable cost. How many units would the company have to sell at the price you computed in requirement (2) to achieve the 24% ROI? How many units would have to be produced and sold to just break even?
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