Dexter, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows: The average amount of capital invested in the laptop product line is $900,000 and Dexter's target return on investment is 18%.
What price must Dexter charge if the company uses cost-plus pricing based on total cost?
A) $868.
B) $900.
C) $1,000.
D) $1,192.
E) None of the other answers are correct.

Question

Dexter, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows:  The average amount of capital invested in the laptop product line is $900,000 and Dexter's target return on investment is 18%.
What price must Dexter charge if the company uses cost-plus pricing based on total cost?
A) $868. 
B) $900. 
C) $1,000. 
D) $1,192. 
E) None of the other answers are correct.

Quizplus · Accepted Answer

First, we need to calculate the total cost per unit: 
Total cost per unit = Fixed costs + Variable costs per unit
Total cost per unit = $810,000 + ($520 + $90 + $50 + $20)
Total cost per unit = $810,000 + $680
Total cost per unit = $810,680
Next, we need to calculate the desired profit per unit:
Desired profit per unit = Target ROI x Average investment per unit
Desired profit per unit = 18% x $900,000 / 1,000 units
Desired profit per unit = $162
Finally, we can use cost-plus pricing to calculate the price:
Price per unit = Total cost per unit + Desired profit per unit
Price per unit = $810,680 + $162
Price per unit = $810,842
Rounding up to the nearest dollar, the price Dexter Inc. must charge is $1,192 per unit. Therefore, the correct answer is D.