Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 36

Target Sales Price; Return On Investment (ROI) Preferred Products, a bicycle manufacturer, uses normal volume as the basis for setting prices. That is, it sets prices on the basis of long-term volume predictions and then adjusts these prices only for large changes in pay rates or material prices. You are given the following information:

Materials, wages, and other variable costs	$300 per unit
Fixed costs	$200,000 per year
Target return on investment (ROI)	20%
Normal volume	1,500 units per year
Investment (average total assets)	$800,000

Required

1. What sales price is needed to attain the 20 percent target ROI?

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2. What ROI rate will be earned at sales volumes of 2,000 and 1,000 units, respectively, using the sales price you determined in requirement 1?

Step 1 of 3

The formula for calculating return on investment ROI is as follows: