Chapter 13, Problem 13.23E

Cost-plus, target pricing, working backward. KidsPlay, Inc., manufactures and sells table sets. In 2016, it reported the following:

Units produced and sold	3,000
Investment	$3,000,000
Markup percentage on full cost	10%
Rate of return on investment	15%
Variable cost per unit	$600

1. 1. What was KidsPlay’s operating income in 2016? What was the full cost per unit? What was the selling price? What was the percentage markup on variable cost to achieve the selling price? What are the total fixed costs? Required
2. 2. KidsPlay is considering increasing the annual spending on advertising by $200,000. The managers believe that the investment will translate into a 10% increase in unit sales. Should the company make the investment? Show your calculations.
3. 3. Refer back to the original data. In 2017. KidsPlay believes that it will be able to sell only 2,700 units at the price calculated in requirement 1. Management has identified $185,000 in fixed cost that can be eliminated. If KidsPlay wants to maintain a 10% markup on full cost, what is the target variable cost per unit?