Chapter 8, Problem 8.2AP

(a)

To determine

Cost-plus pricing: The pricing approach used by the companies to set the target selling price based on the cost plus desired profit is referred to as cost-plus pricing.

Formula:

$\text{Target selling price = Cost + Markup}\left(\text{Profit}\right)$

Markup percentage: The percentage of return on investment (ROI) achieved per unit over the total cost of production per unit, is referred to as markup percentage.

Formula:

$\text{Mark-up percentage =}\frac{\text{Desired ROI per unit}}{\text{Total unit cost}}$

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Formula for ROI per unit:

$\text{ROI per unit =}\frac{\text{Desired ROI percentage×Amount invested}}{\text{Number of units produced}}$

To determine: The markup percentage and target selling price for the new parts of Parts LC

(b)

To determine

Cost-plus pricing: The pricing approach used by the companies to set the target selling price based on the cost plus desired profit is referred to as cost-plus pricing.

Formula:

$\text{Target selling price = Cost + Markup}\left(\text{Profit}\right)$

Markup percentage: The percentage of return on investment (ROI) achieved per unit over the total cost of production per unit, is referred to as markup percentage.

Formula:

$\text{Mark-up percentage =}\frac{\text{Desired ROI per unit}}{\text{Total unit cost}}$

To determine: The markup percentage and target selling price for the new parts of Parts LC, if the volume is 40,000 units, instead of 50,000 units