1323 Costplus target pricing working backward KidsPlay Inc m

13-23 Cost-plus, target pricing, working backward. KidsPlay, Inc., manufactures and sells table sets.n 2016, it reported the following: 3,000 $3,000,000 Units produced and sold Investment Markup percentage on full cost Rate of return on investment Variable cost per unit 10% 15% $600 1. What was KidsPlay\'s operating income in 2016? What was the full cost per unit? What was the selling 2. KidsPlay is considering increasing the annual spending on advertising by $200,000. The managers 3. Refer back to the original data. In 2017, KidsPlay believes that it will be able to sell only 2,700 units at price? What was the percentage markup on variable cost to achieve the selling price? What are the total fixed costs? believe that the investment will translate into a 10% increase in unit sales. Should the company make the investment? Show your calculations 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?

Solution

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? Operating income Investment $3000,000 rate of return on investment 15% Operating Income $450,000 Operating income per Unit =$450,000 /3000 =$150 Full cost per unit =$150/0.10 =$1500 Selling Price per unit =$1500+$150 =$1650 mark up persenatage on variable cost = (Selling price per unit - variable cost per unit) / variable cost =($1650-$600) /$600 =$1050/$600 =175% Total Fixed costs =(Fullcost per unit - variable cost per unit )* Number of units sold =($1500-$600 )3000 Units =$2,700,000 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. Contribution margin per unit =$1650-$600 =$1050 Increse in Slaes =3000*10% =300 Units Increse in Contribution margin =$1050*300 Units $315,000 Less: Advertising Costs 2,00,000 increse in operating income $115000 it should spend $200,000 in advertising because it increases operating income by $115,000. 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? Amount in $ Revenues $1650*2700 Units 4455000 target Full cost at 10 % mark up *($4455,000/1.10) 4050000 Less: target total Fixed cost ($2700,000 -$185,000) 2515000 target variable costs   (4050000-2515000) 1535000 Target variable cost per unit ($1535000/2700 Units $568.52