Gold Corporation invested 1000000 to obtain the capacity to

Gold Corporation invested $1,000,000 to obtain the capacity to produce widgets. Gold Corporation demands a 25% after tax annual return on its investment. The cost structure for Gold Corporation is as follows:

Direct materials $150 per widget

Direct labor $275 per widget

Variable overhead $125 per widget

Commissions $25 per widget

Fixed manufacturing: $175,000 per year

Fixed administrative: $150,000 per year G

old Corporation expects to produce and sell 14,000 widgets during the year. Calculate the selling price that Gold Corporation needs to charge per widget to earn a 25% after tax return on investment, assuming an income tax rate of 15%.

Solution

Income /profit after tax desired = 1,000,000*.25 = 250000

Income before tax = Income after tax /(1-tax)

           = 250000/ (1-.15)

            = 250000/.85

             = $ 294117.65

Total variable cost per widget= 150+275+125+25= 575

Total variable cost = 575*14000= 8050000

Total cost= variable cost + fixed manufacturing +fixed administrative

               = 8050000+175000+150000

               = 8375000

Total sales required to earn desired profit = Total cost+ profit

               = 8375000+294117.65

               = 8669117.65

Selling price per widget = total sales /number of units

                = 8669117.65 / 14000

               = $ 619.22 per unit