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Shmotel Industries wants to build a new manufacturing plant. Their target ROI is 20% and the investment required to build the hotel is $1 million. They plan to produce 500 units in the first year. Unit variable cost is $200, and total fixed cost is $200,000. What is the price that should be charged

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Kolawole845

Answer:

Price  = $1,000

Explanation:

Price to be charged = (Production cost + Target return)/ units

Required target return- ROI × investment cost

= 20% × 1,000,000 = $200,000

Production cost = Variable cost + Fixed cost

Production cost = (500 × 200) +  200,000 = 300000

Total sales revenue to achieve a return= Production cost + target return

= 300,000 + 200,000 = 500,000

Selling price per unit = $500,000/500 units

                                  = $1,000

The price that should be charged is $1,000 per unit.

According to the scenario, computation of the given data are as follows,

Given that,

  • Targeted ROi is 20%.
  • Total investment cost is $1,000,000.
  • Unit variable cost is $200, and total fixed cost is $200,000.

So, Price to be charged can be calculate by using following formula,

Price to be charged = (Production cost + Target return) [tex]\div[/tex] units

Where, Production cost = Variable cost + Fixed cost

= (500 [tex]\times[/tex] $200) + $200,000 = $300,000

Target return = ROI [tex]\times[/tex] investment cost

= (20% [tex]\times[/tex] 1,000,000) =  $200,000

Now, Price to be charged = ( $300,000 + $200,000 ) [tex]\div[/tex] 500 units

= $1,000 per unit.

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