Question:
1. Cost-plus, target pricing, working backward. Road Warrior manufactures and sells a model of motorcycle, XR500. In 2011, it reported the following:
Units produced and sold.......................1,500
Investment................................$8,400,000
Markup percentage on full cost.................9%
Rate of return on investment..................18%
Variable cost per unit........................$8,450
Required
1. What was Road Warrior's operating income on XR500 in 2011? What was the full cost per unit? What was the selling price? What was the percentage markup on variable cost?
2. Road Warrior is considering increasing the annual spending on advertising for the XR500 by $500,000.
The company believes that the investment will translate into a 10% increase in unit sales. Should the investment be made? Show your calculations.
3. Refer back to the original data. In 2012, Road Warrior believes that it will only be able to sell 1,400 units at the price calculated in requirement 1. Management has identified $125,000 in fixed cost that can be eliminated. If Road Warrior wants to maintain a 9% markup on full cost, what is the target variable cost per unit?