Question:
Full-cost pricing to achieve a specified return on investment
This method involves determining the amount of capital invested to support a product. For example, some fixed or non-current assets and certain elements of working capital such as inventory and trade receivables can be attributed to individual products. The selling price is then set to achieve a specified return on the capital invested on behalf of the product. The following example will demonstrate how the method works. LG Limited manufactures product B. Data for product B are as follows:
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Direct material cost per unit
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£62
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Direct labour cost per unit
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£14
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Direct labour hours per unit
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4 hours
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Production overhead absorption rate
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£16 per direct machine hour
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Mark-up for non-production overhead costs
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8% of total production cost
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LG Limited sells 1,000 units of product B each year. Product B requires an investment of £400,000 and the target rate of return on investment is 12% per annum. Calculate the selling price for one unit of product B, to the nearest penny.