Question

Target ROI is 19% Invested Capital is $569,512 Full Cost per unit $1,124 Expected sales volume is 959 units. If the company prices each unit to earn the target ROI, what amount of profit would be added to the cost of each unit?

Answer 1

Answer:

The amount of profit to be added to the cost of each unit = $112.83

Explanation:

Profit is the difference between the selling price per unit and full cost per unit. To determine the the amount of profit to be added , we will divide the total return on invested capital by the number of units to be produced and sold. This is given below as follows:

Target return = ROI (%) × Invested capital

                     = 19% × 569,512 = 108,207.28

Profit per unit = Total return/Number of units

                   = $108,207.28 /959 units

                   = $112.83 per unit

Selling price per unit = Full cost per unit + profit per unit

                                = 1,124 + 112.83 = 1,237.66  (this is not required anyway)

The amount of profit to be added to the cost of each unit = $112.83