Question

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

Answer 1

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