Ben Paul Bikes Inc. is in the process of setting a target price on its newly designed mountain bike. Cost data relating to the bike at a budgeted volume of 20,000 units are as follows.

Ben Paul Bikes uses cost-plus pricing methods that are designed to provide the company with a 20% ROI on its mountain bike line. A total of $19,850,000 in assets is committed to production of the new mountain bike.

Instructions
(a) Compute the markup percentage under absorption-cost pricing that will allow Ben Paul Bikes to realize its desired ROI.
(b) Compute the target price of the bike under absorption-cost pricing, and show proof that the desired ROI is realized.
(c) Compute the markup percentage under variable-cost pricing that will allow Ben Paul Bikes to realize its desired ROI. (Round to three decimal places.)
(d) Compute the target price of the bike under variable-cost pricing, and show proof that the desired ROI is realized.
(e) Since both the absorption-cost pricing and variable-cost pricing produce the same target price and provide the same desired ROI, why do both methods exist? Isn't one method clearly superior to theother?

Transcribed Image Text:

Per Unit $200 $120 Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $1,440,000 $ 200,000