=+7-21 KK Cost-plus, target pricing, working backwards (S. Sridhar, adapted) OBJECTIVE 1 Drummond Ltd manufactures and sells SPRY1, a specialty raft used for white-water rafting. In 2014, it reported the following:

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A B 2014 Units produced and sold 20 000 Investment 2 400 000$

Full cost per unit 300$

Rate of return on investment 20%

Mark-up percentage on variable cost 50%

Required 1 What was the selling price in 2014? What was the percentage mark-up on full cost? What was the variable cost per unit?

2 Drummond Ltd is considering raising its selling price to $348. However, at this price, its sales volume is predicted to fall by 10%. If Drummond’s cost structure (variable cost per unit and total fixed costs) remains unchanged and if its demand forecast is accurate, should it raise the selling price to $348?

3 In 2015, due to increased competition, Drummond Ltd must reduce its selling price to $315 in order to sell 20000 units.

The manager of the rafts division reduces annual investment to $2100000 but still demands a 20% target rate of return on investment. If fixed costs cannot be changed in this time frame, what is the target variable cost per unit?