BabiesNow Co. has just designed a new stroller for joggers that includes a Bluetooth speaker and GPS. The company is in the process of evaluating the costs of designing, producing, delivering, and selling the stroller in order to determine a prospective selling price. The new stroller has already incurred design costs of $585,000. The company expects to produce the model for five years before a more technologically advanced light-weight stroller is developed.

The stroller has an expected annual demand of 30,000 units per year and will be manufactured in six production runs per year. Each production run will incur $24,000 in setup costs.

The direct manufacturing costs per unit are:

Prime costs $ 55

Variable overhead $ 26

Indirect manufacturing costs charged to each production run are $54,000. Selling costs per unit are $4.50, shipping costs are expected to be $0.60 per unit and after-sales warranty costs will average $3 per stroller. Fixed selling and administrative costs are expected to be $900,000 per year.

BabiesNow plans to add a 10% markup on the lifetime cost of the units in the first year of sales, 20% in the second year, and 15% in the third year.

1. What is the prospective selling price per stroller in the second year of operations?

a) $150.72

b) $159.39

c) $162.72

d) $166.32

2. Instead of considering all lifetime costs, BabiesNow decides to price the stroller based on an 85% markup on all manufacturing costs. What will the new selling price be?

a) $ 96.60

b) $154.66

c) $178.71

d) $193.70