Problem A-6 Missing Data; Markup Computations; Return on Investment (ROI); Pricing [LOA-2]

South Seas Products, Inc., has designed a new surfboard to replace its old surfboard line. Because of the unique design of the new surfboard, the company anticipates that it will be able to sell all the boards that it can produce. On this basis, the following incomplete budgeted income statement for the first year of activity is available:

Sales ( ? boards at ? per board)	$	?
Cost of goods sold ( ? boards at ? per board)		1,368,000
Gross margin		?
Selling and administrative expenses		1,006,920
Net operating income	$	?

Additional information on the new surfboard follows::

a. An investment of $1,360,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment. The companys required rate of return is 18% on all investments.

b. A partially completed standard cost card for the new surfboard follows:

Standard Quantity or Hours

Standard Price or Rate

Standard Cost

Direct materials

5.00

feet

$

3.80

per foot

$

19.00

Direct labor

2

hours

?

per hour

?

Manufacturing overhead

?

hours

?

per hour

?

Total standard cost per surfboard

$

?

c. The company will employ 18 workers to make the new surfboards. Each will work a 40-hourweek, 50 weeks a year.

d. Other information relating to production and costs follows:

Variable manufacturing overhead cost (per board)	$	6.00
Variable selling expense (per board)	$	9.00
Fixed manufacturing overhead cost (total)	$	522,000
Fixed selling and administrative expense (total)	$	?
Number of boards produced and sold (per year)		?

e. Overhead costs are allocated to production on the basis of direct labor-hours.

Required:

1. Complete the standard cost card for a single surfboard. (Round your answers to 2 decimal places.)

	Standard Quantity or Hours		Standard Price or Rate		Standard Cost
Direct materials	5.00	feet	$3.80	per foot	$19.00
Direct labor	2.00	hours		per hour
Manufacturing overhead		hours		per hour
Total standard cost per surfboard					$19.00

2. Assume that the company uses the absorption costing approach to cost-plus pricing.

a. Compute the markup that the company needs on the surfboards to achieve a 18% return on investment (ROI). (Round your percentage answer to 1 decimal place i.e., 123 is considered as 12.3)

Markup percentage% = _________________

b. Using the markup you have computed, calculate the target selling price. (Round your final answer to 2 decimal places.)

Target selling price = __________per board

c. Assume, as stated, that the company can sell all the surfboards that it can produce.

c-1. Complete the income statement for the first year of activity. (Round your selling price per unit to 2 decimal places.)

Sales		boards			per board
Cost of goods sold		boards			per board
Gross margin						0
Selling and administrative expenses
Net operating income						$0

c-2. Compute the company's ROI for the year.

ROI
Choose Numerator:	/	Choose Denominator:	=	ROI
	/		=	ROI
	/		=

3. Assume that direct labor is a variable cost. (Round your final answer to whole number.)

a. How many units would the company have to sell at the price you computed in requirement (2) to achieve the 18% ROI?

The company would have to sell _____ boards

b. How many units would have to be produced and sold to just break even?

Break-even point in units sold

boards