Question 4 (10 marks) HKMASK Manufacturing is considering the introduction of a facial mask. To determine a selling price, the company has gathered the following information: Number of units to be produced and sold each year Estimated unit product cost Projected annual selling and administrative expenses Estimated investment required by the company Desired return on investment (ROI) 500,000 S2 $100,000 $2,000,000 15% Required: (a) The company uses the absorption costing approach to cost-plus price. (i) Calculate the markup percentage required to achieve the desired ROI. (2 marks) (ii) Calculate the selling price per unit. (2 marks) (b) The company is experiencing a falloff in demand due to the economic recovery from the coronavirus and the marketing manager believes that the mask can only be sold at the selling price of $2.2 per unit. If the company still wants to achieve the ROI at 15%, calculate the target cost per unit of the product. (2 marks) HKMASK Manufacturing is planning to introduce children surgical masks. The following conversation took place between Janice, the CEO, and Wilfred, the CFO of HKMASK Manufacturing: Janice: Wilfred: Janice: Wilfred: Janice: I am really excited about our new children surgical masks coming out. I think it will be a real market success. I am really glad you think so. I know that our success will be determined by our price. If our price is too high, our competitors will be the ones with the market success. Do not worry about it. We will just mark our product cost up by 50%, and it will all work out. I know we will make money at those markups. By the way, what does the estimated product cost look like? The product cost is around $4 per unit. If we introduce a 50% markup, that will give us a selling price of $6 per unit. I see your concern. That is a little high. Our research indicates that children mask prices are dropping and that this type of mask should be selling for around $4.5 when we release it to the market. I am not sure what to do. Let me see if I can help. How much of the $4 is fixed cost? About $1. There you go. The fixed cost is sunk. We do not need to consider it in our pricing decision. If we reduce the product cost by $1, the new price with a 50% markup would be right at $4.5. Hold for a second, I was really worried for a minute there. I knew something was not right. Wilfred: Janice: Wilfred: Janice: (i) If you were Wilfred, how would you respond to Janice's solution to the pricing problem? (2 marks) (ii) How might target costing be used to help solve this pricing dilemma? (2 marks) [Total for Question 4: 10 marks]
