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: $ ? 1,248,000 Sales ( ? boards at? per board) Cost of goods sold ( ? boards at ? per board) Gross margin Selling and administrative expenses Net operating income 866,420 ? $ Additional information on the new surfboard follows: a. An investment of $1,450,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment. The company's required rate of return is 19% on all investments. b. A partially completed standard cost card for the new surfboard follows: Standard Quantity or Hours 4.00 feet 2 hours ? hours Standard Cost $20.00 Direct materials Direct labor Manufacturing overhead Total standard cost per surfboard $ Standard Price or Rate 5.00 per foot ? per hour ? per hour c. The company will employ 16 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) Variable selling expense (per board) Fixed manufacturing overhead cost (total) Fixed selling and administrative expense (total) Number of boards produced and sold (per year) 6.00 8.10 352,000 & 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 $ 20.00 Direct materials $ Direct labor Manufacturing overhead 4.00 feet 2.00 hours hours 5.00 per foot per hour per hour Total standard cost per surfboard $ 20.00 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 19% 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.) boards per board per board boards Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income C-2. Compute the company's ROI for the year. ROI Choose Numerator: 1 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 19% ROI? The company would have to sell at least the boards b. How many units would have to be produced and sold to just break even? Break-even point in units sold boards
