US CMA Part 2 · Chapter 6 · Question 20 of 22
Marston Boats has invested $2,000,000 in assets for a new product line and requires a 15% return on investment. Annual fixed costs are $600,000, variable cost is $25 per unit and expected sales are 40,000 units. What selling price will achieve the target return?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $47.50
Explanation
Required profit = $2,000,000 x 15% = $300,000. Total revenue needed = variable costs (40,000 x $25 = $1,000,000) + fixed costs $600,000 + target profit $300,000 = $1,900,000. Price = $1,900,000 / 40,000 = $47.50. $40.00 only breaks even, and adding a 15% markup on full cost ($46.00) does not tie the profit to the investment.
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