Trevor Company Is Contemplating the Introduction of a New Product

question 41

Essay

Trevor Company is contemplating the introduction of a new product.The company has gathered the following information concerning the product:
$\begin{array}{|l|r|}\hline \text { Number of Units to Be produced and Sold Each Year } & 12,000 \\\hline \text { Investment Required by the Company } & \$ 200,000 \\\hline \text { Projected Unit Product Cost } & \$ 25 \\\hline \text { Projected Annual Selling, General, and Administrative Expenses } & \$ 90,000 \\\hline \text { Desired Rate of Return on Investment } & 15 \% \\\hline\end{array}$
The company uses the absorption costing approach to cost-plus pricing.
Required:
a)Compute the markup on absorption cost.
b)Compute the target selling price.
c)If the price computed in part b)above is charged,and costs turn out as projected,can the company be assured that no loss will be sustained on the new product? Explain.

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Definitions:

Budget Line

A graphical representation of all possible combinations of two goods that an individual can afford given their income and the prices of the goods.

Indifference Map

A graphical representation in microeconomics, illustrating different bundles of goods between which a consumer is indifferent, showing preferences.

Total Utility

The overall satisfaction or benefit a consumer receives from consuming a specific quantity of a good or service.