Problem -
Rowan Company recently began production of a new product, C, which required the investment of $500,000 in assets. Product C is produced in batch sizes of 100 units.
Each batch requires 50 machine hours. A total capacity of 12,500 machine hours is available. During this current Rowan expects to sell all the units it can produce and the costs were structured accordingly:
Variable costs per unit
Direct materials $5.00
Direct labor 3.25
Factory overhead 1.75
Selling and administrative expenses 2.00
Fixed costs
Factory overhead $70,000
Selling and administrative expenses 30,000
Requirement 1 - Rowan is currently considering establishing a selling price for Product C. the president of Rowan has decided to use the product cost-plus approach to product pricing and has indicated that product C must earn a 16% rate of return on invested assets.
a) Determine the selling price of Product C.
b) Comment on any additional considerations that could influence the establishment of the selling price for Product C.
Assume that as of October 1, 22,000 units of Product C have been produced and sold during the current year. Analysis of the domestic market indicates that 1,500 additional units are expected to be sold during the remainder of the year at the price already set up by the company in (a) of Requirement 1.
On October 20, Rowan Company received an offer from Yu Inc., for 1,000 units of Product C at $12 each. Yu. Inc. will market the units in Japan under its own brand name, and no additional selling and administrative expenses associated with the sale will be incurred by Rowan Company. The additional business is not expected to affect the domestic sales of Product C.
Requirement 2 - You received a memo from the president instructing you to prepare a recommendation whether to accept or reject the above proposal.
a) Prepare a checklist to help you gather the relevant information on the basis of which you are going to make your recommendation.
b) Draft a memo to the president informing him of your recommendation. Attach to your memo all relevant calculations to support your recommendation.