Diamond Machine Technology has invested $250,000 in developing a sharpener. Each sharpener costs $3 to make. In addition, fixed costs for the sharpener are $10,000. The company expects to sell 100,000 sharpeners this year to local supermarkets (you should assume this sales forecast is accurate). Diamond Machine's markup on sales is 30 percent, and it wants to earn a 20% ROI. Calculate both the markup price and the target-return price for the sharpener. How much profit can Diamond Machine earn this year if they sell at the markup price

Diamond Machine Technology

a) Markup price = $4.03

b) Target return price = $3.60

Explanation:

Investment = $250,000

Cost of each sharpener = $3

Additional fixed costs = $10,000

Quantity of sharpeners to sell for the year= 100,000

Markup on sales = 30%

Return on Investment (ROI) = 20%

Markup price = (($3 * 100,000) + $10,000))* 1.3

= $403,000 /100,000 = $4.03

Return on Investment:

Profit for the year = 100,000($4.03 - $3) - $10,000 = $93,000

ROI = $93,000/$250,000 * 100 = 37.2%

Target revenue = (20% of $250,000) + $310,000 = $360,000

Target return price = $360,000/100,000 = $3.60