The management of Landstrom Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product: Per UnitPer YearDirect materials$28 Direct labor$12 Variable manufacturing overhead$9 Fixed annual manufacturing overhead $132,000 Variable selling and administrative expenses$4 Fixed annual selling and administrative expenses $30,000 ?Management plans to produce and sell 6,000 units of the new product annually. The new product would require an investment of $1,036,200 and has a required return on investment of 10%.Required:?a. Determine the unit product cost for the new product.?b. Determine the
markup percentage on absorption cost for the new product.?c. Determine the selling price for the new product using the absorption costing approach.
What will be an ideal response?
a.
The unit product cost is:
| Direct materials | $ | 28 |
| Direct labor | 12 | |
| Variable manufacturing overhead | 9 | |
| Fixed manufacturing overhead ($132,000 ÷ 6,000 units) | 22 | |
| Unit product cost | $ | 71 |
? | ||
| b. | ||
| ? | ||
| Selling and administrative expenses = ($4.00 × 6,000) + $30,000 = $54,000 | ||
| ? | ||
| Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ [Unit product cost × Units sales] | ||
| = [(10% × $1,036,200) + ($54,000)] ÷ [$71 × 6,000] | ||
| = [$103,620 + $54,000] ÷ [$426,000] | ||
| = $157,620 ÷ $426,000 | ||
| = 37% | ||
| ? | ||
| c. | ||
| ? | ||
| The selling price is determined as follows: | ||
| Unit product cost | $ | 71.00 |
| Markup (37%) | 26.27 | |
| Selling price | $ | 97.27 |
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