Quamma Corporation makes a product that has the following costs: Per UnitPer YearDirect materials$18.40 Direct labor$17.30 Variable manufacturing overhead$2.10 Fixed manufacturing overhead $285,200 Variable selling and administrative expenses$3.40 Fixed selling and administrative expenses $473,800 ?The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 23,000 units per year.?The company has invested $280,000 in this product and expects a return on investment of 8%.Required:a. Compute the markup on absorption cost.b. Compute the selling price of the product using the absorption costing approach.
What will be an ideal response?
a.
| Direct materials | $ | 18.40 |
| Direct labor | 17.30 | |
| Variable manufacturing overhead | 2.10 | |
| Fixed manufacturing overhead | 12.40 | |
| Unit product cost | $ | 50.20 |
? | ||
| Selling and administrative expenses = ($3.40 × 23,000) + $473,800 = $552,000 | ||
| ? | ||
| Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales) | ||
| ? | ||
| = [(8% × $280,000) + $552,000] ÷ (23,000 × $50.20) | ||
| = [($22,400) + $552,000] ÷ $1,154,600 | ||
| = 49.75% | ||
| ? | ||
| b. | ||
| Absorption cost based selling price = (1 + Markup percentage on absorption cost) × Unit product cost | ||
| ? | ||
| = (1 + 0.4975) × $50.20 = $75.17 | ||
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