Question

Aldean Company wants to use absorption cost-plus pricing to set the selling price on a new...

Aldean Company wants to use absorption cost-plus pricing to set the selling price on a new product. The company plans to invest $290,000 in operating assets to produce and sell 29,000 units. Its required return on investment (ROI) in its operating assets is 18%. The accounting department has provided cost estimates for the new product as shown below:

Per Unit Total
Direct materials $ 9.00
Direct labor $ 7.00
Variable manufacturing overhead $ 4.00
Fixed manufacturing overhead $ 239,250
Variable selling and administrative expenses $ 3.00
Fixed selling and administrative expenses $ 41,035

Required:

1. What is the unit product cost for the new product? (Round intermediate calculations and final answer to 2 decimal places.)

2. What is the markup percentage on absorption cost for the new product? (Round intermediate calculations to 2 decimal places.)

3. What selling price would the company establish for its new product using a markup percentage on absorption cost? (Round intermediate calculations and final answer to 2 decimal places.)

Business   Accounting   
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Homework Answers

Answer #1

1) Unit product cost

= direct material + direct labour + variable manufcaturing overhead + fixed manufacturing overhead

=$9 + $7 + $4 +$239,250/29,000

=$20 +$8.25

=$28.25

2) markup percentage on absorption cost

Net profit = $290,000*18%

=$52,200

Required product margin = net profit + selling and administrative expenses

= $52,200 + 29,000*$3 + $41,035

= $180,235

Required product margin = $180,235/29,000

= $6.215

Mark up percentage = 6.215/28.25

=22%

3) Selling price = Required margin + product cost

= $6.215 + $28.25

=$34.465

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