Question

Qudsi Company makes a product that has the following costs:

	Per Unit		Per Year
Direct materials	$	16.80
Direct labor	$	14.40
Variable manufacturing overhead	$	1.70
Fixed manufacturing overhead			$700,800
Variable selling and administrative expenses	$	3.40
Fixed selling and administrative expenses			$557,000

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 32,000 units per year.

The company has invested $570,000 in this product and expects a return on investment of 14%.

Required:
a.	Compute the markup on absorption cost. (Round your intermediate and final answer to 2 decimal places. Omit the "%" sign in your response.)

Markup on absorption cost

%

b.	Compute the selling price of the product using the absorption costing approach. (Round your intermediate and final answer to 2 decimal places. Omit the "$" sign in your response.)

Target selling price

$

c.	Assume that every 14% increase in price leads to a 17% decrease in quantity sold. Assuming no change in cost structure and that direct labor is a variable cost, compute the profit-maximizing price. (Round your intermediate and final answer to 2 decimal places. Omit the "$" sign in your response.)

Profit-maximizing price

$

Answer 1

a.Units = 32,000

In Absorption Costing, all costs )(variable as well as fixed are charged to the product)

Therefore, Cost per unit under Absorption Costing = 16.8+14.4+1.70+700800/32000+3.40+557000/32000

=16.8+14.4+1.70+21.9+3.40+17.40625

=75.60625

Total Cost = 75.60625*32000 = 2419400

Required return = 570,000*14% =79800

Required Return per unit = 79800/32000 = 2.49375

Therefore, mark-up on absorption cost = 79800/2419400*100 = 3.30%

b.Target Selling Price of Product = (2419400+79800)/32000 = 78.1

c.Increasing price by 14%

New Price = 89.034

New Units = 26560

Sales = 2364743

VC = 964128

Contribution = 1400615

Less: Fixed Cost 1257800

Profit = 142815