Question

# 19. Kircher, Inc., manufactures a product with the following costs: Per Unit Per Year Direct materials...

19.

Kircher, Inc., manufactures a product with the following costs:

 Per Unit Per Year Direct materials \$ 26.90 Direct labor \$ 14.90 Variable manufacturing overhead \$ 3.10 Fixed manufacturing overhead \$ 1,469,400 Variable selling and administrative expenses \$ 3.00 Fixed selling and administrative expenses \$ 1,453,600

The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 79,000 units per year.
The company has invested \$1,066,000 in this product and expects a return on investment of 20%.
The selling price based on the absorption costing approach would be closest to: (Do not round the intermediate calculations.)

Noreen rechecks 2017-04-04

\$68.58

\$108.96

\$87.19

\$87.60

Explanation :

Unit Product Cost = Direct materials + Direct labors + Variable manufacturing overhead + Fixed manufacturing overhead

= 26.90 + 14.90 + 3.10 + (1,469,400 / 79,000 units) = \$63.50.

Total selling and administrative expenses = (79,000 units * \$3) + \$1,453,600 = \$1,690,600

Markup percentage on absorption cost
= [(Investment * Required ROI ) + Total selling and administrative expenses] / (Unit product cost x Units sales)

= [(\$1,066,000 * 20 %) + \$1,690,600] / (79,000 units * \$63.50)

= \$1,903,800 / \$5,016,500 = 37.95 %

Selling price based on the absorption costing approach =

Unit Product Cost + (Unit Product Cost * Markup percentage on absorption cost)

\$63.50 + (\$63.50 * 37.95 %) = \$87.60

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