Question

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

Answer 1

Answer : $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