Kirgan, Inc., manufactures a product with the following costs: 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 57,000 units per year.
The company has invested $140,000 in this product and expects a return on investment of 13%.
The selling price based on the absorption costing approach would be closest to:

Question

Kirgan, Inc., manufactures a product with the following costs:  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 57,000 units per year.
The company has invested $140,000 in this product and expects a return on investment of 13%.
The selling price based on the absorption costing approach would be closest to:

Quizplus · Accepted Answer

11eacbfc_c82d_4b52_8ffe_435cda2393af_TB7552_00 Selling and administrative expenses = $4.50 per unit × 57,000 units + $723,900 = $980,400
Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(13% × $140,000) + $980,400] ÷ ($59.90 per unit × 57,000 units)
= [$18,200 + $980,400] ÷ $3,414,300
= [$998,600] ÷ $3,414,300 = 29.25%
Absorption cost based selling price = (1 + Markup percentage on absorption cost) × Unit product cost
= (1 + 0.2925) × $59.90 = $77.42