(Appendix 12A)Kircher,Inc.manufactures a product with the following costs:

$\begin{array}{lcr}
&\text { Per unit }&\text { Per year }\
\text { Direct materials } & \$ 24.90 \
\text { Direct labour } & 13.90 \
\text { Variable manufacturing overhead } & 2.10 \
\text { Fixed manufacturing overhead } &&\$ 1,182,600 \
\text { Variable SG\&A expenses } & 2.00 \
\text { Fixed SG\&A expenses } &&1,166,400
\end{array}$

The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 81,000 units per year.The company has invested $220,000 in this product and expects a return on investment of 15%.The target selling price based on the absorption costing approach would be closest to which of the following?
A) $53.29.
B) $71.90.
C) $72.31.
D) $93.67.

Question

(Appendix 12A)Kircher,Inc.manufactures a product with the following costs:

$\begin{array}{lcr}
&\text { Per unit }&\text { Per year }\
\text { Direct materials } & \$ 24.90 \
\text { Direct labour } & 13.90 \
\text { Variable manufacturing overhead } & 2.10 \
\text { Fixed manufacturing overhead } &&\$ 1,182,600 \
\text { Variable SG\&A expenses } & 2.00 \
\text { Fixed SG\&A expenses } &&1,166,400
\end{array}$

The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 81,000 units per year.The company has invested $220,000 in this product and expects a return on investment of 15%.The target selling price based on the absorption costing approach would be closest to which of the following?
A) $53.29.
B) $71.90.
C) $72.31.
D) $93.67.

Quizplus · Accepted Answer

To determine the target selling price using absorption costing, we need to calculate the total unit cost first as follows:

Direct materials $24.90 
Direct labor $13.90 
Variable manufacturing overhead $2.10 
Variable SG&A expenses $2.00 
Total variable cost per unit $42.90 
Fixed manufacturing overhead $14.60 (calculated as $1,182,600 ÷ 81,000) 
Fixed SG&A expenses $14.40 (calculated as $1,166,400 ÷ 81,000) 
Total cost per unit $72.90

Next, we need to add the desired return on investment (ROI) to the total unit cost. The ROI is 15% of the investment of $220,000, which is $33,000. Therefore, the target selling price per unit is:

Total cost per unit $72.90 
Add: Desired ROI per unit $0.41 (calculated as $33,000 ÷ 81,000) 
Target selling price per unit $73.31

Therefore, the closest answer choice is C) $72.31.

(Appendix 12A)Kircher,Inc The Company Uses the Absorption Costing Approach to Cost-Plus Pricing