Danforth Manufacturing Company uses a cost-plus pricing strategy. At the beginning of 2013, Danforth estimated that total annual fixed overhead costs would amount to 60,000. Further, Danforth estimated that the annual volume of production would be 1,000 units of product. Based on these estimates, Danforth computed a predetermined overhead rate that was used to allocate overhead cost to the products made throughout the year. As predicted, the actual volume of production amounted to 1,000 units of product. However, actual fixed overhead costs amounted to $56,000. Based on this information alone:
A) a lower than appropriate selling price was assigned to products in 2013.
B) a higher than appropriate selling price was assigned to products in 2013.
C) the correct selling price was assigned to products in 2013.
D) the answer cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

Since Danforth used a cost-plus pricing strategy, the predetermined overhead rate was used to allocate overhead costs to the products made throughout the year. As actual fixed overhead costs of $56,000 were lower than the estimated amount of $60,000, the allocated overhead cost to each unit of product would have been higher than the actual overhead cost per unit. Therefore, the actual cost per unit would have been lower than the cost per unit that was used to set the selling price. This means that the selling price would have been higher than necessary, resulting in a higher profit margin than originally intended. Therefore, a higher than appropriate selling price was assigned to products in 2013.

Danforth Manufacturing Company Uses a Cost-Plus Pricing Strategy