Magner, Inc., uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 34,000 units next year, the unit product cost of a particular product is $61.80. The company's selling and administrative expenses for this product are budgeted to be $809,200 in total for the year. The company has invested $400,000 in this product and expects a return on investment of 9%. The selling price for this product based on the absorption costing approach would be closest to:
A)$86.66
B)$120.03
C)$67.36
D)$85.60

Question

Quizplus · Accepted Answer

The absorption costing approach to cost-plus pricing includes the cost of goods sold, plus a markup for selling and administrative expenses, and a desired return on investment. The cost of goods sold is $61.80 per unit, the selling and administrative expenses are $809,200 in total, and the desired return on investment is 9% of $400,000, or $36,000. The total markup is therefore $809,200 + $36,000 = $845,200. The selling price is therefore $61.80 + $845,200 / 34,000 units = $86.66.