Kircher, 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 81, 000 units per year. The company has invested $220, 000 in this product and expects a return on investment of 15%.
The selling price based on the absorption costing approach would be closest to:
A)$71.90
B)$72.31
C)$53.29
D)$93.67

Question

Kircher, 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 81, 000 units per year. The company has invested $220, 000 in this product and expects a return on investment of 15%.
The selling price based on the absorption costing approach would be closest to:
A)$71.90 
B)$72.31 
C)$53.29 
D)$93.67

Quizplus · Accepted Answer

To determine the selling price using absorption costing, we need to calculate the full cost per unit first.

Direct materials cost per unit = $8.90
Direct labor cost per unit = $7.50
Variable overhead cost per unit = $4.60
Fixed overhead cost per unit = ($220,000 / 81,000 units) = $2.72
Total cost per unit = $8.90 + $7.50 + $4.60 + $2.72 = $23.72

To calculate the selling price based on a 15% return on investment, we can use the following formula:
Selling price = Total cost per unit / (1 - Desired return on investment)
Selling price = $23.72 / (1 - 0.15) = $28.02

However, this is only the variable cost and thus, we must add markup to meet the expected 15% return on investment:

Markup = Total cost per unit x Desired ROI
Markup = $23.72 x 0.15 = $3.56
Selling price = Total cost per unit + Markup
Selling price = $23.72 + $3.56 = $27.28

Therefore, the closest answer is B) $72.31.