The following information is available on Browning Inc.'s Product A: The company uses the absorption costing approach to cost-plus pricing described in the text.Based on these data, the total selling and administrative expenses each year are:
A)$720, 000
B)$480, 000
C)$640, 000
D)$400, 000

Question

The following information is available on Browning Inc.'s Product A:  The company uses the absorption costing approach to cost-plus pricing described in the text.Based on these data, the total selling and administrative expenses each year are:
A)$720, 000 
B)$480, 000 
C)$640, 000 
D)$400, 000

Quizplus · Accepted Answer

Absorption cost based selling price = (1 + Markup percentage on absorption cost)× Unit product cost
$96 per unit = (1 + Markup percentage on absorption cost)× $60 per unit
(1 + Markup percentage on absorption cost)= $96 per unit ÷ $60 per unit
(1 + Markup percentage on absorption cost)= 1.6
Markup percentage on absorption cost = 0.6
Markup percentage on absorption cost = [(Required ROI × Investment)+ Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
0.6 = [(16% × $500, 000)+ Selling and administrative expenses] ÷ ($60 per unit × 20, 000 units)
0.6 = [($80, 000)+ Selling and administrative expenses] ÷ ($1, 200, 000)
[($80, 000)+ Selling and administrative expenses] = 0.6 × $1, 200, 000
$80, 000 + Selling and administrative expenses = $720, 000
Selling and administrative expenses = $720, 000 - $80, 000 = $640, 000

The Following Information Is Available on Browning Inc