Eckert Corporation uses the absorption costing approach to cost-plus pricing as described in the text to set prices for its products.Based on budgeted sales of 18, 000 units next year, the unit product cost of a particular product is $60.40.The company's selling and administrative expenses for this product are budgeted to be $370, 800 in total for the year.The company has invested $260, 000 in this product and expects a return on investment of 11%. The selling price based on the absorption costing approach for this product would be closest to:
A)$110.76
B)$81.00
C)$67.04
D)$82.59

Question

Quizplus · Accepted Answer

Markup percentage on absorption cost = [(Required ROI × Investment)+ Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(11% × $260, 000)+ $370, 800] ÷ ($60.40 × 18, 000 units)
= [($28, 600)+ $370, 800] ÷ ($1, 087, 200)
= [$399, 400] ÷ $1, 087, 200 = 36.7% (rounded)
Absorption cost based selling price = (1 + Markup percentage on absorption cost)× Unit product cost
= (1 + 1.367)× $60.40 = $82.59 (rounded)

Eckert Corporation Uses the Absorption Costing Approach to Cost-Plus Pricing