Mahan, 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 60,000 units next year, the unit product cost of a particular product is $56.20. The company's selling and administrative expenses for this product are budgeted to be $1,302,000 in total for the year. The company has invested $320,000 in this product and expects a return on investment of 8%.
The selling price for this product based on the absorption costing approach would be closest to:
A) $108.57
B) $77.90
C) $78.33
D) $60.70

Question

Quizplus · Accepted Answer

The unit product cost includes both variable and fixed manufacturing costs. Therefore, we need to add the desired ROI and the selling and administrative expenses per unit to calculate the selling price per unit.

Total budgeted selling and administrative expenses = $1,302,000
Budgeted sales = 60,000 units
Selling and administrative expenses per unit = $1,302,000 ÷ 60,000 = $21.70 per unit

Investment in product = $320,000
Desired ROI = 8%
ROI per year = ($320,000 x 8%) = $25,600
ROI per unit = $25,600 ÷ 60,000 = $0.43 per unit

Therefore, the total additional cost to be added to the unit product cost is:

Total additional cost per unit = ROI per unit + Selling and administrative expenses per unit
Total additional cost per unit = $0.43 + $21.70 = $22.13 per unit

Selling price per unit using absorption costing approach = Unit product cost + Total additional cost per unit
Selling price per unit = $56.20 + $22.13 = $78.33

Thus, the closest selling price for this product based on the absorption costing approach is $78.33.