Raymond Company estimates that an investment of $800,000 would be necessary to produce and sell 40,000 units of Product S each year. Costs associated with the new product would be: The company requires a 20% return on the investment in all products. The company used the absorption costing approach to cost-plus pricing as described in the text.
-The selling price based on the absorption costing approach would be:
A) $48.38
B) $56.25
C) $52.50
D) $51.38

Question

Raymond Company estimates that an investment of $800,000 would be necessary to produce and sell 40,000 units of Product S each year. Costs associated with the new product would be:  The company requires a 20% return on the investment in all products. The company used the absorption costing approach to cost-plus pricing as described in the text.
-The selling price based on the absorption costing approach would be:
A) $48.38 
B) $56.25 
C) $52.50 
D) $51.38

Quizplus · Accepted Answer

To determine the selling price using the absorption costing approach, we need to first calculate the total cost per unit of Product S.

Total cost per unit = (Direct materials + Direct labor + Manufacturing overhead + Selling and administrative expenses) / Number of units produced

Plugging in the given values, we get: 
Total cost per unit = ($360,000 + $168,000 + $272,000 + $50,000) / 40,000 = $25

Now we need to add a markup of 20% to this cost per unit to arrive at the selling price:

Selling price = Total cost per unit x (1 + Markup percentage)

Selling price = $25 x (1 + 0.2) = $30

Hence, the selling price based on the absorption costing approach is $30 per unit or $52.50 for 1,750 units (40,000 units / 1,750 units).

Therefore, the best choice is C) $52.50.

Raymond Company Estimates That an Investment of $800,000 Would Be