Per Unit Total Direct materials . Direct labor .... Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses. Fixed selling and administrative expenses ..... $12 $8 $3 $100,000 $1 $60,000
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Absorption Costing Approach to Cost-Plus Pricing; Customer Latitude and Pricing
Messina Company wants to use absorption cost-plus pricing to establish the selling price for a new product. The company plans to invest $650,000 in operating assets that provide the capacity to make 30,000 units. Its required
Required:
1. If the company plans to produce and sell 20,000 units, what is the absorption unit product cost for its new product?
2. At a planned sales volume of 20,000 units, what is the markup percentage on absorption cost for the new product?
3. Using absorption cost-plus pricing and assuming a planned sales volume of 20,000 units, what selling price would the company establish for its new product?
4. Using an absorption format, calculate Messina’s net operating income if it actually produces and sells only 19,000 units (instead of 20,000 units) at the absorption cost-plus price from requirement 3. Calculate the return on investment (ROI) at this lower sales volume.
5. Assume that Messina’s controller recommends raising the new product’s selling price in an effort to achieve the desired ROI at the lower sales volume of 19,000 units.
a) What would become the new markup percentage? (Round your answer to the nearest one-tenth of a percent.)
b) What would become the new selling price? (Round your calculations and answer to the nearest penny.)
6. Download the optimal pricing model from www.mhhe.com/garrison_opm. Suppose Messina’s Marketing Department surveyed its customers and estimated that an 8% increase in the price of this new product would cause its unit sales to decrease by 22%. The company’s marketing managers also believe that Messina’s total fixed costs will be unaffected by the pricing decision. Assuming that the new product’s actual sales volume was 19,000 units and the marketing managers’ estimates and assumptions are correct, input all of the pertinent data into the pricing model. Be sure to input the current price (as calculated in requirement 3) in cell B12. Click on the Data tab in Microsoft Excel and select Solver in the upper right-hand portion of your screen. When the Solver window opens, click “Solve.”
a) What is the optimal selling price?
b) What profit is earned at the optimal selling price?
c) Comment on the wisdom of the controller’s recommendation to increase the new product’s selling price.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
