Chapter 12.A, Problem 12P

To determine

Absorption Cost Approach:

It is cost based method of determining the price under which the price of a product is based on the cost of incurred on the product. In other words, all the costs are absorbed under absorption cost approach in fixing the price of the product.

1. At the 20,000 units, what is the absorption unit product cost for its new product?

2. At planned sales volume, what is the markup percentage on absorption cost for the new product?

3. What would be the selling price of the new product using absorption cost-plus pricing at planned sales volume of 20,000 units?

4. Computation of net operating income using absorption format if Messina’s actually produces and sells only 19,000 units at the absorption cost-plus price from requirement 3. Calculate the return on investment 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?

b. What would become the new selling price?