Chapter 6A, Problem 6A.1E

Absorption Costing Approach to Cost-Plus Pricing LO6—8

Martin Company uses the absorption costing approach to cost-plus pricing. It is considering the introduction of a new product. To determine a selling price, the company has gathered the following information:

Required:

1. Compute the markup percentage on absorption cost required to achieve the desired ROL.
2. Compute the selling price per unit.

To determine

Concept Introduction:

Costing is a process of calculation of the cost of the product or service manufactured or provided by an organization. There are two methods of costing; absorption costing and variable costing. 

As per nature, costs can be divided into three categories, i.e., variable costs, fixed costs, and mixed costs.

Requirement-1:

The markup percentage.

Answer to Problem 6A.1E

The markup percentage is 25.71%.

Explanation of Solution

The markup percentage is calculated as follows:

Number of units (A)	$ 14,000
Unit product cost (B)	$ 25
Total absorption product cost (C) = (A*B)	$ 350,000
Selling and admn expenses (D)	$ 50,000
Total Cost (E) = (C+D)	$ 400,000
Amount of investment (F)	$ 750,000
Desired return on investment (G)	12%
Desired markup (H) = (F*G)	$ 90,000
Markup % (I) = (H/C)	25.71%

To determine

Concept Introduction:

Costing is a process of calculation of the cost of the product or service manufactured or provided by an organization. There are two methods of costing; absorption costing and variable costing. 

As per nature, costs can be divided into three categories, i.e., variable costs, fixed costs, and mixed costs.

Requirement-2:

The selling price per unit.

Answer to Problem 6A.1E

The selling price per unit is $35.

Explanation of Solution

The selling price per unit is calculated as follows:

Number of units (A)	$ 14,000
Unit product cost (B)	$ 25
Total absorption product cost (C) = (A*B)	$ 350,000
Selling and admn expenses (D)	$ 50,000
Total Cost (E) = (C+D)	$ 400,000
Amount of investment (F)	$ 750,000
Desired return on investment (G)	12%
Desired markup (H) = (F*G)	$ 90,000
Markup % (I) = (H/C)	25.71%
Tota cost per unit (J) = (E/A)	$ 28.57
Markup per unit (K) = (H/A)	$ 6.43
Selling price (J+K)	$ 35.00