MANAGERIAL ACCT FOR MANAGERS LL\AC
5th Edition
ISBN: 9781265872298
Author: Noreen
Publisher: MCG
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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:
- Compute the markup percentage on absorption cost required to achieve the desired ROL.
- Compute the selling price per unit.
Expert Solution
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% |
Expert Solution
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 |
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High-Low Method; Contribution Format Income Statement
Milden Company is a distributor who wants to start using a contribution format income statement for planning purposes. The company has analyzed its expenses and developed the following cost formulas:
Because shipping expense is a mixed cost, the company needs to estimate the variable shipping expense per unit sold and the fixed shipping expense per quarter using the following data:
Required:
1. Using the high-low method, estimate a cost formula for shipping expense in the form Y = a + bX.
2. In the first quarter of Year 3, the company plans to sell 12,000 units at a selling price of $ 100 per unit. Prepare a contribution format income statement for the quarter.
Absorption Costing Approach to Cost-Plus Pricing
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 ROI.
2. Compute the selling price per unit.
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