Loose Leaf For Managerial Accounting for Managers
6th Edition
ISBN: 9781264445394
Author: Noreen, Eric, BREWER, Peter, Garrison, Ray
Publisher: McGraw Hill
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Textbook Question
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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