Question

The management of Musselman Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product: Per Unit Per Year Direct materials $ 27 Direct labor $ 16 Variable manufacturing overhead $ 8 Fixed annual manufacturing overhead $ 216,000 Variable selling and administrative expenses $ 3 Fixed annual selling and administrative expenses $ 72,000 Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%. The markup percentage on absorption cost is closest to:

Answer 1

Answer:

34%

Explanation:

Product cost using absorption costing:

Please note that under absorption costing, all manufacturing costs, whether fixed or variable, would be included in product cost'.

Unit product cost:

= Direct material cost per unit + Direct labor per unit+ Variable manufacturing overhead + Fixed manufacturing overhead

= $27 + $16 + $8 + ($216,000 ÷ 9,000)

= $27 + $16 + $8 + $24

= $75

Markup percentage on absorption cost :

= [(Required ROI × Investment) + Selling and administrative expenses] ÷ [Unit product cost × Units sales]

= [(10% × $1,305,000) + ($3.00 × 9,000 + $72,000)] ÷ [$75 × 9,000]

= $229,500 ÷ $675,000

= 34%