Qudsi Company makes a product that has the following costs: The company uses the
ID: 2408881 • Letter: Q
Question
Qudsi Company makes a product that has the following costs:
The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 32,000 units per year.
The company has invested $570,000 in this product and expects a return on investment of 14%.
Required:
Compute the markup on absorption cost. (Round your intermediate and final answer to 2 decimal places. Omit the "%" sign in your response.)
Compute the selling price of the product using the absorption costing approach. (Round your intermediate and final answer to 2 decimal places. Omit the "$" sign in your response.)
Assume that every 14% increase in price leads to a 17% decrease in quantity sold. Assuming no change in cost structure and that direct labor is a variable cost, compute the profit-maximizing price. (Round your intermediate and final answer to 2 decimal places. Omit the "$" sign in your response.)
Qudsi Company makes a product that has the following costs:
Explanation / Answer
a.Units = 32,000
In Absorption Costing, all costs )(variable as well as fixed are charged to the product)
Therefore, Cost per unit under Absorption Costing = 16.8+14.4+1.70+700800/32000+3.40+557000/32000
=16.8+14.4+1.70+21.9+3.40+17.40625
=75.60625
Total Cost = 75.60625*32000 = 2419400
Required return = 570,000*14% =79800
Required Return per unit = 79800/32000 = 2.49375
Therefore, mark-up on absorption cost = 79800/2419400*100 = 3.30%
b.Target Selling Price of Product = (2419400+79800)/32000 = 78.1
c.Increasing price by 14%
New Price = 89.034
New Units = 26560
Sales = 2364743
VC = 964128
Contribution = 1400615
Less: Fixed Cost 1257800
Profit = 142815