Quamma Corporation makes a product that has the following costs Per Year Per Uni

Question

Quamma Corporation makes a product that has the following costs Per Year Per Unit $17.40 $15.00 $ 2.30 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $855,000 $ 4.00 $563,000 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 38,000 units per year The company has invested $630,000 in this product and expects a return on investment of 8% Required: a. Compute the markup on absorption cost. (Round your intermediate and final answer to 2 decimal places.) b. Compute the selling price of the product using the absorption costing approach. (Round your intermediate and final answer to decimal places.) a. Markup percentage on absorption cost b. Selling price

Explanation / Answer

Solution a:

Required return on investment = $630,000 * 8% = $50,400

Desired sales revenue to cover product cost, selling expenses and margin = (38000*$57.20) + (38000*$4) + $563,000 + $50,400 = $2,939,000

Markup percentage on absorption cost = ($2,939,000 - $2,173,600) / 2,173,600 = 35.21%

Solution b:

Selling price of product using the absorption costing approach = Desired sales revenue / Nos of units

= $2,939,000 / 38000 = $77.34 per unit

Compuation of total production cost and product cost per unit - Absorption Costing Particulars Amount Direct material (38000*$17.40) $661,200.00 Direct Labor (38000*$15) $570,000.00 Varaible Factory overhead (38000*$2.30) $87,400.00 Fixed Manufacturing overhead $855,000.00 Total Production Cost $2,173,600.00 Nos of units produced 38000.00 Product cost per unit $57.20

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