Merrick Candle Co. has estimated a production level of 460,000 candles this wint
ID: 2437151 • Letter: M
Question
Merrick Candle Co. has estimated a production level of 460,000 candles this winter season. Merrick estimates they will incur $2.50 of variable product cost per candle and $230,000 of total fixed overhead cost. Variable selling and administrative costs are expected to be $0.90 per unit, and fixed selling and administrative costs are expected to reach $130,000 total. If Merrick plans to apply an 85% markup on the candles, what would the selling price per unit be using the absorption costing approach to cost-plus pricing? $5.55 $3.40 $6.29 $3.56
Explanation / Answer
Answer: $5.55
Fixed and variable selling and administrative costs are period costs and not product costs and hence excluded from the unit product cost computation.
Variable product cost $ 2.50 Fixed overhead cost ($230000/460000) 0.50 Total unit product cost $ 3.00 Markup ($3.00 x 85%) 2.55 Selling price per unit $ 5.55