Qualls corporation makes a product that has the following costs: The company use
ID: 2486471 • Letter: Q
Question
Qualls corporation 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 48,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 15 percentage. Required: a. Compute the markup on absorption cost. b. Compute the selling price of the product using the absorption costing approach. c. Assume that every 10 percentage increase in price leads to a 13 percentage decrease in quantity sold. Assuming no change in cost structure and that direct labor is a variable cost, compute the profit-maximizing price.Explanation / Answer
Calculation of Markup on Absorption Cost:
Per unit
Direct Material
$ 17.30
Add: Direct Labor
$ 12.90
Add: Variable Manufacturing Overhead
$ 4.20
Add: Fixed Manufacturing Overhead ($916800 /48000 Units )
$ 19.10
Add: Variable selling and admn expenses
$ 2.00
Add: Fixed selling and admn expenses ($907200 /48000 Units )
$ 18.90
Total Costs
$ 74.40
Investment
$360,000
Expected Return on investment
15%
Required Margin = 360000*15% =
$ 54,000.00
Required Margin per unit = ($54000 / 48000 Units )
$ 1.13
Margin % = 1.13 / 74.40 =
1.51%
Calculation of Selling Price :
Total Costs per unit
$ 74.40
Add: Markup
$ 1.13
Selling Price
$ 75.53
Calculation of Markup on Absorption Cost:
Per unit
Direct Material
$ 17.30
Add: Direct Labor
$ 12.90
Add: Variable Manufacturing Overhead
$ 4.20
Add: Fixed Manufacturing Overhead ($916800 /48000 Units )
$ 19.10
Add: Variable selling and admn expenses
$ 2.00
Add: Fixed selling and admn expenses ($907200 /48000 Units )
$ 18.90
Total Costs
$ 74.40
Investment
$360,000
Expected Return on investment
15%
Required Margin = 360000*15% =
$ 54,000.00
Required Margin per unit = ($54000 / 48000 Units )
$ 1.13
Margin % = 1.13 / 74.40 =
1.51%
Calculation of Selling Price :
Total Costs per unit
$ 74.40
Add: Markup
$ 1.13
Selling Price
$ 75.53