Question

Exercise 19-11 Absorption costing and product pricing LO P4 Help Save & EX Sirhuds Inc., a maker of smartwatches, reports the information below on its product. The company uses absorption costing and has a target markup of 40% of absorption cost per unit Check Direct materials cost Direct Labor cost Variable overhead cost Pixed overhead cost Variable selling and administrative expenses Fixed selling and administrative expenses Expected production (and sales) 100 per unit 30 per unit per unit $600,000 per year $ per unit $120,000 per year 50,000 units per year Compute the target selling price per unit under absorption costing. Por unit Direct materials Direct labor Variable overhead Fixed overhead Total product cost using absorption costing Target profit Target selling price

Answer 1

Target selling price per unit under absorption costing

Direct materials	$100
Direct Labour	$30
Variable overhead	$8
Fixed expenses overhead (600,000/50,000)	$12
Total product cost using absorption costing	$150
Target profit ($150×40%)	$60
Target selling price	$210

2 . Contribution margin analysis

Room rate per night	$125
Variable cost per night	$30
Contribution margin per night	$95
Number of nights	3
No of suits	50
Contribution margin from special offer	$14,250
Should management accept this offer	Yes

Revenue(50 suits×3 nights ×$125 per night) =$18,750

Variable costs (50suits× 3 nights × $30 per night)= $4500

As long as there are no additional fixed costs (additional staff that must be hired to see to the extra customers, for instance), and as long as no customers who would otherwise pay the full $250 per night are turned away, the hotel will realize a $14,250 increase in profits.

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All the best