Question

The management of Musselman Corporation would like to set the selling price on a new product using the absorption costing approach to cost plus pricing. The company's accounting department has supplied the following estimates for the new product Per Unit Per Year $ 27 $ 16 Direct materials Direct labor Variable manufacturing overhead Fixed annual manufacturing overhead Variable selling and administrative expenses Fixed annual selling and administrative expenses $216,000 $ 3 $ 72,000 Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%. The absorption costing unit product cost is:

$51

$54

$75

$86

Answer 1

Absorption costing :

Direct materials = 27

direct labor = 16

variable manf costs = 8

fixed manf costs = 24   (216000/9000)

Unit product cost = $75  

Thus the answer is $75.

Note: Selling and administrative costs are not relevant for computation of unit product costs.