Question

Aldean Company wants to use absorption cost-plus pricing to set the selling price on a new product. The company plans to invest $230,000 in operating assets to produce and sell 23,000 units. Its required return on investment (ROI) in its operating assets is 18%. The accounting department has provided cost estimates for the new product as shown below:

	Per Unit			Total
Direct materials	$	8.40
Direct labor	$	6.40
Variable manufacturing overhead	$	3.40
Fixed manufacturing overhead				$	182,850
Variable selling and administrative expenses	$	2.40
Fixed selling and administrative expenses				$	83,835

Required:

1. What is the unit product cost for the new product? (Round intermediate calculations and final answer to 2 decimal places.)

2. What is the markup percentage on absorption cost for the new product? (Round intermediate calculations to 2 decimal places.)

3. What selling price would the company establish for its new product using a markup percentage on absorption cost? (Round intermediate calculations and final answer to 2 decimal places.)

1.Unit product cost_____

2.Markup percentage on absorption cost _______ %

3.Selling price per unit______

Answer 1

1. Unit product cost($)

Direct material 8.4

Direct labor 6.4

variable manufacturing overheads    3.4

Variable selling and administration overheads 2.4

Fixed manufacturing overheads 7.95

Fixed selling and administration overheads 3.645

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32.19

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2. Markup percentage on absorption cost

   Operating profit Operating profit

ROI = 18 % = ------------------------ = ------------------------

Operating assets $230000

Operating profit = $41400

Sales = 32.19*23000+41400 = $781770

Markup % = 41400/781770 = 5.29%

3. Selling price per unit = 32.19*105.29% = $33.89