Question

Aldean Company wants to use absorption cost-plus pricing to set the selling price on a new product. The company plans to invest $220,000 in operating assets to produce and sell 22,000 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	$	8.30
Direct labor	$	6.30
Variable manufacturing overhead	$	3.30
Fixed manufacturing overhead				$	173,800
Variable selling and administrative expenses	$	2.30
Fixed selling and administrative expenses				$	108,460

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.)

Answer 1

Required 1 :
Direct materials per unit	8.30
Direct labor per unit	6.30
Variable manufacturing overhead per unit	3.30
Fixed manufacturing overhead per unit ( 173800 / 22000 )	7.90
Unit product cost	25.80

Required 2 :
Variable selling and administrative expense per unit	2.30
Fixed selling and administrative expense per unit ( 108460 / 22000 )	4.93
Total selling and administrative expense per unit	7.23
Return on investment (ROI) per unit = ( Operating assets * % of ROI ) / Number of units = ( 220000 * 18% ) / 22000	1.80
Markup percentage on absorption cost = ( ROI per unit + Total selling and administrative expense per unit ) / Unit product cost = ( 1.80 + 7.23 ) / 25.80	35%

Required 3 :
Selling price per unit = Unit product cost * ( 1 + Markup percentage on absorption cost ) = 25.80 * ( 1 + 35% )	34.83