Question

Kirgan, Inc., manufactures a product with the following costs: Per Unit Per Year Direct materials $ 26.50 Direct labor $ 15.50 Variable manufacturing overhead $ 3.70 Fixed manufacturing overhead $ 1,571,400 Variable selling and administrative expenses $ 3.60 Fixed selling and administrative expenses $ 1,540,000 The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 97,000 units per year. The company has invested $380,000 in this product and expects a return on investment of 15%. The selling price based on the absorption costing approach would be closest to: (Do not round intermediate calculations.)

Answer 1

Answer:

$81.96 per unit

Explanation:

The computation of selling price based on the absorption costing is shown below:-

Unit Product Cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= $26.50 + 15.50 + 3.70 + ($156,71,400 ÷ 97,000 Units)

= $26.50 + 15.50 + 3.70 + 16.20

= $61.90

Selling and administrative expenses  = Fixed selling and administrative expenses + (production and sales of units × Variable selling and administrative expenses)

=$15,40,000 + (97,000 Units × $3.60)

= $15,40,000 + 349,200

= $18,89,200

Markup on absorption cost  = ((Investment x Return on Investment) + Selling and administrative expenses) ÷ (Number of units × Unit product cost)

= (($380,000 × 15%) + 18,89,200) ÷ (97,000 × $61.90)

= $19,46,200 ÷ $60,04,300

= 0.3241 or

= 32.41%

Selling price based on the absorption costing = Unit product cost × (1 + Markup on absorption cost)

= $61.90 per unit × (1 + 0.3241)

= $81.96 per unit