Currington Company wants to use absorption cost-plus pricing to set the selling price on a newly...

Currington Company wants to use absorption cost-plus pricing to set the selling price on a newly remodeled product. The company plans to invest $168,000 in operating assets to produce and sell 12,000 units. Its required return on investment (ROI) in its operating assets is 16%. The accounting department has provided cost estimates for the new product as follows:

	Per Unit		Total
Direct materials	$	4.90
Direct labor	$	3.90
Variable manufacturing overhead	$	1.90
Fixed manufacturing overhead			$	76,800
Variable selling and administrative expenses	$	1.90
Fixed selling and administrative expenses			$	32,400

Required:

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

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

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

4. Suppose the company actually produced and sold only 10,000 units (instead of its planned sales volume of 12,000 units) at the selling price that you derived in requirement 3. What ROI did the company actually earn at this lower sales volume? (Round intermediate calculations to 2 decimal places. Round your percentage answer to 1 decimal place.)

5. Assume that the company wants to raise the price of its newly remodeled product with the intention of achieving the product’s desired ROI at the lower sales volume of 10,000 units. Using absorption cost-plus pricing, what would be the revised selling price at this lower sales volume? (Round intermediate calculations and final answer to 2 decimal places.)

Expert Solution

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Part 1

Unit product cost:
Direct Material		$ 4.90
Direct Labor		$ 3.90
Variable Overhead		$ 1.90
Fixed Overhead	76800/12000	$ 6.40

Unit Product Cost		$ 17.1

Part 2

Markup Percentage

Required ROI	168000*16%	$ 26,880
Add: Selling and Admin Expense
Variable	12000*1..9	$ 22,800
Fixed		$ 32,400
Total A		$ 82,080

Unit Product Cost		$ 17.10
Units Sale		12,000
Total Product Cost B	75.6*27000	$ 205,200

Markup Percentage	A/B	40%


Part 3

Product cost per unit		$ 17.10
Mark up	40%	$ 6.84

Selling Price		$ 23.94

Part 4

Sale	10000*23.94	$ 239,400
Less: Cost of Goods Sold	10000*17.1	$ 171,000
Gross Maring		$ 68,400
Less: Selling and Admin Expense	32400+(10000*1.9)	$ 51,400

Net Operating Income		$ 17,000
ROI	17000/168000	10.12%

Part 5

ROI Needed	168000*16%	$ 26,880
Less Income at existing Selling Price		$ 17,000
More income needed		$ 9,880
Units		10,000
Per unit increase in Sellin Price needed	9880/10000	$ 0.99

Hence New Selling Price	23.94+0.99	$ 24.93

ekkarill92 answered 2 years ago

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