Question

You are advising the management at company ABC regarding their pricing decisions in relation to a new product. Existing information is as follows:

Direct materials $11 per unit; direct labor $3 per unit; variable manufacturing overhead $4 per unit; variable selling and administrative expenses $3 per unit; fixed manufacturing overhead expenses $60,000; and fixed selling and administrative expenses $80,000.

There is an expectation that company will sell 30,000 units.

1. Determine the unit product cost if the company uses an absorption costing approach in its cost-plus pricing.
2. Determine the target selling price given that company uses a 15 percent markup percentage.
3. It has been brought to your attention that company is making an investment of $200,000 in the making, marketing, and distribution of the 30,000 units of their new product. The management require a 20 percent return on this investment. Calculate the markup percentage on absorption costing given this information.
4. If the company only sells 25,000 units at $23 per unit what would be the return on investment?
5. Describe a limitation of the absorption costing approach to costing.

Answer 1