Question

In: Accounting

Dickson Corporation makes a product with the following costs: Per Unit Per Year Direct materials $...

Dickson Corporation makes a product with the following costs: Per Unit Per Year Direct materials $ 18.20 Direct labor $ 22.30 Variable manufacturing overhead $ 2.90 Fixed manufacturing overhead $ 1,296,000 Variable selling and administrative expenses $ 1.10 Fixed selling and administrative expenses $ 1,104,000 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 60,000 units per year. The company has invested $320,000 in this product and expects a return on investment of 15%. Direct labor is a variable cost in this company. The markup on absorption cost is closest to: 31.2% 15.0% 30.0% 96.5%

Solutions

Expert Solution

Ans: 31.2%

Working:

Markup on absorption cost = [(Required ROI x Investment) + Selling and administrative expenses] / [ Unit product cost x unit sales]

Unit product cost computation:

Per Unit

  Direct materials

$18.20     

  Direct labor

$22.30     

  Variable manufacturing overhead

$2.90     

  Fixed manufacturing overhead $1296000/60,000

$21.60

  Total

$ 65

Selling and administrative expenses computation:

  Variable selling and administrative expenses

$1.10 *60,000    

$66,000

  Fixed selling and administrative expenses

$1104,000   

                         Total

$1170,000

Markup on absorption cost is closest to:

=[($320,000 x 15%) + $1170,000] / [ $65x 60,000]

=$ 1218000 / $ 3900,000

= 31.2%


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