Asked by kylah perry on May 14, 2024
Verified
The management of Landstrom Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product:
Management plans to produce and sell 6,000 units of the new product annually. The new product would require an investment of $1,036,200 and has a required return on investment of 10%.Required:a. Determine the unit product cost for the new product.b. Determine the markup percentage on absorption cost for the new product.c. Determine the selling price for the new product using the absorption costing approach.
Absorption Costing
A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed overhead—in the cost of a product.
Return on Investment
A performance measure used to evaluate the efficiency or profitability of an investment, calculated by dividing the return of an investment by its cost.
Markup Percentage
The percentage by which the cost of a product is increased to determine its selling price.
- Develop an understanding of the basic methodology for calculating the cost of products, with emphasis on factors such as direct materials, direct labor, and overhead costs.
- Understand the principles of cost-plus pricing and how to determine selling prices using this approach.
Verified Answer
![a.The unit product cost is: b.Selling and administrative expenses = ($4.00 × 6,000) + $30,000 = $54,000Markup percentage on absorption cost = [(Required return on investment (ROI) × Investment) + Selling and administrative expenses] ÷ [Unit product cost × Units sales]= [(10% × $1,036,200) + ($54,000)] ÷ [$71 × 6,000]= [$103,620 + $54,000] ÷ [$426,000]= $157,620 ÷ $426,000= 37%c.The selling price is determined as follows:](https://d2lvgg3v3hfg70.cloudfront.net/TB8314/11eb6b8f_62f9_1b38_bf83_9b7a8f060a9c_TB8314_00.jpg)
b.Selling and administrative expenses = ($4.00 × 6,000) + $30,000 = $54,000Markup percentage on absorption cost = [(Required return on investment (ROI) × Investment) + Selling and administrative expenses] ÷ [Unit product cost × Units sales]= [(10% × $1,036,200) + ($54,000)] ÷ [$71 × 6,000]= [$103,620 + $54,000] ÷ [$426,000]= $157,620 ÷ $426,000= 37%c.The selling price is determined as follows:![a.The unit product cost is: b.Selling and administrative expenses = ($4.00 × 6,000) + $30,000 = $54,000Markup percentage on absorption cost = [(Required return on investment (ROI) × Investment) + Selling and administrative expenses] ÷ [Unit product cost × Units sales]= [(10% × $1,036,200) + ($54,000)] ÷ [$71 × 6,000]= [$103,620 + $54,000] ÷ [$426,000]= $157,620 ÷ $426,000= 37%c.The selling price is determined as follows:](https://d2lvgg3v3hfg70.cloudfront.net/TB8314/11eb6b8f_62f9_4249_bf83_3d2552eee5c1_TB8314_00.jpg)
Learning Objectives
- Develop an understanding of the basic methodology for calculating the cost of products, with emphasis on factors such as direct materials, direct labor, and overhead costs.
- Understand the principles of cost-plus pricing and how to determine selling prices using this approach.
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